UniCredit Euro Credit Pilot JULY

Euro Credit
Pilot
Economics & FI/FX Research

Credit Research
Equity Research
Cross Asset Research
“ Beware of the 'Great Correlation'
072010
July 2010 Credit Research
Euro Credit Pilot
Contents
4 Story of the month: Beware of the "Great Correlation" (part 2)
5 Credit Drivers
5 Macro: Fears of a "globalized Japanese" scenario reign
6 Micro Fundamentals: Earnings Dispersion
7 Debt-Equity Linkage: The correlation game
8 Credit Quality Trend: Default cycle uncertainty
9 Market Technicals – Bond supply vs. market spreads
10 Valuation & Timing
12 Other Credit Markets
12 Credit derivatives – Spreads and the FX rate
13 Securitization: Issuance in the doldrums for longer?
14 EEMEA Corporates: Risk of more recoupling
15 Sector Allocation
16 Appendix
16 Correlation assessment – the (bitter) mathematical truth
18 Fundamental Credit Views
18 Telecommunications (Marketweight)
26 Media (Marketweight)
28 Technology (Marketweight)
30 Automobiles & Parts (Marketweight)
32 Utilities (Marketweight)
38 Oil & Gas (Overweight)
40 Industrial Goods & Services (Core) (Underweight)
44 Aerospace & Defense (Marketweight)
45 Industrial Transportation (Overweight)
47 Basic Resources (Marketweight)
49 Chemicals (Underweight)
51 Construction & Materials (Underweight)
53 Health Care (Underweight)
55 Personal & Household Goods (Core) (Marketweight)
56 Tobacco (Overweight)
58 Food & Beverage (Overweight)
60 Travel & Leisure (Underweight)
61 Retail (Underweight)
62 Banks (Marketweight)
70 Financial Services (Marketweight)
71 Insurance (Marketweight)
75 UniCredit Research Model Portfolio
UniCredit Research page 2 See last pages for disclaimer.

Euro Credit Pilot
Throughout the crisis, there has been an increasing level of market correlation, in
particular in times of panic. This tail dependency can be found on the level of different
asset classes (stocks vs. credits vs. rates vs. exchange rates) but also on the level of
individual assets. The central message can summarized in the following way: If
everything is going down the drain, really everything is going down the drain. In this
publication we focus on the elevated correlation in current markets and its potential
implications. Moreover, we describe a simple model that allows to quantify the
"average" correlation within a portfolio.
■ Macro Outlook: A double-dip recession scenario is not our core view, but the latest
battery of early indicators revealed an astonishing congruency in the slowdown of the
headline readings across economies.
■ Micro Fundamentals: As the global growth momentum has peaked, we are likely to
observe higher variability in sector earnings and greater dispersion in sector spreads in the
near future.
■ Debt-Equity-Linkage: Given a significant rise in risk aversion, the level of correlation

among equities also jumped to new highs. The "average" correlation of single stocks within
the EuroStoxx 50 index increased above post-Lehman levels recently.
■ Credit Quality Trend: The subdued growth outlook brings about great uncertainty
regarding future default rates, due to the correlation between default and economic cycles.
■ Market Technicals: While fundamentals are key in the long run, new bond supply and
liquidity are a major driving force for credit markets in the short to medium term.
■ Valuation & Timing: On a tactical time horizon, the next big topic is the 2Q10 earnings
release season, which will keep investors busy over the next few weeks. While for non-
financials, earnings will probably be in line with OK-ish expectations, earnings data for
European financials will meet more scrutiny from investors.
■ Other Credit Markets: Credit Derivatives: The relationship between credit spreads and the
exchange rate has an impact on the pricing of credit risk in different currencies.
Securitization: in the wake of the sovereign debt crisis, ABS issuance has become scarce
again due to high spread volatility. EEMEA Credits: Uncertainty about the outcome of the
euro zone debt crisis led to a re-coupling of EEMEA corporates with global credits.
■ Allocation: We reduce our sector recommendation for Basic Resources to MW from OW.
With this step, we continue with our de-risking strategy that we announced last month: we
missed an opportunity to reduce exposure to this more cyclical sector, however, we were
reluctant to act in the middle of a panic. All other recommendations were kept unchanged.
■ Model Portfolio: Our financials portfolio underperformed the benchmark by -64bp, while
the non-financials portfolio outperformed by 11bp due to the recovery in cyclicals.
Dr. Philip Gisdakis (UniCredit Bank) Dr. Tim Brunne (UniCredit Bank)
+49 89 378-13228 +49 89 378-13521
philip.gisdakis@unicreditgroup.de tim.brunne@unicreditgroup.de
Markus Ernst (UniCredit Bank) Dr. Stefan Kolek (UniCredit Bank)

+49 89 378-14213 +49 89 378-12495
markus.ernst1@unicreditgroup.de stefan.kolek@unicreditgroup.de
Dr. Christian Weber, CFA (UniCredit Bank) Corporate Credit Research

+49 89 378-12250 Financials Credit Research
christian.weber@unicreditgroup.de
Bloomberg Internet
UCCR www.research.unicreditgroup.eu

Euro Credit Pilot
Story of the month

Beware of the "Great Correlation" (part 2)
Exactly one year ago*, we analyzed the correlation pattern in different asset classes.
This analysis referred to Harry Markowitz's groundbreaking theory of portfolio diversification
to avoid devastating losses. However, as shown at that time, there is an adverse tail
dependency between different asset classes, which could be highlighted by analyzing
the correlation pattern of the so-called maximum drawdown time series (i.e. the
maximum loss of an index relative to its previous all-time high). The finding was very
simple: in an adverse scenario, most financial asset classes tend to behave in a very
correlated manner. In the following analysis, we refer to the correlation pattern of
individual assets within the same index. In this article, we analyze credits, while in the
"Debt-Equity Linkage" section, a similar analysis is shown for equities.
In the current environment, The central message of all these studies can summarized in the following way: If everything is
managing the portfolio beta
is key rather than focusing going down the drain, really everything is going down the drain. This applies not only to
on alpha different asset classes, but also to the individual assets. In an environment in which macro
fears (like a recession) rule the overall sentiment, credit spreads tend to be highly correlated.
The data shown below confirms this hypothesis. In the two charts below, we used the
methodology illustrated in the appendix to estimate the "average" portfolio correlation. Further
details of the algorithm can be found in the "Debt-Equity Linkage" section. In summary, we
refer to about 120 constituents of the current iTraxx Main 13 for which a reasonably long
spread time series is available. For this (static) portfolio we refer to weekly spread changes
and have calculated the correlation over a rolling 24-week period. Moreover, as we did not
use the real iTraxx (but just a subset of the current series), we compare the time series with
the average spread of the subset (left chart) and the corresponding 30D volatility (right chart).
The major findings are, that the historical correlation varies massively and that it is currently at
a very high level. For a portfolio manager the message is simple: in the current environment,
managing the portfolio beta is the key rather than focusing on alpha.
Other statistical concepts However, there is also a methodological interpretation: the data indicates that the normal
to measure dependencies
(such as a Clayton copula) correlation measure is too limited to capture the economically important dependency pattern.
are much more suitable Other statistical concepts that make allowance for a tail dependency (such as, for example
the Clayton copula) are much more suitable to describe these dependencies: in a normal
environment, correlation remains at moderate levels (which allows for alpha and relative value
strategies), while during a crisis correlation jumps substantially (managing beta is then key).
"Average" portfolio correlation versus the average portfolio spread… …and versus the historical (30D) spread volatility
Correlation Average Portfolio Spread Correlation Volatility

0.9 300 0.9 9
0.8 0.8 8
250
0.7 0.7 7
Avg. Portfolio Spread
Portfolio Correlatrion
Portfolio Correlatrion
Portfolio Volatility
0.6 200 0.6 6
0.5 0.5 5
150
0.4 0.4 4
0.3 100 0.3 3
0.2 0.2 2
50
0.1 0.1 1
0 0 0 0
Dec-07 Jun-08 Nov-08 May-09 Nov-09 May-10 Dec-07 Jun-08 Nov-08 May-09 Nov-09 May-10
*July 2009 edition of the Euro Credit Pilot Source: Bloomberg, UniCredit Research

Euro Credit Pilot
Credit Drivers
Macro: Fears of a "globalized Japanese" scenario reign
Withdrawal of fiscal stimulus packages in a number of G-20 countries, ongoing
deleveraging of corporate sectors and uncertainty about the final financial markets
regulatory framework are putting a brake on the speed of the economic recovery. The
latest battery of early indicators revealed an astonishing congruency in the slowdown of
the headline readings across economies (see chart), suggesting a broad-based decline
in manufacturing confidence across countries. A double-dip recession scenario is not
our core view; but the more widespread the slowdown becomes the more pressure on
prices across markets and the higher correlation among asset classes will be.
Widespread economic Amid uncertainty regarding the extent of the economic decline in 4Q08, companies cut
slowdown
massively their production plans; in most cases, they overreacted and ran out of stock soon.
Firms were soon forced to raise production in order to catch up, as demand felt positive
impulses from fiscal packages, leading to sharp economic growth acceleration over the last
two quarters, largely on the back of restocking of inventories, while private consumption and
exports are weak. Now, as governments are moving into a consolidation mode, private
consumption in major economies remains weak and China as a major export market is also
implementing tighter policies, sentiment has started to deteriorate. The latest PMI data
reflected again a decline in the new orders-to-inventories ratios, which was in the past a
harbinger of weaker growth. Even more worrying from a credit investor point of view are fears
of deflation. Although this is not our main scenario, core inflation rates in a number of
developed economies are rapidly declining. Against this backdrop, what is dominating
markets currently is investor fears of a repeat of the Japanese double-dip recession scenario
in the 1990s, when the government raised taxes too early and cut public spending in 1996,
just when the economy was starting to show robust growth rates, responding to worries about
a rising fiscal deficit and an aging population. The timing was unfortunate. The economy
started to sputter, and with the onset of the East Asian crisis, it plunged into another severe
recession and the government found itself back in the position of devising stimulus packages,
but starting from a much worse fiscal position. To dispel fears of the Japanese scenario on a
global stage is a big challenge for politicians. Unless a coordinated exit strategy has credibly
been communicated, the above-mentioned fears will continue to rile markets, leading to a
more widespread correlated move in asset prices.
EARLY INDICATORS SUGGEST SLOWER ECONOMIC GROWTH
Selected PMI indices New orders to inventories ratio vs. US GDP
GDP (% qoq, LS) New Orders-to-Inventories (RS)

65 12 2.0
10
60 1.8
8
55 6 1.6
4
50 1.4
2
45 1.2
0
Euroland
40 -2 1.0
US
China -4
35 0.8
-6
30 -8 0.6
Oct-83
Jun-85
Feb-87
Oct-88
Jun-90
Feb-92
Oct-93
Jun-95
Feb-97
Oct-98
Jun-00
Feb-02
Oct-03
Jun-05
Feb-07
Oct-08
Jan-00
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Jun-09
Sep-09
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Dec-09
Mar-10
Jun-10
Source: Bloomberg, UniCredit Research

Euro Credit Pilot
Micro Fundamentals: Earnings Dispersion

Constant headline risk and disappointing macroeconomic news caused investors to
look for signals of the strength of the recovery on a daily basis, elevating correlation
levels across various asset classes. As the global growth momentum has peaked, this
trend will likely reverse and bring higher variability in sector earnings, greater
dispersion in sector spreads and – eventually – rising default rates. Hence, we expect
more cyclical industries and High Yield to underperform in the second half of the year.
In economic downturns, the Credit market spreads kept widening in June. Increasing risk aversion on peripheral sovereign
variability of earnings across
sectors rises debt, banks' funding ability and concerns on the economic recovery left spreads substantially
higher from April through June. The Main softened by 50bp to 128bp (+64%) while the
Crossover went out 147bp to 574bp (+31%). With various macroeconomic indicators in the
US, Europe, and China showing a softening of the global recovery in June, the determinant of
investor sentiment became headline risk and macro data, leaving relative value considerations
across credit segments and in between asset classes on the sidelines. Instead, investors'
growing fears of a global recession drove correlations up and caused asset classes to move
in line with each other, even stock prices and bond yields were more closely linked lately. The
correlation of the ten-year Treasury yield and the S&P reached its highest level for the year in
June (see left chart below) as market participants looked for indications on the state of the
economy on a day-to-day basis. Macro being center stage even allowed further compression
of the ratios of Xover to Main and Xover to HiVol, which is stunning, given that the recovery
has topped out. The evolving change in the macroeconomic picture will turn this trend around
and also weigh on earnings of cyclical industries. With ample auctioning of debt by peripheral
sovereigns and rising redemptions of bank paper in the rest of the year, access to funding of
highly levered companies may start to fade. This risk is also flagged by Moody's liquidity
stress index, which worsened for the first time in 15 months, indicating that the share of
speculative grade companies relying on highly uncertain external sources of funding has
increased. The rise from 4.8% to 5% in June was small, but it was the first increase since
March 2009, when the index peaked at 20.9%. The bottoming out of the measure signals that
the improvement in companies' liquidity has ended. In economic downturns, the variability of
earnings across sectors rises (see right chart below) and subsequently dispersion of sector
spreads increases.
CORRELATION OF US TEN-YEAR GOVERNMENT YIELD TO EQUITY AND GDP VS SECTOR EARNINGS GROWTH
Correlation US 10y Treasury Yield & S&P 500 US GDP Growth Rate (real) & Sector Earnings Change
1.0 200% 10%

Sector earnings change (EPS change)
0.8
0.6 100% 5%
0.4
0% 0%
GDP growth
0.2
0.0 -100% S&P 500 CONS DISCRET IDX -5%
S&P 500 ENERGY INDEX
-0.2 S&P 500 FINANCIALS INDEX
-0.4 -200% S&P 500 INDUSTRIALS IDX -10%
S&P 500 INFO TECH INDEX
-0.6 S&P 500 TELECOM SERV IDX
-300% S&P 500 UTILITIES INDEX -15%
-0.8 S&P 500 CONS STAPLES IDX
US real GDP (forecast)
-1.0 -400% -20%
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10

Euro Credit Pilot
Debt-Equity Linkage: The correlation game

On the back of a significant rise in risk aversion, also the level of correlation among
equities jumped to new highs. Referring to the methodology shown in the appendix, we
calculated the "average" correlation of single stocks within the Euro STOXX 50 index.
The analysis reveals that this correlation recently reached new highs – even higher
than during the post-Lehman shock period.
We use a simple model The correlation chart below was determined on a moving basis. We derived it for the current
to quantify the "average"
level of correlation within constituents of the Euro STOXX 50 index. The weights were fixed at current levels, which
a portfolio means that any changes in weights were not reflected in the calculation. As this fixation of the
weight affects the index level, we derived the portfolio variance not from the real Euro STOXX 50
time price series, but from the calculated weighted average of individual asset returns.
Moreover, we prefer to calculate correlations on a more stable weekly basis rather than on a
very volatile daily basis. The moving variances in the calculation were derived for a (moving)
24-week period. The resulting time series of historical moving correlation is given in the charts
below (red line) – versus the Euro STOXX 50 index (left chart) and versus the implied volatility
of the Euro STOXX 50 (right chart).
Findings: How can the results be interpreted? First, the volatility of the correlation is substantial. During
1) volatility of correlation
is substantial the period under consideration, it ranges from 10% to 70%. This finding places a question
mark on a Markowitz-style portfolio optimization. Second, the current level of the correlation is
2) current level higher than
after the Lehman default
even higher than during the post-Lehman shock period. Third, there is a remarkable
dependency between the volatility and the correlation (right chart), while the dependency
3) remarkable dependency between the index level and the correlation is not that high. Nevertheless, the chart shows
between correlation and
volatility that the correlation is rather event-driven. During the two phases of stress – the Lehman
collapse and the sovereign debt crisis – the correlation rose significantly. This, however, is no
surprise. If there is an important external factor that is driving markets, all assets typically
behave in the same way and this is also the time when risk aversion (measured by implied
volatility) is high. This finding refers to the concept of tail-dependency. In simple terms, this
means that during normal times (i.e. in the belly of the distribution), asset returns may be
moderately correlated, while under extreme conditions (i.e. in the tail of the distribution), the
correlation jumps and assets tend to be highly correlated. In mathematical terms, this
dependency pattern can be modeled using a suitable copula function. What can a portfolio
manager learn from this analysis? When everything is correlated, it is not the time for relative
value plays but for maintaining the absolute value of a portfolio.
"Average" portfolio correlation versus the index level… …and versus implied volatility
Correlation Euro STOXX Correlation Implied Volatility

1.0 5,000 1.0 90
0.9 4,500 0.9 80
0.8 4,000 0.8 70
0.7 3,500 0.7
Average correlation
Average correlation
60
Implied volatility
Euro STOXX
0.6 3,000 0.6

50
0.5 2,500 0.5
40
0.4 2,000 0.4
30
0.3 1,500 0.3
0.2 1,000 0.2 20
0.1 500 0.1 10
0.0 0 0.0 0
Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10

Euro Credit Pilot
Credit Quality Trend: Default cycle uncertainty

The European sovereign debt crisis has filled the headlines during the past few
months. But more recently also concerns regarding a slowing global economic
recovery have weighed on risky asset markets and supported continuously strong
investor demand for safe-haven assets like German Bunds, UST and Swiss francs. Talk
about a double-dip recession in some of the major economies has not abated. Most
economists think that investors should not be overly concerned about a double-dip
recession, neither in the US nor in Europe overall. However, the subdued growth
outlook already brings about great uncertainty regarding future default rates, due to
the correlation between default and economic cycles.
US historical default rates The left chart below shows the historical 12M trailing default rate for the US corporate sector.
The data provided by Moody's comprises the defaults in the portfolio of corporate debt issuers
rated publicly or non-publicly by the rating agency. For the speculative-grade rated sub-
portfolio, separate default rate figures are published on a monthly basis (red line), which are
markedly higher than the historical rates for the whole portfolio. During the past decades,
default cycles in the US were usually associated with economic recessions. The peak of the
trailing default rates occurs usually towards the end or shortly after the recessionary period.
Recessions and default rates Therefore, the economic growth outlook for the US and Europe should have immediate
consequences for the default rates and credit quality trend for corporate credit. Moody's most
recent default forecasts for the European (right chart) and US (left chart) speculative grade
corporate sectors reflect precisely this fact. The baseline scenario foresees for both regions a
vigorous decline of the default rate until the end of 2010 and beyond. This scenario assumes
moderate economic growth but no economic contraction. Interestingly, the baseline case does
not differ dramatically from the optimistic forecast in both regions.
A large gap between the The pessimistic scenario involves a double-dip recession. Although this is an unlikely scenario
baseline and pessimistic
scenarios according to mainstream economists, the consequences for high-yield default rates are
dramatic according to Moody's. In particular, for Europe a renewed economic contraction
could lead to a high-yield default rate in June 2011, which is of the same magnitude as the
peak level in November 2009 (11.8%). There is clearly a great gap between the pessimistic
and baseline default projections for June 2011. Correspondingly, uncertainty regarding
economic growth is amplified by the future default rate development. Credit spreads will
certainly need to reflect this default rate uncertainty.
US BUSINESS CYCLES* AND CORPORATE DEFAULT RATES SG DEFAULT RATES AND FORECASTS FOR EUROPE**
US recession Europe SG hist DR

16% US Spec. Grade 16%
Europe SG DR forecast (base)
14% US Allcorp Europe SG DR forecast (pessimistic)
14%
baseline forecast
Europe SG DR forecast (optimistic)
12% pessimistic forecast 12%
12M trailing default rate
12M trailing default rate
optimistic forecast
10% 10%
8% 8%
6% 6%
4% 4%
2% 2%
0% 0%
Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan 99 Jan 02 Jan 05 Jan 08 Jan 11
*The NBER has not yet formally announced the end of the 2007-2009 recession Source: Bloomberg, Moody's, UniCredit Research
**Moody's speculative grade default rate forecasts as of 8 June 2010

Euro Credit Pilot
Market Technicals: Bond supply vs. market spreads

Technicals can clearly dominate the fundamental environment as we have seen
throughout the crisis, particularly on the primary bond market. Bond supply is getting
scarce (despite fundamentally sound issuers) as soon as there is a market distortion.
While fundamentals are key in the long run, new bond supply and liquidity are a major
driving force for credit markets in the short to medium term. Primary activity is thereby
negatively correlated to credit spreads and positively correlated to liquidity.
New Issuance activity On primary markets, investors are – on the one hand – demanding a spread pick-up for new issues
is negatively correlated
with credit spread and as an investment incentive and compensation for rising debt levels. On the other hand, liquidity is
positively with liquidity improving gradually with a (moderately) higher outstanding bond volume of an issuer. But
especially in crisis mode, wider spreads accompany declining primary activity as issuance
becomes costly and demand shrinks. Thus, liquidity declines with rising risk aversion of
investors. Vice versa, narrowing spreads are fueling new bond supply. This relationship is
especially pronounced: a) after an external shock or within a recovery leg from market turmoil,
or b) the riskier the assets class and the more center stage it is in a crisis. In practice, High
Yield issuance totally eroded from Sept 07 with deepening risk aversion from the subprime
spillover and issuance returned with significant volume in Jan 09 when spreads narrowed on
the economic recovery. However, recent volatility led to subdued high yield primary activity
again. In Financials, the spread blowouts particularly in Jun 07 (subprime), Sept 08 (Lehman)
and in 2Q10 (Greece) led to a halt in issuance. In the corporate universe, narrowing spreads
in March 2008 and April 2009 were fueling new issuance, while primary markets were
subdued in 2Q07, 3Q-4Q08 as well as in 2Q10. With a marginal stabilization of market
spreads, the technical situation should slightly improve in 3Q.
EUROPEAN PRIMARY BOND MARKET ACTIVITY AND MARKET SPREAD LEVELS
Market Technicals are

likely to stabilize, but new High Yield Bond Issuance iTraxx Xover High Yield Cash Spread
issuance should not pick 1,600 9
up significantly before the 1,400 8
summer lull in August 7
1,200
6
1,000
5
800
bp
bn
4
600
3
400 2
200 1
0 0
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Corporate Bond Issuance iTraxx Main iBoxx Non Fin Financial Bond Issuance iTraxx FinSen iBoxx Finsen
350 40 400 35
300 35 350 30
30 300
250 25
25 250
200 20
20
bp
200
bn
bn
bp
150 15
15 150
100 10
10 100
50 5 50 5
0 0 0 0
Nov-07
Aug-09
Nov-07
Aug-09
Feb-06
Sep-06
Apr-07
Jun-08
Jan-09
Mar-10
Feb-06
Sep-06
Apr-07
Jun-08
Jan-09
Mar-10
Source: iBoxx, Bondradar, UniCredit Research

Euro Credit Pilot
Valuation & Timing

Tactical View: The short-term pressure will not disappear…
On a tactical time horizon, the next big topic is the 2Q10 earnings release season, which will
keep investors busy over the next few weeks. While on the non-financials side, earnings will
probably be in line with OK-ish expectations (a slowdown in the growth momentum is
expected, but it will still be in positive territory), earnings data for European financials will meet
more scrutiny from investors. Although there was already a considerable spread widening of
sovereign bonds in the European periphery in the first quarter, the second quarter was a real
bummer. 5Y CDS spreads for Greece, for example, closed above 900bp at the end of June,
not very far from previous spread highs above 1000bp, which compares with about 350bp at
the end of 1Q. While for Portuguese and Spanish government bonds the fears calmed down
towards the end of the quarter, spreads are still well above 1Q closing levels (Portugal 310bp
versus 140bp, Spain 265bp versus 120bp). Moreover, other credit assets came under
pressure as well. Non-financials cash bond spreads, for example, closed the second quarter
at 115bp (iBoxx), almost 30bp higher than at the end of 1Q. For financials bonds (iBoxx
financials incl. subordinated bonds), spreads rose from 165bp to almost 240bp, while for
covered bonds spreads widened from 70bp to almost 120bp. Consequently, for mark-to-
market assets, there should be some losses. However, besides some possible idiosyncratic
disappointments, this should not (yet) lead to disastrous earnings data even for banks, as the
underling fundamental performance in loan books will remain OK. Hence, investors will watch
for early indicators of a fundamental deterioration, such as downward earnings revisions
(or sales figures) of non-financial corporations or rising loan-loss provisions by banks.
Strategic View: …while longer-term prospects deteriorate

But even if the 2Q earnings season will be disastrous (which we do not expect), many signs
indicate a deterioration ahead: 1) The expectation component of sentiment indices like the
German Ifo are already pointing towards a decline. 2) The growth locomotive (China) tries to hit
all the breaks to avoid an overheating of the economy, in particular to calm the already bubbling
housing market (however, a rising yuan will make it easier for Chinese competitors to sell
goods and, in particular, exporters for consumer goods to China – like cars – will benefit in the
short term). 3) Even the quite strong recovery in the US did not lead to an easing in the US
labor market, which will weigh on consumption in the second half of 2010. 4) The continuing
turmoil in the US financial system on the back of old/known problems (savings & loan crisis,
commercial real estate delinquencies) and new/upcoming problems (municipality defaults) will
keep investors busy with negative headlines. 5) The European sovereign debt crisis is not
over and the (already initiated) process of resolving the fundamental problems via austerity
measures will weigh on growth. Hence, it would be no surprise to enter into a phase of hefty
discussions regarding a potential double dip recession. Recall that ahead of the last
recession, there was a plethora of comments that the global economy was fundamentally
robust and that the problems would be contained and that the decoupling of developing
economies from the problems in the developed countries will also help to stabilize the latter.
All these hopes were invalidated after the collapse of Lehman sent financial markets into a
spin and resulted in a spike in risk aversion. The latter had to be resolved by governments
and central banks injecting trillions of additional stimulus and liquidity. The fundamental problems
(too much leverage in our economies), however, have not been resolved despite the
deleveraging of the shadow banking system, which cost billions. On the contrary, additional
leverage problems on the sovereign side became apparent and limit governments’ ability to
act in similar manner as last year (i.e. throwing vast amounts of money at the problem). It has
long been clear that at a certain point in time these fundamental problems have to be
addressed. The hopes were that this could be done in a much better economic environment.
This is the case right now.

Euro Credit Pilot
Spread Forecast Table

SPREAD FORECAST 2010 (BP)
actual forecast actual forecast

iBoxx nonFin iTraxx Main 250 250
300 300
iBoxx FinSen iTraxx FinSen
250 250 200 200
200 200
150 150
bp
bp
150 150
100 100
100 100
50 50
50 50
0 0 0 0
Jun-09 Aug-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jun-09 Aug-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
actual forecast
1400 1400
HY iTraxx Xover
1300 1300 Index 1-3M 3-6M
1200 1200 A iBoxx universe o o
1100 1100 BBB iBoxx universe – –
1000 1000 Telecoms iBoxx universe o o
900 900 Automobiles iBoxx universe – –

Industrials iBoxx universe – –
bp
800 800
700 700 Utilities iBoxx universe o o

600 600 Hybrids iBoxx universe – –
500 500 Financials Sub iBoxx universe – –
400 400 Financials Sub iTraxx universe – -
300 300 HY cash BB (ML) – –
200 200 HY cash B (ML) – –
Jun-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
Source: UniCredit Research

Euro Credit Pilot
Other Credit Markets

Credit derivatives – Spreads and the FX rate
Quanto adjustment The EUR/USD exchange rate is probably one of the most liquidly traded financial assets
EUR credit spreads
globally. Euro-zone sovereign debt troubles, counterproductive political response (at
least from the point of view of investors) and associated vulnerability of the European
banking sector triggered the weakness of the EUR – not only vs. the USD. At the same
time, credit risk premia for many euro-zone government bonds deteriorated. The
relationship between credit spreads and the exchange rate has an impact on the
pricing of credit risk in different currencies, leading to a quanto adjustment for credit
spreads of sovereign and increasingly also of corporate issuers.
Short-term correlation is weak The left chart below shows the past year's trends of both the EUR/USD rate and the SovX
Western Europe CDS spread. The chart shows that both indicators are cointegrated, meaning
that they were driven by the same macro-economic developments. However, the short-term
correlation of the sovereign CDS spreads and the exchange rate is indeed weak, like the
correlation of daily changes. Spread and rate changes are correlated meaningfully only if
changes are calculated for periods of a few weeks.
Quanto adjustment historically Credit spreads for the same issuer but for credits in different currencies differ and according
important for emerging market
credits to pricing theory, they should do so. This is best motivated in terms of CDS cash flows: The
protection leg of a CDS in a currency that would usually depreciate (e.g. EUR) before the
respective entity defaults or when its credit quality deteriorates (e.g. euro-zone government) is
worth less than the CDS protection leg in another currency (e.g. USD) that is not cointegrated
with the credit spread. This leads to a tighter spread in the former currency. Historically, the
issue arose in the context of emerging market debt (e.g., Finkelstein, 1999) but regained
importance in the current crisis in conjunction with EUR and USD, the most liquidly traded pair
and the two currencies in which more than 98% of global CDS are denominated in!
Current quanto adjustments Usually, CDS are quoted in a single currency only. The spread difference between EUR and
traded in the market
USD denominated CDS (the quanto adjustment) is currently available for sovereign and some
corporate names. For Greece (see right chart below), the absolute level of the quanto
adjustment increased during the past few months. Relative to the Greek sovereign CDS
spread, the adjustment remained rather constant (≈-5%). Recently, however, the ratio of the
CDS-spread quanto-adjustment increased markedly for better credit qualities. For example,
the relative quanto adjustment for Germany CDS reached -20% to -25% recently.
COINTEGRATED CREDIT SPREADS AND EXCHANGE RATES QUANTO SPREAD ADJUSTMENT FOR 5Y GREECE CDS
SovX WE (USD) EUR/USD Greece 5Y CDS quanto adj. (EOD)

180 1.10 30 1,100
Greece 5Y CDS quanto adj. (5D average)
20 1,000
EUR-USD CDS quanto adjustm. (bp)
160 1.15 Greece 5Y CDS (in USD) (RS)

10 900
140 1.20
index CDS spread (bp)
0 800
120 1.25
CDS spread (bp)
-10 700
exchange rate
100 1.30 -20 600

80 1.35 -30 500
-40 400
60 1.40
-50 300
40 1.45
-60 200
20 1.50 -70 100
0 1.55 -80 0
Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10
Source: Markit, Bloomberg, UniCredit Research

Euro Credit Pilot
Securitization: Issuance in the doldrums for longer?

Public issuance volumes in Securitization picked up markedly from 3Q09, while origination
activity for repo purposes leveled off. However, in the wake of the sovereign debt
crisis, ABS issuance has become scarce again due to high spread volatility. Although
ABS spreads widened just marginally compared to, e.g., financial spreads, new
issuance fell below EUR 6bn per month. The primary market dried up, while issuance in
alternative products like covered bonds thrives (EUR 35 bn in 2Q).
Steady primary issuance is Securitization issuance today remains dominated by transactions structured for central bank
not to be expected soon
refinancing (e.g. via repo facilities) by the originator. The largest part of securitized exposure
since last July is made up of retained RMBS deals (EUR 154bn), which are mainly related to
tranches from the Netherlands (25%), the UK (23%), Italy (24%) and Spain (8%). Retained
exposure today contains, to a large degree, non-senior, hardly-sellable tranches, some
refinancing of maturing transactions, as well as exposure related to higher fundamental risk
(e.g., CMBS, CLOs) for which the primary spread is relatively wider and public issuance
hardly feasible economically. But structuring for repos has natural limits (effectual exposure is
already placed with the ECB, while loan volumes are off their peaks) – hence, also ABS
central bank refinancing has declined and overall ABS outstanding amortized slightly below
EUR 3.1tn. Recent credit volatility and the blowout in financials/ sovereigns have made it once
more difficult for originators to structure cost effectively and find investors. Currently, the
public primary market remains open only for well established mainly high quality originators
within the Dutch & UK prime RMBS and Auto ABS sector. Will primary market activity remain
in the doldrums for longer? Future ABS amortization (more than EUR 40bn in 2010 and 2011)
and distorted wholesale funding options are continuing to keep the pressure on originators.
With prolonged high volatility, dismal securitization activity is furthermore accompanied by
declining primary activity elsewhere on credit markets, thus from a pure funding perspective,
securitization still has a reason to exist. Furthermore, securitization volumes are hardly
absorbed by other sectors with a stable investor base and tighter issuance spreads, like
covered bonds (CB), as an alternative to RMBS. As the ECB's CB purchase program ended,
the CB primary market is now no longer running on extra steam. In addition, CBs are no
substitute from a regional point of view, as paper is mainly referencing French and German
mortgages while RMBS is predominantly backed by UK, Spanish, Dutch or Italian mortgages.
Demand for Spanish CB remains subdued as well and CB are no alternative with respect to
non-senior debt. In any case, it takes at least two preconditions in order to achieve a healthy
primary market: a) risk aversion needs to clearly decline, while b) a regulatory reliable
environment has to be established. Both are unlikely to materialize in the short term.
EUROPEAN SECURITIZATION MARKETS: ISSUANCE VOLUMES AND OUTSTANDING SINCE JULY 2009
Cumulative issuance activity in securitization Issuance activity per month & securitization outstanding*
ABS retained CDO retained CLO retained CMBS retained ABS retained CDO/ CLO retained CMBS retained
RMBS retained ABS placed CMBS placed RMBS placed RMBS retained ABS placed CMBS placed
RMBS placed Covered Bonds Outstanding (RS)
350
80 3.2
300
70
Outstanding (EUR trn)
250 60
200 50
EUR bn
40 3.0
150
30
100
20
50 10
0 0 2.8
Aug-09
Nov-09
Aug-09
Nov-09
May-10
Jul-09
Oct-09
Jan-10
Mar-10
Apr-10
Jun-10
Jul-09
Sep-09
Oct-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
Jun-10
*covered bonds include only Euro 500mn+ issues Source: UniCredit Research

Euro Credit Pilot
EEMEA Corporates: Risk of more recoupling

Uncertainty about the outcome of the eurozone debt crisis led to a recoupling of
EEMEA corporates with global credits. This means that the sell-off we saw particularly
in May can be repeated again, offering even more appealing entry levels for EEMEA
credit exposure as headline risk from the eurozone remains high. However, the main
question is how strong the recoupling with the eurozone will actually be; as long as the
correlation remains low, it still offers diversification benefits from including EEMEA
credits in developed markets’ portfolios. Although there are reasons to expect that
correlations between EEMEA credits and eurozone credits will rise, it is unlikely to
become perfect, i.e., reach levels seen during the Lehman crisis.
Scope for less than "perfect" We think, however, that the most important channel causing a potentially quick rise in
correlation between EEMEA
and eurozone credits correlation between EEMEA and global credits is the credit transmission channel: core
European banks present an important (contagion) bridge between eurozone periphery and
Emerging Europe: between 77% (Turkey) and 99% (Estonia) of Emerging European external
borrowing comes from Western European banks, which are at the same time important
creditors to the eurozone periphery. Thus, there is a risk that core European banks facing
troubles in the periphery might tighten credit links to Emerging Europe. We think that there are
reasons why the correlation between Emerging European and major markets' credits should
be less than "perfect": (1) Emerging European banks' fundamentals are improving, which
allows them to scale up domestic lending, thus substituting to a certain extent international
lending. (2) The Russian government built up a reputation of strong support for "strategically
important" issuers during the Lehman crisis, something we expect to happen again, if
required. (3) Rating momentum turned positive in Emerging European credits in 1H10, which
should remain supported by our macro view that the fiscal consolidation in the euro-zone
periphery should not affect too dramatically the Emerging European growth outlook. The latter
are primary dependent on Germany, where fiscal adjustments are weaker; CEE 17 are
expected to grow by 3.1% and 4.3% in 2010 and 2011. (4) Refinancing needs in 2H10 are
moderate and even if risk appetite dries up again, maturities throughout 2H10 remain
manageable. Nonetheless, as the eurozone crisis creates substantial downside growth risks
including deflationary risks, and growth momentum looks to be abating also in China, which
would be a bad omen for commodities notably oil, industrial metals and steel prices, we
recommend only defensive positioning in quasi-sovereign credits and private credits with very
strong fundamentals (e.g. GAZPRU, TMENRU, TPSA, RSHB, VTB).
CORRELATION IN EEMEA CREDITS INCREASED… BUT TO DIFFERENT DEGREES
EEMEA 5Y CDS* correlation with iTraxx Crossover Correlation of ML HY Index and EEMEA components of CEMBI
Jun-10 Jan-10 High Yield-EEMEA Corporates High Yield-Kazakh Corporates

1.0
1.000 High Yield-Russian Corporates
0.8
0.800
0.6
0.600
0.4
0.400
0.2
0.200
0.0
-0.2 0.000
-0.4 -0.200
-0.6 -0.400
RU QuasiSov
RU Private
Metals&Mining
Kazakh3
RU OIG
Russia10
CEE3
RU Banks
RU Telecoms
-0.600
Corp.
07-May-08
07-Nov-08
07-May-09
07-Nov-09
07-May-10
07-Jan-08
07-Mar-08
07-Jul-08
07-Jan-09
07-Sep-08
07-Mar-09
07-Jul-09
07-Jan-10
07-Sep-09
07-Mar-10
RU
Source: Markit, Bloomberg, JPM, UniCredit Research

Euro Credit Pilot
Sector Allocation
Given the expected growth deceleration in China and its implications for commodity demand,
we reduce our sector recommendation for Basic Resources to Marketweight from Overweight.
With this step, we continue with our de-risking strategy that we announced last month: we
missed an opportunity to reduce exposure to this more cyclical sector, however, we were
reluctant to act in the middle of a panic. All other recommendations were kept unchanged.
CREDIT ALLOCATION TABLE
Current iBoxx weight YTD spread Current

As of 6 July 2010 recommendation (%) change spread level
Macro allocation
Sovereigns AAA OW 35.0 -20.3 -27.6
Sovereigns ex-AAA MW 27.9 60.8 119.1
Sub-Sovereigns OW 13.0 17.2 41.7
Covered Bonds OW 4.3 52.0 117.3
Financials UW 9.0 39.3 235.3
Non-Financials UW 10.9 24.1 116.0
Sector allocation NFI
Telecommunications TEL MW 16.9 45.2 137.3
Media MDI MW 1.5 -1.0 134.2
Technology THE MW 0.8 11.8 113.1
Automobiles & Parts ATO MW 9.5 9.0 106.7
Utilities UTS MW 25.2 26.9 101.6
Oil & Gas OIG OW 7.4 35.3 121.7
Industrial Goods & Services (Core) IGS UW 6.5 -0.2 120.1
Aerospace & Defense AED MW 0.9 49.3 145.9
Industrial Transportation ITR OW 3.3 58.7 172.5
Basic Resources BAS MW 2.2 64.7 210.4
Chemicals CHE UW 4.4 3.3 92.4
Construction & Materials CNS UW 3.3 58.5 199.2
Health Care HCA UW 6.3 6.2 53.2
Personal & Household Goods (Core) PHG MW 2.0 -1.6 81.1
Tobacco TOB OW 2.4 7.0 99.7
Food & Beverage FOB OW 2.9 -1.3 87.8
Travel & Leisure TAL UW 0.6 -82.9 182.6
Retail RET UW 3.8 16.1 101.5
Quality allocation NFI
AAA OW 0.2 -11.1 25.1
AA OW 12.6 12.1 62.2
A MW 49.8 16.5 88.8
BBB UW 37.4 35.5 170.7

Euro Credit Pilot
Appendix
Correlation assessment – the (bitter) mathematical truth
In the following, we aim at deriving a mathematical framework to assess the price correlation
in a portfolio of risky assets. Note that this refers to the price correlation, not to the event
correlation, such as the default correlation. We start by assuming a portfolio consisting of n
assets Si with individual weights wi . The volatility of each asset is given by σi and the
pair-wise correlations by ρ i, j . Using these parameters, the average portfolio volatility σ P is

defined by the following equation.
σP = ∑w w σ σ
i, j
i j i j ρi, j (1)
Let us define an average correlation of the individual assets by the following substitution
ρ i, j = ρ . Equation (1) can this be reformulated in the following way:
σP = ∑w w σ σ
i≠ j
i j i j ρ+ ∑w σ 2
i i
2
(2)
144244
3 1
424
3
i
off diagonal elements diagonal elements
This means that we pursued the following substitution of an example correlation matrix
⎛ 1 ρ1, 2 ρ1,3 ⎞ ⎛ 1 ρ ρ⎞
⎜ ⎟ ⎜ ⎟
⎜ ρ1, 2 1 ρ 2,3 ⎟ → ⎜ ρ 1 ρ⎟
⎜ρ ρ 2,3 1 ⎟⎠ ⎜⎝ ρ ρ 1 ⎟⎠
⎝ 1,3
In the next step, we want to rearrange equation (2) such that we can solve for the average
correlation ρ .
∑w w σ σ
i≠ j
i j i j ρ + ∑ wi2σ i2 = σ P2
i
… and resolving the result for ρ
σ P2 − ∑ wi2σ i2
ρ= i
∑w w σ σ
i≠ j
i j i j
This means that we can calculate the "average" correlation in an index from the volatility (or better:
from the variance) of the index and the volatility (variance) of the individual assets. This
concept is useful when dealing with so-called equity dispersion products. In such a product,
an investor buys a variance swap on an index and sells variance swaps on the underlying
individual assets (or vice versa). In the above-mentioned notation, this residual variance can
be described as follows:

Euro Credit Pilot
⎛ ⎞
σ{P2 − ⎜ ∑ wi2σ i2 ⎟ = ρ ⋅ ∑ wi w j σ iσ j
Variance of index ⎝1i4243⎠ 14 i≠ j
42443
Variance of individual assets Residual variance
In this way, one can isolate the residual variance of a long index variance swap and short a
portfolio of individual variance swaps. The ρ is thus a parameter that – besides the
volatilities σ i and σ j describes this residual variance in this portfolio.
Another way to approximate a mean pair-wise correlation ρ~ is to calculate the average over
the individual pair-wise correlations ρ i, j (assuming equal weights). The factor ½ in the
equation below accounts for the double counting of ρ i, j and ρ j,i .
1 1
ρ~ ≈ ⋅ ⋅ ∑ ρi , j
2 n i≠ j
Finally, one can also approximate the "level of correlation" within a portfolio by calculating the
"mean" correlation of the individual assets to the total portfolio. However, this quantity is
typically higher than taking the full pair-wise correlation matrix into account.
1 n
ρ~ ≈ ⋅ ∑ ρ i,P
n i =1
Note, however, that this "mean" correlation is a rather artificial mathematical concept. The
figure has a limited "real" life meaning, other than being the "mean" correlation that leaves the
portfolio volatility invariant. It is a similar concept that is typically used for deriving an average
default correlation in a credit portfolio in order to calculate implied correlations for tranches. In
such a tranche pricing model (i.e. a credit portfolio model), one derives an average correlation
of the individual assets to an overall economic factor.

Euro Credit Pilot
Fundamental Credit Views

Telecommunications (Marketweight)
Sector key figures Sector Wrap-Up
Weight in iBoxx NFI: 16.9% Sector drivers: Major spread drivers of the telecom sector are the macroeconomic environment (in the respective
regions/countries), emerging market exposure, pension liabilities, shareholder background, competitive and regulatory
Current ASW spread: 135.6bp environment, M&A activities, shareholder remuneration measures, the impact of currency exchange rate deviations,
change mom/YTD: +4.5 / +43.5 inflation, liquidity, new issue pressure and, last but not least, the sovereign debt crisis. Currently, fundamentals took a
backseat in the assessment of telecom credits and the underlying sovereign debt crisis is the main driver for spreads,
while the impact from austerity measures and the macroeconomic environment is mainly visible in Greece and Spain.
Euro STOXX TEL YTD: -14.0% For 2H10, we mainly assume three possible scenarios: 1) The sovereign debt crisis appears more manageable and
the related negative sentiment calms down. Then, the telecom average sector bond spread should face a stronger
recovery than the NFI average bond spread. 2) The sovereign debt crisis and austerity measures weigh significantly
stronger on the economic development than expected and we face a so called "double-dip" scenario. Then, telecom
bonds are likely to benefit in general from its "safe haven"-status and low cyclicality compared to other sectors. 3) The
situation remains basically unchanged. Then, telecom bond spreads, in particular from OTE, PT, TEF and TI will
continue to stabilize at currently exaggerated levels.
Last month's recap: In June, the iBoxx average telecom sector spread widened by another 8bp to 138bp, while the
NFI spread widened by 2 bp to 115bp. Hence, the telecom sector underperformed the iBoxx NFI average spread.
While in particular OTE, TITIM and Telefonica bonds were the major underperformers due to the spread development
of related sovereign debt (and the Vivo acquisition), bonds of telecom operators with a strong underlying sovereign
(KPN, Vivendi, DT, TELNO) outperformed during last month.
Current Ratings Credit Name (Ticker): Recommendation Weight in iBoxx

(Moody's/S&P/Fitch) Profile Comment Telecommunications sector
A2s/A-s/A-s Stable America Movil (AMXLMM): No recommendation (event-driven coverage) 1.5%
In June, America Movil made its debut in the EUR and GBP bond markets, as it issued EUR 1.0bn (7Y), EUR 750mn (12Y) and
GBP 650mn (20Y) notes. America Movil is Mexico's largest wireless operator with a market share of approximately
71%. In addition, it is positioned as a leading regional mobile telecom service provider in Latin America with over 206 million
wireless subscribers. Globally, it ranks as No. 8 in the global telecom universe in terms of revenues and EBITDA. It
generated a strong operating cash flow of over USD 10bn in the last twelve months ended in 31 March 2010, stand alone,
and should have a low leverage of 1.3x adjusted debt to EBITDA for year-end 2010 (expected by Moody's pro forma
for the recent acquisitions of Telmex and Telint). The integration of recent acquisitions of Telmex and Telint (reason for
the new issues: refinancing these acquisitions) will help America Movil to return its targeted leverage of adjusted debt-
to-EBITDA back to its guidance of below one time. The new issues were well received in the Eurobond market as good
diversification in the single A-rated telecom segment.
A2n/An/As Stable AT&T (T): Marketweight 2.4%
AT&T reported mixed 1Q10 results. Sales increased by 0.3% yoy to USD 30.65bn (consensus estimate of USD 30.74bn)
versus USD 30.86bn in 4Q09. The group EBITDA rose yoy by 2.0% and 9.7% qoq to USD 10.84bn. The group
EBITDA margin increased yoy from 34.7% and qoq from 32.0% to 35.4%. The main driver behind this development
was the wireless business where service revenues increased by 10.3% yoy. AT&T Wireless had, with 1.9mn new
subscribers, the highest net gain in its history. Churn levels improved, postpaid net adds increased over-
proportionately and data ARPU increased. One of the very few negative points was a decline in equipment sales of
over 12% yoy. In our opinion, the good operating performance was mainly driven by the success of the iPhone, which
is sold at highly subsidized prices. The success of the wireless business was almost offset by the strong voice revenue
decline of 12.0% yoy, while wireline data revenue growth of 5.6% mitigated this decline. In 1Q10, FOCF (operating
cash flow minus capex) generation fell to USD 3.9bn from USD 4.6bn in 1Q09, mainly due to higher working capital
outflows, while FFO and CAPEX were roughly at the same level yoy. The company used USD 2.5bn of FCF for
dividend payments, while the remainder was mainly used for net debt reduction. Net debt (derived from the reported
balance sheet) declined yoy from USD 68.3bn to USD 66.8bn, according to our calculations. AT&T's annualized net
debt-to-EBITDA (LTM) declined qoq to 1.6x from 1.7x at YE09. AT&T has a relatively stable operating outlook for 2010,
while moderate upside potential could stem from an economic rebound: revenues and operating margins are expected
to remain stable yoy. However, FCF will decline to the 2008 level (USD 13.3bn), as capex is expected to rise to USD 18-19bn
due to higher wireless capacity investments and one-time W/C gains in 2009. The company stated that its 1Q10
margins are on track with its above-mentioned outlook. Moody's and S&P have a negative outlook on AT&T's A2/A
rating, as the company has essentially exhausted its debt capacity at the current rating level. An unanticipated
weakening of operations, a significant debt-funded acquisition, or a further increase in unfunded pension and other
retirement liabilities could lead to a downgrade, while the announced acquisition of Alltel assets from Verizon for USD 2.35bn is
already incorporated in this rating view. Hence, this acquisition is expected to be closed in 1H10 (depending on
regulatory approval) and will delay the return to the leverage target of below 1.5x (net debt to EBITDA). If the company
returns to below 1.5x leverage, it might consider a new share buyback program. However, we assume that AT&T
needs to deleverage to slightly above 1.0x on a reported basis to reduce its fully adjusted leverage to around 2.0x on a
fully pension and operating lease adjusted basis, which is in line with current ratings. Hence, if the company reinitiates
share buybacks before its leverage is reduced to a level commensurate with current ratings, agencies might consider a
one-notch downgrade to a low single A rating. However, current spread levels of its euro-denominated bonds discount
for these risks as well as for a potential downgrade to a low single A rating. (2Q10 results: 22 July)

Euro Credit Pilot

A1s/A+s/--- Stable Belgacom (BELGBB): Underweight 1.6%
Belgacom released solid 1Q10 results. Total revenues increased by 10.0% yoy to EUR 1,641mn, driven by the
consolidation of the BICS business. EBITDA (excluding non-recurring items) remained almost flat (increased by 0.7% yoy, or
EUR 3mn) at EUR 495mn. The EBITDA margin declined yoy to 30.2% from 33.0% in 1Q09, but in adjusted terms,
declined only to 32.4%. Quarterly FCF (OCF minus capex) improved yoy to EUR 303mn versus EUR 291mn. Net debt
decreased from EUR 1.7bn at YE09, to EUR 1.4bn at the end of 1Q10, due to FCF generation. The reported net debt
to EBITDA ratio was down at around 0.7x from 0.9x in the previous quarter. Against the current economic background
and taking into account the estimated regulation impact, Belgacom reiterated the following outlook for 2010: Group
revenues are expected to increase by between 8% and 9% due to the consolidation of BICS as of 1 January 2010,
which is more towards the upper end of expectations. EBITDA should range between 30%-31% meeting the overall
consensus expectation) and the capex-to-revenue ratio should be stable at 10% yoy. We do not expect a negative
impact from this quarterly announcement on Belgacom's rating. Despite pressure on the company's EBITDA margin,
its cost reduction measures seem to moderate it. We keep our underweight recommendation for the name, despite the
fact that Belgacom is more than 50% owned by the Belgian government. Belgacom bond spreads continue to trade
relatively tightly compared to peers and we regard the downside risk, e.g., from M&A activities and shareholder
remuneration, as higher than upside potential. (2Q10 results: 30 July)
Baa2n/BBB-s/BBBs Stable BT-Group (BRITEL): Underweight 3.1% (member of the iTraxx NFI)
BT Group released better-than-expected 4Q09/10 results and provided a relatively stable (adjusted EBITDA) outlook
for 2010. Revenues (Retail -4.0%, Wholesale -5.2%, Global Services -2.3%, Openreach -0.9%) decreased by 3.4% yoy to
GBP 5,198mn (consensus of GBP 5.17bn) and adjusted EBITDA (Retail +6.3%, Wholesale 0.0%, Openreach -3.7%)
rose by 16.2% yoy to GBP 1,530mn (consensus of GBP 1.44bn), as the Global Services EBITDA rose to GBP 177mn
from GBP 32mn in 4Q09. Excluding the Global Services segment, EBITDA improved by 5.2% yoy mainly thanks to
cost reduction measures. The adjusted EBITDA margin was 28.6% compared to 23.9% in 4Q08/09 or 27.6% on
average in FY09/10. FCF (defined as OCF minus capex) declined yoy by 7.8% to GBP 1,045mn in 4Q FY09/10, mainly
due to lower contributions from working capital, which offset the improved operating performance and lower tax
payments. On a full-year basis, FCF benefited from a capex reduction of GBP 573mn and a positive change in taxes of
GBP 577mn, while it was burdened by a W/C-related swing of GBP 865mn. Hence, FCF increased to GBP 1,408mn
(after GBP 525mn in pension deficit payments) versus GBP 737mn in FY08/09. We think that these FCF
improvements (GBP 671mn) do not appear fully sustainable. The usually strong fourth quarter FCF reduced reported
net debt from GBP 10.1bn to GBP 9.3bn. According to our calculations, adjusted net debt to adjusted EBITDA declined
to 3.0x qoq from 3.4x, which should be in line with a BBB- rating at S&P, as the pension deficit also declined. BT
provided a relatively stable yoy outlook for FY10/11: Revenues are expected to decline yoy by 4.4% to EUR 20bn and
adjusted EBITDA is expected to be at the same level as in FY09/10 at around GBP 5.8bn. Capex should be around
GBP 2.6bn and free cash flow at GBP 1.8bn (before pension deficit payment of GBP 525mn but after the cash flows
related to specific items of around GBP 150mn) versus GBP 1.9bn in FY09/10. The company stated that it sees
potential to roll out fiber to around two-thirds of the UK by 2015, with total fiber investments of GBP 2.5bn. These
investments should be covered by the above-mentioned annual capex guidance. The company further targets to
reduce net debt to below GBP 9.0bn in FY10/11. BT has not provided an update on its discussions with the pensions
regulator so far. The net pension deficit declined qoq to GBP 5.7bn (GBP 7.9bn gross of tax) from GBP 6.4bn net of
tax (GBP 8.8bn gross of tax). We keep our underweight recommendation for the name, as we are skeptical about the
FCF improvement. Moreover, we are skeptical that BT can continue to execute its capex reductions (capex-to-sales
ratio of 12.0% in FY09/10) on a sustainable basis, given the highly competitive UK telecommunications market and
BT's need to roll out a fiber network. The company's outlook is already skewed towards a weaker operating
development (revenues, FCF) in FY10/11. Any unexpected weakness, for example due to a softer-than-expected
macroeconomic development, could exaggerate this trend. (1Q FY10/11 results: 29 July)
Baa1s/BBB+s/BBB+s Stable Deutsche Telekom (DT): Marketweight 15.7% (member of the iTraxx NFI)
Deutsche Telekom (DT) released 1Q10 results with better-than-expected revenue growth, while EBITDA was roughly
in line with expectations. DT adjusted its outlook for the deconsolidation of T-Mobile UK from 1 April onwards, but kept
it otherwise unchanged. In 1Q10, net revenues decreased by 0.6% yoy (domestic: -2.9%, international: +1.3%) to EUR 15.8bn
(consensus estimate of EUR 15.58bn). Adjusted EBITDA increased yoy by 1.6% to EUR 4.89bn, almost hitting the
analysts' consensus of EUR 4.86bn. The company posted a net profit of EUR 767mn versus a loss of EUR 1.12bn in 1Q09.
Net debt declined qoq by EUR 0.5bn to EUR 40.4bn at the end of 1Q10 due to FCF generation. This reflects a net debt
to EBITDA (LTM) ratio of 2.06x, almost unchanged qoq. DT reiterated its outlook for full-year 2010, expecting an
EBITDA of EUR 20.0bn and FCF of EUR 6.2bn. However, the EBITDA outlook needs to be adjusted for the
deconsolidation of T-Mobile UK as of 1 April 2010 for EUR 400-500mn, while the FCF target does not need to be
adjusted as DT expects to receive dividends from the JV with Orange (FT) in the UK. The 1Q10 results announcement
contains no significant surprises. Assuming stable net debt of EUR 40.4bn and the new EBITDA guidance of the
company (EUR 19.5-19.6bn), the net debt to EBITDA ratio will moderately increase to 2.07x in 2010 and still remains
at the lower end of the target range of 2.0-2.5x. However, given potential acquisition payments for OTE (and maybe PTC),
as well as spectrum license payments (which are likely to be at the lower end of expectations) and merger integration
costs for the domestic operations merger, leverage could turn out to be higher at YE10. Given the high amount of off-
balance operating lease liabilities, rating agencies' adjusted leverage is on average roughly one time higher at around
3.0x net debt to EBITDA. Hence, the expected yoy EBITDA decline at constant dividend payments reduces the
company's financial flexibility at current ratings and makes its rating more sensitive to additional unexpected negative
performance changes. However, during DT's investor day in March, the company pointed out a couple of promising
initiatives which should support its efforts to stabilize its business in the domestic fixed line segment, the US mobile
business and in Eastern Europe. We keep our marketweight recommendation for DT bonds whose main strengths in
the current market environment are the underlying sovereign background, its known shareholder remuneration policy
and the fact that according to management, no major M&A activities are planned. (2Q10 results: 5 August)

Euro Credit Pilot

A3s/A-s/A-s Stable France Telecom (FRTEL): Marketweight 14.1% (member of the iTraxx NFI)
France Telecom (FT) released 1Q10 figures below expectations (especially with respect to the EBITDA development), but
confirmed its outlook for 2010. Consolidated revenues fell by 2.0% to EUR 10,959mn (consensus of EUR 10,995mn)
on a historical basis, and 2.7% yoy on a comparable basis, mainly caused by regulatory measures. EBITDA dropped
4.8% on a historical basis to EUR 3,764mn (consensus estimate of EUR 3,836bn), down 5.5% yoy on a comparable
basis. The EBITDA margin was 34.3% in 1Q10, a yoy 1.0pp decline on a comparable as well as on a historical basis,
largely due to regulatory measures and a new telecommunications tax. Capex declined 21.0%/21.7% yoy on a
historical/ comparable basis, reflecting poor weather conditions (causing capex deferrals) in Europe as well as a high
level of capex in 4Q09. The capex-to-sales ratio was, at 8.0%, unsustainably low compared with the already low 9.9%
in 1Q09. Consequently, the amount of "EBITDA minus capex" (as an indicator of FCF) was up 1.4%/0.8% on a
historical/ comparable basis. France Telecom confirmed its 2010 outlook. Given that FT has not provided concrete full-
year EBITDA guidance, there was no need for an outlook revision as long as it has no impact on its FCF guidance. So
far, FT left its FCF unchanged for 2010 as well as for 2011. Given the low capex in 1Q10, we expect that the first thing
that might be revised is capex guidance, as weaker-than-expected EBITDA is likely to be offset by capex reductions (at
least in a first step). The consensus currently expects full-year revenues and EBITDA to decline yoy by 1.6% and 4.0%
to EUR 45.1bn and EUR 15.6bn, respectively. We assume that the company's FCF is still achievable despite the
EBITDA weakness in 1Q10. Recently, FT's new CEO unveiled its new industrial project "conquests 2015". Despite a
significant growth initiative including acquisitive growth, the company confirmed its FCF target of EUR 8.0bn of organic
FCF in 2010 and 2011 and reiterate its medium-term target of 2.0x net debt to EBITDA (1.97x at YE09). Hence, net
debt only needs to be slightly adjusted to the lower EBITDA to fulfill its target leverage. We keep our marketweight
recommendation for FRTEL bonds at current valuations. (2Q10 results: 29 July)
Baa2s/BBB+s/BBB+s Stable KPN NV (KPN): Marketweight 9.7% (member of the iTraxx NFI)
KPN reported sound 1Q10 results with slightly weaker revenue growth, but stronger-than-expected EBITDA growth.
The company confirmed its outlooks for 2010 and 2011. In 1Q10, revenues decreased by 3.5% yoy (vs. -6.9% yoy
in 4Q09) to EUR 3,277mn (consensus estimate of EUR 3.32bn), including a EUR 28mn (-0.9%) effect from disposals.
KPN's EBITDA increased yoy by 7.2% to EUR 1,323mn, which exceeded the consensus estimate of EUR 1.29bn. The
EBITDA margin strongly increased from 36.3% in 1Q09 to 40.4% in 1Q10 (38.8% in 4Q09). In 1Q10, FCF amounted to
EUR 228mn, up yoy from EUR -56mn due to higher profitability and lower capex. The reported net debt to EBITDA
increased qoq from 2.1x to 2.2x at the end of 1Q10, as the company prepaid its 2010 corporate income tax liability of
EUR 543mn in a lump sum to receive a discount. KPN confirmed its outlook for revenues, EBITDA and FCF for 2010.
Despite a yoy 3.5% revenue decline, KPN's CEO was confident that he can achieve a flat yoy top-line result, as growth
in Germany is expected to revive from 2Q10 onwards. EBITDA could cope well with the lower top-line and actually
benefitted from cost reduction and efficiency measures, despite adverse regulatory measures such as declining mobile
termination rates. KPN's CFO stated that the company will be able to further reduce its OPEX going forward. A new
gliding path for MTRs was announced recently. KPN said that it should have only a minor effect on its 2010 results,
while for 2011, the company still needs to assess the impact. The company recently obtained 2x10MHz of spectrum in
the 2.6GHz band for EUR 0.9mn. MNO's, Tele2 and a combination of UPC/Ziggo have also obtained spectrum. The
2.6GHz spectrum is capex-wise not efficient for a nationwide rollout. It is more likely that the spectrum was only bought
because it was (very) cheap and as it might improve the negotiation power for MVNO conditions. We do not expect
more competition from the 2.6GHz auction alone, while more clarity might come from the 800, 900 and 1,800MHz
frequencies in the future. KPN did not comment on the ongoing spectrum auction in Germany. The highest offer for the
attractive 800MHz frequencies (2x5 paired) is at around EUR 300mn. We still assume that KPN will continue to return
excess FCF to shareholders and, depending on the auction outcome, that a significant investment in spectrum in
Germany would reduce the share buyback volume in 2010 and/or 2011. We keep our marketweight recommendation
for KPN bonds. We expect that KPN's (proven) modest M&A policy compensates for its aggressive shareholder
remuneration policy. We currently like KPN's underlying sovereign risk as well as its low affinity to acquisitions in the
current market environment. (2Q10 results: 27 July)
A2s/As/A-s Weakening Nokia (NOKIA): Underweight 0.0%
Covered under Technology (Telecom equipment provider)
Aa1n/AAs/NR Stable NTT (NTT): No recommendation (event-driven coverage) 0.0%
Nippon Telegraph and Telephone Corporation (NTT) released FY09/10 results that were on track to meet the
company's full-year forecast, which was revised downwards in November 2009. In FY09/10, operating revenues
decreased yoy by 2.3% to JPY 10,181.4bn (company forecast: JPY 10,170bn) and operating income increased by
0.7% yoy to JPY 1,117.7bn (company forecast: JPY 1,110bn), as the negative impact from the traditional voice
revenue decline was mainly offset by cost reduction measures. The company provided a relatively stable forecast for
FY10: operating revenues of JPY 10,160mn (-0.2% yoy), operating income of JPY 1,165mn (+4.2% yoy) and net
income of JPY 500mn (+1.6% yoy). Moody's negative outlook reflects concerns regarding sustainable growth in
revenue and earnings in the current economic environment and that the improvement to its key financial metrics may
be delayed. Japan's telecom market is mature and growth driven by the next generation network services might slow
down. In addition, the penetration rate in the mobile telecom market is already high (above 85%) and the growth rate is
slowing. Despite the increase in its subscriber base, NTT DoCoMo's market share is gradually declining. As a result,
NTT's revenue may continue to decline, and earnings could be pressured further, if it fails to lower its operating costs.
NTT should maintain or improve its financial metrics over the medium term via controlling its operating costs and capex
to keep its ratings stable. Recently, KDDI, Japan’s second largest telecom operator, announced that it would pay USD 4bn
for a 38% stake in Jupiter Communications, which will lower KDDI's dependence on market leader NTT for access to
NTT's phone lines. However, Moody's believes that it is unlikely that this transaction will take much business away
from either NTT or Japan’s third telecom operator, Softbank, and the impact on NTT's credit quality will be negligible.
Moody's and S&P regard the NTT group as a government-related entity, as the Japanese government (Aa2s/AAn/AAs)
holds 33.71% of NTT's shares as of YE09. NTT's euro-denominated bond spreads recently suffered from the
Japanese sovereign CDS and government bond spread widening. (1Q FY10/11 results: 5 August)

Euro Credit Pilot

Baa2s/BBB-s/BBBs Stable OTE (OTE): Overweight 2.8% (member of the iTraxx NFI)
OTE has reported a relatively good start for 2010 (above expectations) given the negative economic and the
challenging market environment of the company, while the results themselves were clearly yoy weakening. However,
the company warned in its outlook statement that the pace of deterioration could accelerate during 2010. In 1Q10,
group revenues declined yoy only by 3.1% (like-for-like: -2.7% excluding the deconsolidation of Cosmofon in 2Q09),
FY09: -6.6%) to EUR 1,409.3mn (consensus estimate of EUR 1.38bn), as they benefited from a resilient operating
performance in the Greek mobile market, while keeping revenue erosion in the remaining segments under control. Pro-
forma OIBDA (~EBITDA) decreased yoy by 5.1% to EUR 515.9mn in 1Q10 (consensus estimate of EUR 479mn),
reflecting an OIBDA margin of 36.6%, 0.8pp lower than the comparable quarter of the prior year. FOCF (defined as
OCF minus capex) declined to EUR 17.3mn in 1Q10 from EUR 108.7mn, mainly due to a special tax contribution of
EUR 113.1mn. Net debt apparently changed little qoq at EUR 5,548.9 mn. Taking reported net debt and pro-forma
EBITDA LTM (including the impact of the voluntary retirement program) into account, the net debt to EBITDA ratio was
unchanged qoq at 2.4x. With respect to the company outlook for 2010, OTE indicated that the revenue decline seen in 1Q10
might accelerate during 2010 with obviously negative consequences for EBITDA. However, for the time being, we are
confident that OTE benefits from synergies due to the cooperation with DT and that it is likely to receive refinancing
support from DT, which is underpinned by OTE's recent request to its upcoming AGM to approve a loan from DT at
market conditions, or better. Moreover, we believe that in an effort to reduce sovereign debt, the Greek government is
likely to sell at least 10% of its remaining 20% stake in OTE in the foreseeable future. Nevertheless, further rating
pressure on OTE, such as S&P's recent downgrade to BBB-, becomes increasingly likely the more OTE's operating
performance suffers from the weak macroeconomic environment and the more rating pressure weighs on the Greek
sovereign. We assume that such rating pressure can mainly be reduced by a stronger equity investment of DT in OTE.
Recently OTE cut its dividend to one third of its former proposal (probably to save cash and to reduce rating pressure).
We keep our overweight recommendation for OTE bonds. Given statements by DT's management regarding its OTE
investment during DT's investor day in March, we are confident that DT will continue to support OTE even with
intercompany loans. Moreover, we assume that DT is interested in increasing its stake in OTE beyond the put option of
the 10% stake in OTE which the government has against DT. Given the EU supranational aid package and the
separate support package for Greece combined with the assumed support of DT, we recommend to buy short-dated
OTE bonds in particular, such as the OTE 3.75% 11/11/11 and OTE 5.365% 02/14/11. (2Q10 results: 4 August)
Baa2s/BBBwn/BBBs Weakening Portugal Telecom (PORTEL): Underweight 3.5% (member of the iTraxx NFI)
Portugal Telecom (PT) released 1Q10 results roughly in line with expectations. PT's Brazilian operations (Vivo – 50-50 JV
with Telefonica) were the main "growth" driver in BRL, offsetting weaker results from its domestic (mobile) operations,
which were impacted by MTR cuts, lower equipment sales and the build-up of the Meo pay-TV business. In 1Q10, revenues
increased by 10.5% yoy to EUR 1,773.4mn. EBITDA before post-retirement benefits increased by 5.1% yoy to
EUR 633.4mn, reflecting a declining EBITDA margin yoy of 35.8% (35.8% in 4Q09) compared to 37.6% in 1Q09. Net
debt increased from EUR 5,528.0mn at YE09 to EUR 5,659.8mn at the end of 1Q10. This was mainly as a result of
negative FCF generation (EUR -57mn versus EUR -92mn in 1Q09), driven primarily by a seasonal working capital
outflow and currency adjustments (EUR 30mn). Adjusted net debt to EBITDA LTM (company definition) remained flat
qoq at 2.2x in 1Q10 and remained flat yoy. If we adjust this ratio by operating lease and pension liabilities, it would be
around 2.9x. With respect to the company's operating performance, the trends remain basically unchanged. On
13 May, S&P placed its BBB corporate credit rating on Portugal Telecom (PT) on creditwatch with negative
implications, reflecting that the group might not deleverage to the extent that the rating agency had previously
anticipated. According to S&P, PT's leverage (defined as fully adjusted debt to EBITDA) for 2009 was 3.3x. This is
higher than S&P's previous estimate and similar to the level achieved at YE08. The accounts show a significant
increase in off-balance-sheet operating lease commitments (with total commitments of EUR 951.7mn compared with
EUR 703.4mn a year earlier). S&P considers the FY09 and 1Q10 credit metrics to be weak for the rating. The metrics
indicate that PT has not yet achieved material debt deleveraging. Given the group's heavy capital expenditures and the
difficult economic conditions in its home market, S&P is uncertain how much, if any, debt deleveraging can be
achieved in 2010. S&P's creditwatch placement comes at an interesting time. Not only is the Portuguese government
under pressure to reduce its debt burden, but PT has recently received an offer from Telefonica for its 50% stake in
Brasilcel, i.e., its stake in Vivo, for EUR 7.15bn. Hence, PT could deleverage (total net debt of EUR 5.7bn) with only
one disposal, while the company has no refinancing needs until 2012. S&P's creditwatch status for PT's rating was
unrelated to Telefonica's offer and reflects a lack of progress in deleveraging. Moreover, PT's future ratings will depend
on the usage of the disposal proceeds for acquisitions, shareholder remuneration and debt reduction. Given this high
uncertainty, we have an underweight recommendation for PORTEL bonds. (2Q10 results: 22 July)
---/---/A-s Weakening SFR SA (SFRSA): Underweight 0.0%
SFR is the second largest mobile operator in France. The company is 55.8% owned by Vivendi Universal SA and
43.9% by Vodafone Group Plc. In 2008, SFR finalized its merger with Neuf Cegetel, thus creating the second-ranking
global operator in France. With 19.7 million mobile customers and 3.9 million high-speed Internet customers, SFR is
the leading alternative mobile and fixed-line operator in France. In FY09, reported group revenues increased by 7.6%
to EUR 12,245mn driven by the integration of Neuf Cegetel into SFR, while on a comparable basis revenues increased
only by 0.3%. Mobile revenues remained almost flat yoy at EUR 8,983mn (-0.1% yoy), as a huge MTR cut (-31% in
July 2009) was offset by good subscriber growth, in particular in post-paid customers (1,225,000 net adds in 2009
reflecting a market share of 36.2%), which was supported by the successful introduction of the iPhone in April 2009.
However, the company's market share, measured by its customer base, declined yoy by 0.7 pp. to 33.2%. Broadband
Internet and fixed revenues decreased 1.3% on a comparable basis to EUR 3,775mn due to the structural reductions
in voice revenues and regulatory measures, partially offset by good growth in broadband Internet customers (565,000 net
adds reflecting on third of market net adds). Reported group EBITDA remained basically flat at EUR 3,967mn (+0.2%) yoy,
while on a comparable basis group EBITDA declined by 4.5% yoy. The decline reflects the fact that benefits from
mobile customer growth and higher data usage were more than offset by the increasingly competitive environment,
additional taxes (to finance the state-owned audiovisual sector reform) and from MTR cuts as well as the economic
crisis. The reported group EBITDA margin declined to 31.9% in 2009 from 34.3% in 2008, while this was mainly driven
by the integration of Neuf Cegetel's lower margin fixed/broadband Internet business. Despite the moderately
weakening operating performance, the financial profile is expected to remain solid. However, credit metrics are
burdened by its dividend policy (maximum distribution of net profits), especially as Vivendi Universal's ratings depend
on the cash flow of its majority-owned subsidiary. A standalone rating, totally separated from the rating of VU, is rarely
seen and needs a fully secured ring-fencing from the parent company. This might be one reason why the company is
not rated by S&P and Moody's. We continue to see no value in the bond, as our rating estimate is at best reflected in a
high BBB rating. (2Q10 results: 1 September)

Euro Credit Pilot

Aa2s/A+s/As Stable Singapore Telecom (SINTEL): No recommendation (event-driven coverage) 0.5%
Singapore Telecommunications Limited (SingTel) released 4Q09/10 results in line with expectations, which were
positively impacted by a strengthened AUD, continued growth in mobile services across the group, as well as healthy
growth in the company's IT and engineering segments. In 4Q09/10, the group's operating revenues increased by 25.4% yoy and
0.5% qoq to SGD 4,471mn. The operational EBITDA rose by 16.2% yoy and 8.4% qoq to SGD 1,336mn. The
operational EBITDA margin fell yoy to 29.9% from 32.2% in 4Q08/09 and increased from 27.7% in 3Q09/10. The
Group EBITDA rose by 13.1% yoy and 4.1% qoq to SGD 1,901mn. Excluding the impact of currency fluctuations,
SingTel's consolidated revenue and EBITDA improved yoy 7.9% and 9.2%, respectively. Hence, SingTel reported
healthy yoy growth in group revenue and EBITDA, bolstered by a strengthening in the AUD and improvements in
associates' contribution (Bharti, Telkomsel, Globe, etc.), as well as solid underlying growth in the company's Singapore
and Optus businesses. Net debt increased qoq moderately from SGD 6.2bn to SGD 6.3bn. The main credit protection
ratios showed almost unchanged healthy figures: EBITDA to net interest coverage of 24x and net debt to EBITDA of 0.9x
(adjusted by Moody's: 1.3x). As SingTel continues to invest abroad for growth opportunities, and receives an
increasing contribution of dividends and earnings from overseas, SingTel can no longer be viewed solely in the context
of Singapore and Australia, according to Moody's. To incorporate this, Moody's also considers SingTel's metrics on a
pro-rata consolidated basis, consolidating SingTel's associates proportionally for the company's ownership. As Bharti's
acquisition of Zain assets is largely debt financed, Moody's expects SingTel's proportionally consolidated leverage, pro
forma for the transaction, to rise closer to 2.0x debt / EBITDA. While this is high for the rating level, Moody's gains
comfort from SingTel's strong market positions in Singapore and Australia, both of which provide a high degree of
stability to underlying earnings. (1Q10/11 results: 12 August)
Baa2s/BBBs/BBBs Stable Telecom Italia (TITIM): Marketweight 9.1% (member of the iTraxx NFI)
TI released 1Q10 results above expectations, while unexpected weakness in its domestic fixed line business combined
with rumors about increasing competition in the Italian fixed line business and assumed rising Italian sovereign risk, led
to a significant spread widening of TITIM bonds. In 1Q10, organic revenues declined by 4.7% (reported by 0.7%) yoy
to EUR 6,527mn (consensus estimate of EUR 6,464mn) and organic EBITDA remained almost flat yoy (+0.1% yoy,
reported +3.2%) at EUR 2,836mn (consensus estimate of EUR 2,761mn). The group EBITDA margin improved
consequently by 1.6 pp. yoy to 43.6%. FCF defined as OCF minus capex was negative with EUR 149mn in 1Q10
versus a positive EUR 76mn in 1Q09. Due to the Hansenet disposal proceeds of EUR 0.9bn, adjusted net debt
declined to EUR 33.3bn at the end of 1Q10 from EUR 34.0bn at YE09. This leads to a reportedly adjusted net debt to
organic EBITDA ratio of 2.94x, down from 3.0x at YE09. TI confirmed its 2010 outlook: Revenues (like-for-like) are
expected to decline yoy by 2%-3%, while organic EBITDA should remain stable yoy. Capex should amount to EUR 4.3bn
(EUR 4.5bn in FY09) and adj. net debt should reduce to around EUR 32bn (FCF est. after dividends EUR >1.0bn). The
main driver behind the TI Group's outperformance of the consensus was the result of TIM Brazil, where revenues and
EBITDA increased yoy by 8.2% and 36.2% respectively. Wireline revenues declined qoq by 4.9%, which is the
strongest decline over the last five quarters. Domestic mobile revenues declined by 7.4% and were slightly better than
expected. TI's CEO indicated that the dividend might be increased in the medium term, if FCF generation improves and
progress in net debt reduction is achieved. The company excluded M&A transactions for the purpose of geographic
expansion. In fact, the company will demonstrate capital discipline and continue its deleveraging strategy via further
non-core asset disposals such as Telecom Argentina (estimated disposal proceeds of EUR 500mn). During the
conference call, TI's CEO did not even rule out a potential disposal of TIM Brazil in case of "a very, very generous
offer". This would be, however, in complete contradiction with TI's 3Y Strategic Plan framework, i.e., we do not think
that this is currently under discussion. We have changed our overweight recommendation to marketweight for TITIM
bonds. While we are still convinced that TI's operating performance would improve under "normal" circumstances in 2010,
mainly driven by cost reduction measures, our overweight recommendation did not fit with the current environment of
rising sovereign risk in the EU, as demonstrated by recent rating actions on Greece, Portugal and Spain. In addition, the
unexpected weakness in the domestic wireline business came as a negative surprise, while we are currently not overly
concerned about the potential NGN of TI's competitors and its negative influence on competition. (2Q10 results: 5 August)
Baa1p/A-wn/A-s Stable Telefonica (TELEFO): Overweight 12.4% (member of the iTraxx NFI)
Telefonica released mixed 1Q10 results, as revenues were slightly above and OIBDA slightly below expectations.
Consolidated revenues increased by 1.7% yoy in reported terms to EUR 13,932mn (consensus estimate of EUR 13.75bn).
Consolidated OIBDA fell by 4.1% in reported terms to EUR 5,114mn (consensus estimate of EUR 5.235bn). FOCF (net
cash flow after capex) declined by 13.6% yoy to EUR 984mn. Net debt increased to EUR 45.3bn due to share
buybacks (EUR 446mn) and acquisitions (mainly Hansenet). The ratio of net debt (plus commitments) to OIBDA
increased qoq from 2.1x at YE09, to 2.3x at the end of 1Q10, which is in the middle of the company's target range (2x-2.5x). In
May, Telefonica announced an offer to acquire Portugal Telecom's stake in Brasilcel (Vivo) for EUR 5.7bn. In the meantime,
Telefonica increased the purchase price twice to EUR 7.15bn. However, despite a positive vote of PT's shareholders at
an EGM, the purchase was rejected as the Portuguese government blocked the positive vote via the special power of
its "golden share" (500 Class A shares). Minority shareholders associations in Spain and Portugal are considering
suing the Portuguese government over its use of a “golden share” to veto Telefonica’s bid. Telefonica believes that the
veto under the "Golden Share" is illegal, as it infringes, in addition to Portuguese law, EU Law, in particular, among
others, Article 56 of the EU Treaty. The European Court of Justice will rule on the veto power on 8 July. Therefore,
Telefonica extended the period granted to PT to communicate its acceptance of the offer until 16 July, 2010. We think
that, in the medium term, the transaction would be positive for Telefonica's business profile and outweighs the negative
impact on Telefonica's financial profile in the short-term leverage. S&P placed its A- rating for Telefonica on
creditwatch as it is uncertain that Telefonica can keep its leverage below 2.8x including this transaction (hurdle ratio).
Especially purchase price increases like the last one to EUR 7.15bn increase(d) the likelihood of a downgrade to BBB+
by S&P. However, Telefonica trades already relatively wide, driven by the underlying sovereign risk that we do not
expect a significant spread widening on TELEFO bonds, if at all, when the above-mentioned transaction is eventually
approved (our base case scenario). Our overweight recommendation is based on relatively value terms (TELEFO
bonds trade significantly wider than bonds of its peers), which is only due to the situation of the Spanish sovereign,
while the company's exposure to Spain is only in the area of 40%-45% of revenues/OIBDA. (2Q10 results: 30 July)

Euro Credit Pilot

A3s/BBBs/--- Weakening Telekom Austria (TKA): Underweight 1.9% (member of the iTraxx NFI)
Telekom Austria (TA Group) released 1Q10 results, which were typically in line with expectations and slightly better
with respect to EBITDA. TA Group confirmed its outlook for the full year 2010. In 1Q10, revenues decreased by 5.9%
to EUR 1,126.0mn (consensus estimate of EUR 1.13bn), driven by lower revenues from domestic operations and
Bulgaria. Cost reductions in the Mobile Communication segment absorbed half of the pressure on revenues and limited
the EBITDA decline to 6.4%. EBITDA was EUR 425.9mn (consensus estimate of EUR 413mn) in 1Q10. While the
ongoing reduction of line losses allowed a stabilization of operating trends in the Fixed Net segment, Mobile
Communication continues to be impacted by a fierce competitive environment combined with regulative interventions.
Net debt declined by 4.6% to EUR 3,450.2mn at the end of 1Q10 compared to EUR 3,614.8mn at YE09. Net debt to
EBITDA (LTM) was unchanged qoq at 2.0x. TA Group reiterated its outlook for 2010: For full year 2010, revenues are
expected to amount to roughly EUR 4.7bn. Given significant cost reduction programs in both segments, EBITDA
should reach about EUR 1.6bn (EUR 1,794mn in 2009). Depending on investments for the migration to an All-IP based
voice network in the Fixed Net segment, capex is forecasted to reach approximately EUR 800mn. This amount does
not reflect a material roll-out of glass fiber, which is not expected to start in 2010. Operating FCF should amount to
EUR 800mn. The TA Group is suffering from a challenging environment, which is expected to persist in 2010:
a) Ongoing fixed-to-mobile substitution in Austria; b) Continued price pressure in TA's major markets; c) Adverse
regulatory measures such as lower roaming prices as well as reduced mobile termination rates in Austria, Bulgaria,
Croatia and Slovenia; d) Introduction of taxes levied on selected mobile communication services in Croatia and the
Republic of Serbia. The company tries to counterbalance these negative effects via cost reduction programs, but is
limited in its efforts in Austria due to a large percentage of civil servants in its workforce. We keep our underweight
recommendation on the name due to circumstances which are not under the control of the company, such as
sentiment for a company which has a significant part of its activities in Eastern Europe, regulatory measures and costs
from the merger of domestic operations. (2Q10 results: 18 August)
A3s/A-n/BBB+n Stable Telenor (TELNO): Overweight 2.1% (member of the iTraxx NFI)
Telenor released sound 1Q10 results with a better-than-expected EBITDA development, despite missing the net profit
consensus. In 1Q10, Telenor’s revenues fell by 2.7% yoy to NOK 23.95bn (consensus estimate: NOK 23.9bn) on a
reported basis. This was driven mainly by negative currency effects (strengthening of the NOK), which were partially
offset by subscription growth in Asian operations. EBITDA decreased by 10.1% yoy to NOK 7.1bn (consensus estimate
of NOK 6.7bn), while EBITDA before other income and expenses decreased by 9.2% yoy to NOK 7.2bn. The EBITDA
(before other income and expenses) margin declined yoy from 32.10% to 29.95% (2009: 31.87%), impacted by the
start of its operations in India. The company lifted its rather conservative outlook for 2010, which is still impacted (as
expected) by investments in India. Based on the current group structure (including Uninor in India and excluding
Kyivstar), using currency rates as of 31 March 2010, Telenor expects low single digit organic revenue growth. The
EBITDA margin before other income and expenses is expected to be around 28% (versus 27%-28% previously), while
capital expenditure as a proportion of revenues, excluding licenses and spectrum, is expected to be 13%-14% (versus
14%-16% previously) after the company will need less capex, mainly in India. Telenor continues to expect that Uninor
in India will contribute with an EBITDA loss in the range of NOK 4.5-5.0bn, but that it will spend less capex in the range
of NOK 2.0-2.5bn (previously NOK 2.5-3.5bn) in India. The successful completion of the VimpelCom Ltd. transaction is
positive for the Telenor Group. The VimpelCom Ltd. share started trading on the New York Stock Exchange on 22 April 2010
and the market value of Telenor Group’s 39.6% economic stake in the company was around USD 7.6bn (NOK 49.4bn),
reflecting a significantly improved governance structure and better financial flexibility. We changed our marketweight
recommendation for TELNO bonds to overweight mainly due to the sovereign debt crisis. We assume that bonds of
telecoms operators in sovereigns with a strongly perceived creditworthiness will be preferred by investors going
forward. We expect that single issuer related matters will take a backseat, which justifies our recommendation for
TELNO bonds which trade already relatively rich for its inherent risks and ratings. (2Q10 results: 21 July)
A3s/A-s/A-s Stable TeliaSonera (TLIASS): Overweight 2.9% (member of the iTraxx NFI)
TeliaSonera released sound 1Q10 results, reflecting the usual pattern of slightly weaker-than-expected revenue
development and stronger-than-expected profitability. Net sales decreased 3.9% to SEK 26,090mn (consensus of SEK 26.3bn),
while organic revenues (in local currencies and excluding acquisitions) increased by 2.5% yoy, as the actual results
were negatively impacted by exchange rate fluctuations. In Mobility Services, the company had good organic growth,
while Eurasia's organic top-line growth of 12.7% compensated for the organic revenue decline in Broadband Services
of 4.1%. EBITDA, excluding non-recurring items, increased by 1.6% yoy to SEK 8,963mn (consensus of SEK 8.76bn),
while organically it grew by 8.8% yoy. Consequently, the EBITDA margin improved yoy to 34.4% (33.0% in 4Q09)
versus 32.5% in 1Q09 due to still improving profitability in Eurasia and efficiency measures mainly in Sweden and
Finland. Free cash flow rose to SEK 3,372mn (versus SEK 3,259mn in 1Q09), mainly due to higher EBITDA and lower
capex, while being negatively influenced by W/C-related cash outflows. Reported net debt decreased to SEK 44,973mn at the
end of 1Q10 from SEK 46,175mn at YE09, as a consequence of FCF generation. The fully adjusted net debt to
EBITDA (LTM) ratio declined qoq from 1.6x to 1.5x (reported 1.2x) at the end of 1Q10. The company's outlook for 2010
remained unchanged. Excess capital shall be returned to shareholders after the Board of Directors has taken into
consideration the company’s cash at hand, cash flow projections and investment plans on a medium-term perspective,
as well as capital market conditions. The company might want to take advantage of the crisis to seek acquisition
targets in Emerging Markets, while it indicated that it might dispose of its Spanish venture YOIGO, which should reach
breakeven in 4Q10. We changed our underweight recommendation for TLIASS bonds to overweight mainly due to the
sovereign debt crisis. We assume that bonds of telecoms operators in sovereigns with a strongly perceived
creditworthiness will be preferred by investors going forward. We expect that single issuer related matters will take a
backseat, which justifies our recommendation for TLIASS bonds which trade already relatively rich for its inherent risks
and ratings. (2Q10 results: 20 July)

Euro Credit Pilot

A2wn/An/An Stable Telstra (TELECO): Marketweight 3.3%
On 11 February, Telstra reported weaker-than-expected 1H09/10 results with net income of AUD 1.85bn, down from
AUD 1.92bn a year ago, compared to an estimate of AUD 1.92bn. Revenues fell by 2.5% yoy to AUD 12.3bn and
EBITDA declined yoy by 0.3% to AUD 5.32bn. However, after cutting capex yoy by 22.5%, FCF increased by 37.0% yoy to
AUD 2.62bn. Telstra lowered its original FY09/10 forecast: While it forecasted low single-digit growth in sales in
summer last year, it now expects a low single-digit decline. However, its EBITDA should continue to show low single-
digit growth and FCF is still expected to be AUD 6.0bn in FY09/10 (ending 30 June 2010). The company indicated that
it will keep its yoy dividend payments stable. Recently, Telstra announced that it had signed a non-binding heads of
agreement (HOA) with the NBN Co. regarding Telstra's participation in the proposed national broadband network. All
three rating agencies (Fitch, S&P and Moody's) released statements, saying that this would have no immediate ratings
impact, as it is too early to judge the potential impacts. The non-binding HOA, if completed, would see Telstra
participate in the roll-out of the fixed NBN, including the eventual decommissioning of Telstra's copper network and
cable broadband service, in return for approximately AUD11bn in net present value terms. Despite a couple of
regulatory and political uncertainties, the potential credit impact will depend on a number of key issues such as: a) The
nature and timing of any compensation payments, and the mix between one-off payments and ongoing rental
payments; b) The composition of Telstra's continuing revenues post any decommissioning of its copper network and its
cable broadband service; c)The expected margin and market share effects on Telstra's retail and wholesale fixed-line
businesses as customers migrate progressively to the NBN; d) Telstra's financial policy and the deployment of funds
received from the NBN Co. and the degree to which they are utilized to re-invest in new technology, used to retire debt
or potentially diverted to shareholders. Telstra's rating is currently on negative outlook by all big three rating agencies,
reflecting concerns over the terms of any structural separation of Telstra, should it be concluded, and the potential for a
dilution of the company's earnings and changed operating and financial profile, in that event. S&P considers that the
compensation payments should provide Telstra with the financial flexibility to limit any near-term downside rating
impact to not more than one notch. As this is currently largely discounted in Telstra's credit spreads, we keep our
marketweight recommendation for the name. (FY09/10 results: 12 August)
A3s/BBB+s/BBB+s Stable TPSA (TPSA): Overweight 0.7%
Telekomunikacja Polska SA (TP-Group) released slightly weaker-than-expected 1Q10 results, while the company
confirmed its full year 2010 outlook. The group revenue decline was less pronounced in 1Q10 than in 4Q09, with
revenues falling yoy by 10.2% to PLN 3,873mn (-4.7% in 1Q09, -7.4 in 2Q09, -10.6% in 3Q09, -12.6% in 4Q09) on a
comparable basis, indicating that the revenue decline might have seen its peak. The company claimed that 1Q revenues were
in line with the FY outlook. EBITDA (before provisions) declined by 14.3% (-17.5% in 1Q09, -21.6% in 2Q09, -19.7% in 3Q09,
-6.5% in 1Q10) yoy to PLN 1,420mn. The resilient EBITDA margin amounted to 36.7% (38.4% in 1Q09, 37.2% in
2Q09, 39.9% in 3Q09, 36.5% in 4Q09), down "only" 1.7pp yoy on a comparable basis (full-year 2008: 42.1% versus
FY09: 37.9%). However, free cash flow-wise, the operating pressure is offset mainly by capex reductions. In 1Q10,
FFO declined yoy by 26.3% to PLN 1,188mn. Working capital needs declined yoy by roughly PLN 100mn and capex
by more than PLN 250mn, resulting in an "only" 11.8% yoy lower FCF of PLN 464mn in 1Q10. Net debt decreased qoq
from PLN 4,382mn to PLN 3,959mn at 1Q10. The reported net debt to adjusted EBITDA (LTM) ratio was stable qoq at 0.7x,
well below the company's own threshold of 1.5x. The company's outlook for 2010 does not suggest a significant
improvement of the situation versus 2009: The telecom market will continue to decline in 2010, although at a slightly
slower pace than in 2009, as further heavy competitive pressure is anticipated, but with a smaller MTR impact in 2H10.
Hence, the company expects revenues to decline at an upper-range single digit figure, but smaller than in 2009 (-8.8%). The
company aims to partially offset the negative effects of regulations, retail price pressure and commercial costs required
to regain market momentum via a cost transformation plan. The EBITDA margin is anticipated to decline by only a low
single digit figure. However, capex to sales ratio (13.3% in FY09) is anticipated in the range of 16%-18%, driven by
additional investments in broadband as part of the memorandum of understanding with the Polish regulator. Given the
FY increase in capex, the net FCF is only expected to be above PLN 2.0bn p.a. between 2010-2012, while this will be
spent for dividend payments. This would have a negative impact on the company's credit metrics (e.g. RCF/debt) and the
company's financial flexibility. Hence, we would not be surprised to see negative rating actions over time. However, we
believe that current spreads of the TPSA 6% 5/22/14 bond more than discount for this development. (2Q10 results: 28 July)
A2s/An/As Stable Verizon Wireless (VZW): No recommendation (event-driven coverage) 1.2%
Verizon Wireless (Cellco Partnership) is the largest wireless service operator in the US and is owned by Verizon
Communications Inc. (55%) and Vodafone (45%). The ratings of Verizon Wireless are mainly based on those of its
majority owner and operator parent Verizon Communications Inc. (A3s/An/As) and reflect the rapid growth of Verizon's
wireless segment, strong business position and cash generation, sizable local exchange operations capable of
producing substantial free cash flow, as well as a modest financial risk profile. In 2009, total revenues of Verizon
Wireless increased on a pro-forma basis by 6.1% yoy to USD 62.1bn. The EBITDA margin (EBITDA/service revenues)
remained almost stable yoy at 45.9% (2008 pro forma for the Alltel acquisition: 46%). 4Q09 pro-forma revenue growth
was only 3.1% and the EBITDA (USD 23.9bn in FY09) margin was 45.0%, indicating some weakness. However, given
the strong subscriber growth of 2.236mn in 4Q09, we assume that most of the operating weakness stemmed from the
subscriber development, which recovered in 1Q10. In 1Q10, revenues increased by 4.4% to USD 15.8bn and the
EBITDA margin returned to 46% (same level as in 1Q09). In FY09, Verizon Wireless had a FCF (net cash provided by
operating minus investing activities) of USD 9.9bn, while net debt amounted to USD 21.0bn. Verizon Wireless had a
leverage of <1.0x. Recently, Verizon Communications' CFO John Killian said that Verizon would be interested in
purchasing Vodafone’s 45% stake in Verizon Wireless. According to the press, Verizon held talks with Vodafone,
discussing options including a merger, buyout and dividend payout from Verizon Wireless. Moreover, Verizon indicated
that dividend payments from Verizon can only be expected after the full repayment of debt at Verizon Wireless, which
might be the case somewhere in mid-2011, according to our estimates. Hence, we expect a relatively positive
development of Verizon Wireless' creditworthiness going forward.

Euro Credit Pilot

Baa2s/BBBs/BBBs Stable Vivendi (VIVFP): Underweight 4.9% (member of the iTraxx NFI)
Vivendi released solid 1Q10 results with higher-than-expected profitability. Revenues increased by 6.0% yoy (6.0% at
constant currencies) to EUR 6,924mn. EBITA rose by 14.1% yoy (14.7% at constant currencies) to EUR 1,590mn and
adjusted net income was up by 13.4% to EUR 736 mn, exceeding the consensus estimate of EUR 658.9mn. Growth
came mainly from Activision Blizzard (due to the strong global demand for "Call of Duty" and "World of Warcraft") and
the consolidation of GVT since 13 November 2009 as well as from SFR. Net debt declined slightly qoq by EUR 0.1bn
to EUR 9.5bn at the end of 1Q10. Vivendi confirmed its guidance of a slight increase in EBITA and high dividend
payments. It increased, however, EBIT(D)A guidance of Activision and SFR and upgraded the overall guidance of GVT
due to the stronger-than-anticipated performance. In 2H09, Vivendi announced the acquisition of Brazilian fixed-line
operator GVT for up to USD 4.2bn, as well as the acquisition of minority stakes in Canal+ France. The acquisitions did
not lead to a strong deterioration of Vivendi's credit metrics. Despite past acquisitions, the company continues to
confirm that it is committed to its Baa2/BBB/BBB ratings, despite its relatively strong shareholder orientation. Moreover,
Vivendi's CEO reiterates continuously that the company is seeking acquisitions in emerging markets and to buy out
minority partners such as Largadere's 20% in Canal+ France, which is currently for sale, as well as Vodafone's 44%
interest in SFR. The disposal of Vivendi's 20% stake in NBC Universal for USD 5.8bn, which the company should
receive in 2010, would increase the company's headroom to make such transactions, while it is questionable if this
headroom alone would be sufficient to keep current ratings in executing such transactions. In addition, the US
Southern District Court of New York found in 4Q09 that Vivendi had violated US securities law, and it might have to
pay more than USD 4.0bn in damages. We believe that the final amount to be paid will be much lower and that it might
take years before a final decision is taken. Vivendi recognized a EUR 550mn reserve as of YE09 with respect to the
estimated damages. However, the amount of damages that Vivendi might have to pay the class plaintiffs could differ
significantly, in either direction, from the amount of the reserve. Hence, legal risk will continue to burden the company's
credit profile for the foreseeable future. We keep our underweight recommendation for Vivendi bonds, as its current
ratings, its M&A ambitions, its strong shareholder orientation/remuneration as well as potential payments regarding a
class action trial are not compatible with current bond valuations. We still believe in the commitment of Vivendi's
management to a BBB rating, but negative headline momentum from its M&A ambitions as well as unsolved
(significant) legal claims could drive spreads wider from current levels, despite a decent operating performance.
(2Q10 results: 1 September)
Baa1s/A-n/A-n Stable Vodafone (VOD): Marketweight 6.6% (member of the iTraxx NFI)
Vodafone released mixed FY09/10 results that were roughly in line with expectations (revenues 2% above and
EBITDA 1% below expectations). The company provided a relatively conservative outlook for FY10/11, but increased
dividend payments. Group revenues and service revenues increased by 8.4% and 8.9% yoy to GBP 44.5bn and GBP 41.7bn
respectively on a reported basis, mainly driven by favorable exchange rate developments and the full consolidation of
Vodacom since May 2009. On a comparable basis, revenues/service revenues declined yoy by 2.3% and 1.6%,
respectively. Organic service revenues (Europe -3.5%, Africa/Central Europe -1.2%, Asia Pacific/Middle East +9.8%)
were impacted by challenging conditions in Europe/Central Europe, while growth stemmed from Africa, Asia-Pacific
and the Middle East, i.e., Vodacom, India, and Turkey. Reported EBITDA grew by 1.7% and organic EBITDA declined
by 7.4% (Europe -7.3%, Africa/Central Europe -5.8%, Asia-Pacific/Middle East +1.4%). Consequently, the EBITDA
margin declined to 33.1% in FY09/10 versus 35.3% in FY08/09. The adjusted operating profit decreased by 2.5% (-7.0%
organically) to GBP 11.5bn, while the company's net income suffered from an impairment charge of GBP 2.3bn on the
goodwill in India due to unexpectedly strong price competition in this market. FCF increased yoy by 26.5% to GBP 7.2bn,
exceeding the company's target of GBP 6.5-7.0bn, mainly due to improved W/C management and a deferred dividend
from Verizon Wireless. Net debt decreased yoy to GBP 33.3bn from GBP 34.2bn, primarily as a result of foreign
exchange movements, as FCF was used for dividend payments (GBP 4.1bn), the 15% stake in Vodacom (1.7bn) and
spectrum purchases in Turkey, Egypt and Italy. Vodafone gave a relatively conservative outlook for FY10/11: adjusted
operating profit of GBP 11.2-12.0bn and FCF in excess of GBP 6.5bn. Vodafone increased the final dividend such that
the total dividend for FY09/10 increased yoy by 7%. Given the expected FCF development, the company also targets
annual dividend per share growth of 7% for the next three years. We keep our marketweight recommendation for VOD
bonds. While we view the company's indication to return to top-line growth as positive, the company's main (rating)
weakness (EBITDA margin pressure) is still not offset, although the decline is expected at a much lower pace. The
improved FCF is positive, but the proceeds were not and probably will not be used for debt reduction. Leverage
declined only modestly yoy, which does not erase rating pressure. A major positive rating trigger would be unexpected
dividends upstream or disposal proceeds from Vodafone's minority interests in Verizon Wireless and SFR. However,
we believe that unexpected dividends as well as disposal proceeds would be largely used for shareholder
remuneration rather than for debt reduction. (1Q10/11 results: 23 July)
Stephan Haber (UniCredit Bank)

+49 89 378-15192
stephan.haber@unicreditgroup.de

Euro Credit Pilot
Media (Marketweight)
Weight in iBoxx NFI: 1.5% Sector drivers: Major spread drivers are the cyclical recovery in advertising expenditures, consumer confidence and
corporate expenditures. We believe that in the current environment, shareholder-friendly financial policies are not on
Current ASW spread: 133.0bp the agenda. However, the sector also consists of less cyclical businesses like Pearson, WPP (market research
change mom/YTD: -13.8 / -2.3 businesses of subsidiary Kantar and acquired TNS), Wolters Kluwer, Reed Elsevier, SES and Eutelsat. More cyclical
are Bertelsmann and Publicis. Nevertheless, WPP, RTL and Publicis saw a stabilization in their markets in 1Q and
expect this also for 2010. The refinancing possibilities of the sector are good.
Euro STOXX MDI YTD: -4.6%
Last month's recap: In June, the iBoxx average media sector spread tightened by around 13bp with SESGLX 20,
EUTELS 17 and BERTEL 14 outperforming and PUBFP12, BERTEL 12 and REEDLN 13 underperforming.

(Moody's/S&P/Fitch) Profile Comment Media sector
Baa2s/BBBs/BBB+n Improving Bertelsmann (BERTEL): Overweight 28.0% (member of the iTraxx NFI)
The Bertelsmann CEO recently said that he is optimistic for 1H10 and the company remains on a "very good course".
The company reported 1Q10 revenues up by 2.7% to EUR 3,622mn and operating EBIT rising to EUR 284mn from
EUR 115mn yoy. The results were supported by cost measures made in FY09, a revival in advertising markets and
continued cost discipline. Net financial debt declined in 1Q10 to EUR 2,775mn from EUR 2,793mn, while economic
debt declined to EUR 5,821mn vs. EUR 6,024mn. Bertelsmann's economic debt/EBITDA dropped to <3.0x from 3.2x in FY09
(Bertelsmann's own target <3x). This leaves no room for acquisitions within the current leverage target and rating.
Bertelsmann confirmed its FY10 forecast for a stable revenue and operating EBIT performance and significantly higher
group profit than last year. We continue to have an overweight recommendation on Bertelsmann bonds in the iBoxx
media sector given the cyclical recovery momentum, the conservative financial policy and strong liquidity situation.
(1H10 results: 31 August)
Baa3s/BBB-s/-- Stable Eutelsat (EUTELS): Underweight 8.1%
Eutelsat's rating was upgraded in November 2009 by S&P after it raised its FY09/10 (ending 30 June 2010) guidance:
revenues +8.4%, EBITDA > EUR 795mn p.a., capex: EUR 450mn p.a. on average in 2010-12, dividends: 50%-75% of
net income (consensus: EUR 250mn). The company's net debt/EBITDA in LTM 1H10 was 3.4x and S&P's hurdle ratio
for the IG rating is a maximum debt leverage of 3.5x. Given the company's guidance, we believe that FCF (after
dividends) in FY10 will be positive and therefore we expect a further improvement in credit metrics. We initiate
coverage with an underweight recommendation for the bond for relative value reasons and as it has a rating close to
sub investment grade. (1Q10/11 results: 29 July)
Baa1s/BBB+s/--- Stable Pearson (PSON): Marketweight 0.0% (member of the iTraxx NFI)
FY09 sales increased by 17% (underlying +2%) and adjusted operating profit increased by 13% (underlying: +2%).
FCF (after dividends) improved slightly to GBP 431mn vs. GBP 347mn yoy and reported net debt declined to GBP 1,267mn
vs. GBP 1,695mn yoy. Pearson's cash position at FY09 was GBP 750mn of short-term debt of GBP 81mn and no bond
maturities in 2010 (2011: GBP 328mn). Net debt/EBITDA (adj.) improved to 2.1x vs. 2.6x yoy and FFO/net debt (adj.)
improved to 38% vs. 31% yoy. The company's 2010 outlook is for another year of underlying profit growth, helped by
the overall resilience of its businesses and good growth prospects in digital, services and emerging markets. We think
that the company finally deleveraged back to the rating hurdles and given stable FCF generation and the very strong
liquidity position, the company might soon be forced to opt for acquisitions on the back of shareholder pressure. For
the time being, we continue to be neutral on Pearson's 5Y CDS, which trades relatively tight for its rating, close to the
other less cyclical media sector names Reed Elsevier and Wolters Kluwer. (1H10 results: 26 July)
Baa2s/BBB+s/--- Weakening Publicis (PUBFP): Underweight 5.0% (member of the iTraxx NFI)
Organic growth in 1Q10 was +3.1% (reported: +8.1%, digital revenues growth >15%) and net debt was down to EUR 707mn vs.
EUR 1,097mn yoy. In FY09, organic growth was -6.5% in a market that declined by 1%-14%, according to the
company. FCF after dividends in 2H09 was a strong EUR 755mn and for FY09 it was EUR 440mn. Total debt/EBITDA (adj.)
weakened to 2.8x from 2.5x yoy. Pubicis' objective is to return to positive organic growth, outperforming the market
once again, and it is aiming to maintain its margins prior to embarking on a new phase of margin growth in 2010. As global
advertising expenditures were revised upwards, Publicis is confident to achieve growth in 2010 that will outperform the
sector in 2010. We note that Publicis has no bond or loan maturities in 2010/2011. According to WPP, Publicis is
looking closely to Interpublic Group in terms of consolidation. As the PUBFP 01/12 bond trades at very tight levels, we
continue to see no value in the bond for relative value reasons. (1H10 results: 23 July)
Baa1n/BBB+n/A-n Stable Reed Elsevier (REEDLN): Marketweight 6.3% (member of the iTraxx NFI)
FY09 revenues up by 14% (flat at constant currencies) and adjusted operating profit was up by 14% (+1% at constant
currencies). On the positive side, net borrowings declined to GBP 3,931mn from GBP 5,726mn yoy, supported by
positive FCF (GBP 1,051mn before restructuring expenditures, dividends), an equity placing on 30 July 2009 (GBP 829mn)
and the weaker USD vs. GBP, as Reed's debt portfolio is largely USD-denominated. Reed's net debt/adjusted EBITDA
improved to 2.9x vs. 3.6x yoy, and is now in line with the company's target of 3.0x after the proceeds of the equity
placement were used to repay the outstanding ChoicePoint acquisition facility and reduce short-term CP borrowings.
The company said that business trends seen in 2H09 are continuing in 2010, particularly with regard to late cycle
effects in its relatively resilient professional markets. Advertising and promotion and certain other markets, such as
employee screening, remain difficult. The rate of revenue decline is, however, expected to slow as comparatives get
easier. A modest reduction in the adjusted operating margin is expected due to a weak revenue environment and
increased investment in legal markets. The exhibition business segment is obviously targeted by buyout firms
according to press reports. We continue to see fair value in the bond as we like the debt leverage target of Reed to
keep its current ratings. (1H10 results: 29 July)

Euro Credit Pilot

(Moody's/S&P/Fitch) Profile Comment Media sector
Baa2s/BBBs/BBBs Stable SES (SESGLX): Marketweight 17.9%
1Q10 recurring revenue increased by 2.4%, recurring EBITDA increased by 2.2% and net debt/EBITDA was 3.11x.
FY09 revenues increased by 4.4% (recurring revenue: +1.7%) and EBITDA improved by 8.1% (recurring: +5.2%). FCF
(after dividends) was a positive EUR 44mn vs. EUR 46mn yoy. For FY10, SES expects a recurring infrastructure
EBITDA margin >82% and a services business profitability of 11%-15% (normalized for start-up activities). For FY10,
the company estimates recurring revenue growth of around 5%. Net Debt/EBITDA is targeted at <3.3x (FY09: 2.99x
vs. 3.16x yoy) in order to maintain "a solid investment grade rating". SES had a contract backlog of EUR 6.7bn at
FY09. We think that the visibility of SES' utility-like business model is comparatively good. At FYE09, SES had a cash
position of EUR 286mn at debt maturities of EUR 367mn in 2010 and EUR 765mn in 2011. In addition, the company
has a new EUR 2bn revolver maturing in 2012. A risk for bondholders could be that the company's financial policy
might become more aggressive (e.g., increasing dividend payments, capex, bolt-on acquisitions), which could lead to a
downgrade to low-BBB, which would still be in line with its investment grade rating target. We still like SES' cash flow
visibility due to a long-term order book, group EBITDA margins of around 70% and the 17%-ownership (1/3 voting
rights; 20.1% cap on any ownership) by the Luxembourg government, effectively prohibiting unfriendly takeovers, as
well as the company's explicit leverage and investment grade rating target. Although the company aims to increase its
dividend payment, we like the resilience of SES's business model and the explicit debt leverage target and now see
fair value in the bonds given the more defensive character of the business. (1H10 results: 30 July)
Baa1s/BBB+s/BBB+n Stable Wolters Kluwer (WKLNA): Overweight 15.5% (member of the iTraxx NFI)
With 1Q10 results, the company confirmed its 2010 guidance for FCF (before dividends) of EUR≥ 400mn (FY09: EUR 424mn),
an ordinary EBITA margin of 20%-21% (FY09: 19.9%), ROIC ≥8%, and diluted ordinary EPS of EUR 1.41-1.45 (FY09:
EUR 1.45). The company's net debt/EBITDA (company definition) improved to 2.9x vs. 3.2x yoy, while its target is
deleveraging to 2.5x over the medium term. We calculated net debt/EBITDA (adj.) improved in FY09 to 3.1x vs. 3.4x
and FFO/net debt (adj.) of 23% vs. 22% yoy. S&P's stable outlook expects WK to maintain its leverage target of
reported net debt/EBITDA of 2.5x (1H: 3.1x), which translates into a fully adjusted debt/EBITDA <3x and FFO/debt of
about 30% (i.e., hurdle ratios for the current BBB+ rating). We like Wolters Kluwer's absolutely resilient business profile
with high visibility, its conservative financial policy with a transparent deleveraging target and good liquidity headroom
above its EUR 500mn policy minimum. We upgrade our recommendation to overweight given the defensive nature of
its business. (1H10 results: 28 July)
Baa3s/BBBn/BBBs Weakening WPP (WPPLN): Marketweight 19.2% (member of the iTraxx NFI)
The first five months' revenues increased by 1.8% (constant currency: +2.2%, like-for-like: +2.0%) and average net
debt for the first five months was GBP 3,121mn vs. GBP 3,391mn at FYE09. FCF in this period amounted to >GBP 900mn.
Net debt/EBITDA (adj.) in FY09 improved to 3.0x vs. 3.2x yoy. The company said that FY10 should profit from the
Winter Olympic Games in Vancouver, the Asian Games in Guangzhou, the FIFA World Cup in South Africa, the World
Expo in Shanghai and the mid-term congressional elections in the United States, which should, on the basis of past
experience, add approximately 1pp to industry growth rates. WPP's 2010 guidance is for flat like-for-like revenue
growth, with a mildly weaker 1H10 and a stronger 2H10. Operating margins for 2010 are targeted to rise 1 margin point
to 12.7% and 13.2% for 2011. The company had cash of GBP 946mn and undrawn credit facilities of GBP 1,334.6mn
and short-term debt of GBP 720.7mn. WPP has only GBP 200mn in debt maturities in 2010 and 2011 each. Given
concerns about the cyclical recovery in 2H10, we only have a marketweight recommendation for the bonds, although
we believe that the company is working to maintain its investment grade rating. (1H results: 26 August)
Dr. Sven Kreitmair, CFA (UniCredit Bank)

+49 89 378-13246
sven.kreitmair@unicreditgroup.de

Euro Credit Pilot
Technology (Marketweight)
Weight in iBoxx NFI: 0.8% Sector drivers: A gradually improving economy should result in better demand patterns for technology companies in 2010.
However, the biggest threat to IT spending in 2010 is the fragile economy, particularly in Europe, and the weak
Current ASW spread: 111.4bp recovery in the US, as well as the resulting impact on consumer and business confidence. Therefore, we have a stable
change mom/YTD: +15.4 / +10.0 but cautious technology sector outlook for 2010. Most issuers so far provided no or just vague guidance for 2010,
indicating that market visibility is low despite the economic recovery and the positive impact on the particular industry.
Low market visibility often indicates that high earnings volatility might continue. However, the rising number of positive
Euro STOXX THE YTD: -2.7% indicators for an economic recovery, although a bumpy one, caused spreads in the technology sector to tighten
strongly. We keep our marketweight recommendation for the technology sector, as we currently expect a further
stabilization of results in 2010. This should also be reflected in relatively stable ratings.
Last month's recap: In June, the iBoxx Technology sector spread widened by around 20bp to 113bp and the non-
financials index widened by 2bp to 115bp mainly driven by ASML and Nokia bonds.

(Moody's/S&P/Fitch) Profile Comment Technology sector
Baa3s/---/BBB-s Stable ASML (ASML): Marketweight 11.7%
ASML reported strong 1Q10 results. Total net sales increased yoy more than fourfold and by 27.7% qoq to EUR 742mn, while
the company had earlier indicated an increase to around EUR 700mn. The gross margin was 40.3% in 1Q10, which is
in line with the company's guidance of about 40%. Operating profit strongly improved yoy from EUR -146mn to EUR +137mn
in 1Q10 (4Q09: EUR 68mn). The operating margin increased to 18.5% versus 11.8% in 4Q09. In 1Q10, the company
generated a positive FCF of EUR 34mn despite negative W/C changes of EUR 143mn. The company's cash position
increased qoq to EUR 1,087mn at the end of 1Q10 from EUR 1,037mn. In 1Q10, the company had strong net
bookings of EUR 1,004mn (4Q09: EUR 956mn). ASML expects 2Q10 bookings of the same magnitude as in 1Q10,
confirming the upturn of the semiconductor industry. ASML expects 2Q10 net sales of around EUR 1.0bn, EUR 50mn
higher than indicated at the publication of 4Q09 results, and a gross margin in 2Q10 of about 42%. Clearly, ASML is
benefitting from the recovery of the semiconductor business, driven by technology purchases from the memory market
segments and technology and capacity purchases from major foundry customers. ASML's management is optimistic
that the company is on track for full year sales above the 2007 peak of EUR 3.8bn. Moreover, controlled capacity
increase supports the possibility of sustained growth in 2011. Given this outlook, especially the strongly improved
operating margin and the positive FCF development despite negative W/C changes, we assume that negative rating
changes are not in the cards. We change our underweight recommendation for ASML bonds to marketweight, as
during the semiconductor industry's upturn, the company's operating performance and its bonds should perform well.
We still view this company more as a crossover company, and we view ASML bonds as less appropriate for pure IG
investors. (2Q10 results: 15 July)
Baa1s/BBB+s/BBB+s Stable Ericsson (LMETEL): Marketweight 22.6%
Ericsson released 1Q10 results once again below market expectations, as network sales were impacted by tight
industry component supply conditions. In 1Q10, net sales decreased by 13% yoy and by 23% qoq to SEK 45.1bn
(consensus estimate of SEK 48.1bn), and for comparable units it fell even by 16% as it was already positively
influenced by exchange rate developments. Thanks to cost reduction measures, the gross margin (excluding
restructurings) improved to 39% versus 35% in 4Q09 and 36% in 1Q09. The Group EBITA margin before JVs and
excluding restructurings improved yoy to 13% versus 12% in 1Q09, but fell from 15% in 4Q09. Operating income
before JVs and excluding restructurings fell by 4% yoy and by 37% qoq to SEK 4.5bn. Net income continued to be
negatively affected by a weak performance of the ST-Ericsson JV (while the Sony Ericsson JV became breakeven in 1Q10)
as well as by restructuring costs in JVs, and hence declined yoy to SEK 1.3bn from SEK 1.8bn (consensus estimate of
SEK 2.0bn). The stronger-than-expected network sales decline of 14% yoy in 1Q10 was the main driver behind the
group's top-line underperformance. Operators in a number of developing markets were cautious with their investments
which impacted Networks' sales. However, Networks' sales in the US were particular strong, driven by continued
mobile data traffic increase from the usage of smartphones and other devices. As a consequence, Ericsson foresees
that mobile data traffic will double annually over the next five years, which indicates significant need to increase
network capacity (mainly in developed countries) and therefore higher demand for networks. The gross margin
improved significantly during 1Q10 by 3pp, mainly driven by the company's cost efficiency program, product and
market mix changes. We are cautious if the gross margin improvements are sustainable, given the strong pricing
pressure in the industry. Nevertheless, the full benefits of Ericsson's restructuring program will be visible from 3Q10
onwards, as the program will be finalized in 2Q10 with approximately SEK 1.5bn of restructuring costs. According to
our calculations, FOCF generation improved yoy to SEK 1.4bn in 1Q10 versus minus SEK 4.1bn in 1Q09. Hence, the
company's net cash position increased to SEK 46.6bn. The total adjusted debt to EBITDA ratio remained stable qoq at 1.7x,
according to our calculations. Liquidity of the company is excellent with SEK 77.9bn of cash and cash equivalents and
no debt maturities before 2012. We currently see the best value in the LMETEL 17. (2Q10 results: 23 July)
A1s/A+s/A+s Stable IBM Corp (IBM): Marketweight 28.2%
IBM released stronger-than-expected 1Q10 results and lifted its EPS guidance for 2010, but similar to the last quarter
the volume of new service contracts declined yoy and disappointed equity markets. IBM's management pointed to its
high degree of financial flexibility and noted that acquisitions and share buybacks in 2010 will be more similar to 2008
than to 2009. Recently, IBM also announced that its board has authorized an incremental USD 8bn to its remaining
USD 2bn share buyback program and increased its common dividend by eighteen percent. In our opinion, the
shareholder remuneration policy is in line with the company's FCF generation and still leaves some room for
acquisitions, while in addition a more aggressive M&A policy, as mentioned above, could have an impact on credit
metrics. However, we assume that IBM will continue to wisely combine its shareholder remuneration activity with its
M&A ambitions, as demonstrated in the past. Hence, we think that IBM's rating will be unaffected by the increased
shareholder remuneration package and that the company will continue to be well positioned in its rating category.
Moody's already (shortly) commented that IBM's A1 will not be affected by it. Consequently, we keep our marketweight
recommendation for euro-denominated IBM bonds. (2Q10 results: 16 July)

Euro Credit Pilot

(Moody's/S&P/Fitch) Profile Comment Technology sector
A2s/As/A-s Weakening Nokia (NOKIA): Marketweight 37.6%
Nokia released weaker-than-expected 1Q10 results, as it lost market share in the crucial mobile devices market and as
its average selling price for devices declined faster than expected. Consequently, the company had to revise down its
margin targets in this segment. In 1Q10, net sales increased by 3% yoy (1% @coc) and declined (mainly) seasonally
by 21% qoq to EUR 9.5bn (versus the consensus estimate of EUR 9.78bn). However, operating profit increased
strongly yoy to EUR 488mn (non-IFRS to EUR 820mn) from EUR 55mn (non-IFRS to EUR 514mn), mainly due to cost
reduction measures undertaken in 2009. Net income (attributable to equity holders of the parent company) amounted
to EUR 349mn in 1Q10 (consensus estimate of EUR 404mn) versus EUR 122mn in 4Q09. Free operating cash flow
increased strongly to EUR 955mn from EUR 114mn in 1Q09, according to our calculations, primarily driven by better
profitability. The company's cash and cash equivalents position increased to EUR 9.7bn (from EUR 8.9bn in 4Q09) and
the company's net cash position rose to EUR 4.6bn (from EUR 3.4bn), mainly due to FCF generation. Nokia did not
give an overly optimistic outlook for 2Q10. In the devices & services business, Nokia expects net sales to be between
EUR 6.7bn-7.2bn and its non-IFRS operating margin should be between 9%-12%, which is at the very low end of the
revised range for the full year 2010 target of 11%-13% (previously 12%-14%). Nokia continues to expect industry
mobile device volumes to be up approximately 10% in 2010, compared to 2009, while it revised the definition of the
mobile device market (i.e. this appears as a hidden downward revision of this guidance), but still targets mobile device
volume market share to be flat in 2010, compared to 2009. We keep our marketweight recommendation for the name.
Recently, Nokia released a profit warning and consequently S&P changed its outlook to negative from stable for
Nokia's single A rating, reflecting the company's weakening position in the important (high-margin) smartphone market
and the possibility that Nokia will not achieve an operating margin in 2010 similar to the one in 2009. Nokia's 5Y CDS
suffered quite strongly from the last profit warning/rating action and trades now wider than the one of Ericsson. We
expect further negative newsflow in the short term from Nokia, while we expect Nokia to keep at least a low single A
rating over the next two years; a period during which we expect the company to stabilize its operating performance.
Hence, Nokia's CDS spread appears attractive as such, but the expected ongoing negative newflow might prevent
significant tightening potential from current spread levels. (2Q10 results: 22 July)
Baa1n/BBB+s/A-n Stable STMicroelectronics (STM): Underweight 0.0% (member of the iTraxx NFI)
STMicroelectronics (ST) released 1Q10 results that were in line with the company's own guidance but below the
consensus estimate due to its ST-Ericsson JV. In 1Q10, net revenues increased 40.1% yoy and declined seasonally
10.0% qoq to USD 2,325mn. Growth yoy came mainly from its ACCI and IMS businesses, while the ST-Ericsson JV
disappointed. The gross margin was 37.7% in 1Q10, which was in line with the company's guidance of 37.5%
(plus/minus 1pp). The operating loss amounted to USD 20mn in 1Q10 versus USD -393mn in 1Q09. However,
excluding restructuring charges, ST returned to an adjusted operating income of USD 13mn in 1Q10 versus USD -337mn
in 1Q09 and USD 90mn in 4Q09. The adjusted operating margin was 0.5% in 1Q10. FCF (net cash from operating
minus used in investing activities) amounted to USD 148mn in 1Q10 versus USD 242mn in 4Q09 and USD 683mn
(disposal-driven) in 1Q09. At the end of 1Q10, ST's cash and cash equivalents, marketable securities (current and non-
current), short-term deposits and restricted cash equaled USD 2.76bn versus USD 2.91bn at the end of December 2009.
The company's net cash position increased qoq from USD 420mn to USD 566mn. Regarding the outlook, ST expects
to register a sequential net revenue increase between 6% and 12%, which equates to a yoy increase of 24% to 31%.
Moreover, the company anticipates a gross margin of about 38%, plus/minus 1pp, thanks to better manufacturing
loading and efficiency and an improved product mix. We assume that the short-term outlook for the industry is further
improving. However, in our opinion, demand visibility is still limited. Hence, the currently improving industry trend and
the improving operating trend at ST heavily depend on macroeconomic developments. However, it looks as if the
company's recovery is less pronounced than expected and slower than that of its peers. Hence, at current CDS and
bond spread levels, we do not see value in STM bond and CDS spread levels. (2Q10 results: 28 July)
Stephan Haber (UniCredit Bank)

+49 89 378-15192
stephan.haber@unicreditgroup.de

Euro Credit Pilot
Automobiles & Parts (Marketweight)

Weight in iBoxx NFI: 9.5% Sector drivers: The major spread driver is the extent of the 2010 recovery, especially in 2H10, when the inventory
restocking cycle ends and the government's auto sales incentives expire. In addition, the auto sales environment
Current ASW spread: 107.1bp remains difficult with weak consumer confidence, increased unemployment levels, slow global economic growth, and
change mom/YTD: -10.2 / +9.4 overcapacities leading to low profit margins. In addition, FCF generation will be difficult in FY10 in general given the
necessary build-up in working capital, heavy investment in environmentally friendly cars (capex, R&D), increasing raw
material cost headwind as well as potential support for auto suppliers and dealers. A risk factor for several companies,
Euro STOXX ATO YTD: +5.2% if the improvement in FY10 is not strong enough, is the achievement of the rating agencies' hurdle ratios in order to
keep their ratings. We note that liquidity and refinancing risk declined significantly and that the companies are
meanwhile sitting on heavy liquidity resources after their bond-prefunding and cash focus in 2009. In 2010, mass
market manufacturers will experience a sales decline due to expiring scrappage incentive programs. Auto suppliers are
suffering from low production levels and cost-cutting programs of OEMs.
Last month's recap: In June, the spread of the automobiles & parts sector tightened by around 15bp. Bonds of Toyota
and Renault underperformed, Robert Bosch, Honda and Toyota outperformed, while issues of Renault and Peugeot
underperformed.

(Moody's/S&P/Fitch) Profile Comment Automobiles & Parts sector
Baa1n/BBBn Weakening Banque PSA (PEUGOT): Marketweight 5.5% (member of the iTraxx XOVER)
Banque PSA sold EUR 500mn 5Y bonds at 165bp. Peugeot's 1Q10 consolidated revenue increased by 27.5% yoy
(22.8% like-for-like) due to the successful performance of the new Citroën C3, Peugeot 3008 and 5008, plus the
sustained recovery at Faurecia. For FY10, PSA Peugeot Citroën now expects to report significant recurring operating
income for 1H10 (previously, it only expected its operating income "to be positive" in 1H10), including a positive
contribution from the automotive division. Peugeot still expects automotive markets to contract by around 9% yoy and
its market share should continue to increase compared with 2009, led by the full-year impact of models introduced in
recent months and those currently being launched. We think that the French car market incentive, which will be phased
out in 2H10, will lead to a more negative profit momentum for Peugeot and Renault in 2H10. Nevertheless, we
continue to have a marketweight recommendation on Banque PSA, assuming that the Mitsubishi tie-up and cross
shareholding plan will not be pursued by the company. (1H10 results: 28 July)
A3n/A-n/--- Improving BMW AG (BMW): Overweight 24.7% (member of the iTraxx NFI)
BMW's five-month unit sales increased by 13%. For FY10, BMW is aiming for adjusted automobile FCF on the order of
the FY09 level of EUR 1,456mn. BMW's dividend cash outflow in FY10 will remain unchanged at EUR 197mn and the
company intends to fund its external pension fund by another EUR 1.5-1.6bn in FY10. In FY10, BMW intends to
increase its automobile sales by a single-digit percentage range to >1.3mn (FY09: 1.286mn) on the back of the
expected gradual economic recovery worldwide and the momentum from new models. The EBIT margin of the
automobiles segment is forecasted to reach a low single-digit percentage. BMW's long-term profitability targets for 2012
remain unchanged with an automotive EBIT margin of 8%-10% (FY09: -0.6%). BMW aims to achieve a group EBT for
FY10 that is significantly higher than that of FY09 (EBT EUR 413mn). We believe that FCF generation and the FY10
profitability guidance is positive and a revision of BMW's rating outlook at Moody's and S&P to stable is more likely
now. BMW currently has the strongest automotive credit metrics among European sector peers, although its spread
level is also the tightest in the liquid automotive sector. Given the positive profitability and FCF momentum in FY10, as
well as its conservative financial policy plus prospects of rating stabilization, we upgrade our recommendation for BMW
to overweight. (1H10 results: 3 August)
A3n/BBB+n/BBB+n Improving Daimler AG (DAIGR): Overweight 22.0% (member of the iTraxx NFI)
In January-May 2010, MB Cars unit sales increased by 11.9%. With 1Q10 results, Daimler increased its 2010 guidance
for group EBIT from ongoing business to EUR >4bn from EUR >2.3bn previously (FY09: EUR -779mn excl. special items)
on the back of a positive development in MB cars and Daimler Trucks. Despite these expenditures and a working
capital build up, Daimler said that it would expect a significant positive industrial FCF in FY10. The expected
improvement in group EBIT and the dividend cancellation will certainly help to improve industrial credit metrics in FY10.
We believe that after the recent guidance increase and credit metrics improvement, rating pressure has eased and the
company is on its way to a more stable rating outlook. We see still value in the name given its good rating with a
chance for outperformance in a cyclical downturn. (1H10 results: 27 July)
A1s/A+s/As Stable Honda (HNDA): Underweight 3.5%
Honda's forecast for FY10/11 is for a sales increase of 8.9% to JPY 760.8bn, operating income margin improving 4.3%
vs. 4.2% yoy and net income of JPY 340bn vs. JPY 268.4bn yoy. The forecast is based on JPY to USD and EUR of
JPY 90 and JPY 120 for FY10/11 (FY09/10: JPY 93 and JPY 130), respectively. We note that Honda's recovery
potential in FY10/11 is quite weak compared to peers, but the company has a highly conservative debt leverage even
through the industry downturn in 2009. Honda's industrial net cash position increased further to JPY 690.4bn vs. JPY 515.9bn qoq.
We change our recommendation for Honda to underweight given the tight spread levels and headwinds from the
strengthened JPY. (1Q10/11 results: July 29)
Baa2s/BBBn/BBB-s Stable Michelin (MICH): Marketweight 2.2% (member of the iTraxx NFI)
Michelin did not provide any operating margin guidance for FY10 with its FY09 results. Nevertheless, its major target
for FY10 is to report positive FCF. Michelin's credit metrics at FYE09 are below S&P's and Moody's hurdle ratios. We note
that the consensus expects positive revenue growth for FY10, while Michelin's operating margin was at around 7%-10% in
the previous peak years, which indicates some potential for improvement from the 5.8% level at FYE09. Downside risk
for Michelin's credit profile is mitigated by the strong brand and pricing power, two-thirds exposure to the somewhat
less cyclical replacement tire market and a good liquidity situation. We believe that the 2010 guidance for positive FCF
is debtholder-friendly. Nevertheless, FY10 will be again challenging given the weak economic recovery, increasing
headwinds from rising commodity prices as well as lower positive effects from a further reduction of inventories, capex
and dividends. We continue to see fair value in the bonds, given quite resilient FY09 results, a rather stable credit
metrics outlook and also as agencies are giving the company time to reach their hurdle ratios. (1H10 results: 30 July)

Euro Credit Pilot

(Moody's/S&P/Fitch) Profile Comment Automobiles & Parts sector
Baa2s/BBB-s Improving RCI Banque (RENAUL): Marketweight 6.6% (member of the iTraxx XOVER)
1Q10 group revenues were up by 28.4% yoy (automobile +30.3%, sales financing -1.4%) and auto unit sales
increased by 32.0%. The company confirmed its 2010 guidance and still expects that the total industry volume on the
European market could decline by 10%. In addition, Renault said that it is on track to generate positive FCF and
increase market share. Renault's CFO recently said that asset sales would play a role in the FY10 FCF objective and
that he was encouraged by the recent Volvo share price increase. There were rumors that Renault plans to dispose of
its 302.9mn B-shares (10% voting rights; market value SEK 26.77bn or EUR 2.77bn) in Volvo. We note that this
disposal would improve Renault's pro-forma FY09 automotive FFO/net debt (adj.) from 13% to 19%, which would lead
to a one-notch rating upgrade in our view. This could lead to an upgrade of RCI Banque (Baa2s/BBB-s) bonds. Given
the positive credit metrics momentum of Renault in 1H10, the possibility of a rating upgrade from a potential Volvo
shares disposal, but also cyclical concerns, we downgrade our recommendation to marketweight. (1H10 results: 30 July)
--/AA-s/-- Improving Robert Bosch GmbH (RBOSCH): Underweight 3.4%
S&P revised its rating outlook to stable from negative in June. Bosch's 2010 outlook is for an increase of group sales >10% to
EUR 42bn and to return to a positive net income, but to stay significantly below its target of 7%-8% EBT margin. The
company stated that in regional terms Asia-Pacific and in sector terms automotive technology will make the greatest
contribution to this growth given increased demand for vehicles, especially outside Europe. The company intends to
spend around EUR 1-2bn p.a. in acquisitions, but said that in terms of financial resources, it could also stem from a
bigger acquisition. Given the positive FCF in FY09, the still strong credit metrics (inc. non-current financial assets) and
the stabilizing FY10 outlook, we believe that rating pressure has diminished. We believe that Bosch's FY09 results
stayed well within S&P's hurdle ratios, also supported by the good performance of its securities position. We change
our recommendation on Bosch to underweight. Although we believe that the credit metrics momentum is positive in FY10,
there is some risk for debt-financed acquisitions and the bonds trade at the tightest spread level in the iBoxx auto
sector. (FY10 annual report: end of April 2011)
Aa2n/AAn/A+wn Stable Toyota Motor Corp. (TOYOTA): Marketweight 10.1%
The company's unit sales momentum in the US and Europe and its profitability is somewhat under pressure due to
current headlines regarding its safety-related recalls. With its 3Q results release, Toyota improved its FY09/10
guidance. Toyota expects a decline in revenues by 9.9% (previously: -19.6%) to JPY 18.5bn, operating income of JPY -20bn
(previously: JYP -350bn) and net income down to JPY -200bn (previously: JPY -550bn). The company's operating
income in FY09/10 is affected by a negative sales volume/mix and FX rate effects, which is more than offset by positive
cost reduction efforts. The latest available automotive credit metrics are from FY08/09, with a net debt/EBITDA (adj.) of a
strong 0.2x. We recently changed our recommendation to underweight given the negative headlines surrounding the
name, which will certainly lead to costs and a negative sales momentum for a certain period of time. After the widening
of Toyota's bonds and its inverse cash curve, we change our recommendation to marketweight from underweight.
(FY09/10 results: 4 August).
A3s/A-n/BBB+s Stable Volkswagen AG (VW): Overweight 22.0% (member of the iTraxx NFI)
Main rating driver for VW is obviously the extent of a recovery in industry conditions, with other factors including
incentive expirations in 2H10 and also the planned transactions regarding Porsche and the commercial vehicle
activities with MAN (A3s/BBB+s) and Scania (--/A-n). In 4Q09, VW took a 49.9% stake in Porsche AG for EUR 3.9bn.
The current high level of automotive net cash position safeguards VW's rating and opens the way to purchase Porsche
Holding GmbH, Austria, from the Porsche & Piech families for an EV of EUR 3.55bn in 2011. This in turn enables the
capital increase of Porsche SE by EUR 2.5bn in common shares and by EUR 2.5bn in preferred shares scheduled for 1H11.
The put and call option for the Porsche Zwischenholding GmbH for the remaining 50.1% stake on behalf of Porsche
SE can be exercised starting from 15 November 2012. The final stage is a merger between Porsche SE and VW AG.
Given the positive performance in 1Q10, we believe that VW is on the way to a stable rating outlook at S&P assuming
that all Porsche transactions will be executed as planned and the company will not spend larger debt financed cash
amounts for its truck activities (MAN/Scania cooperation). We see value in VW bonds after the company's successful
capital placement, which in our view, safeguards its low-A ratings and given that VW's credit has a chance to
outperform in a more difficult cyclical environment in 2H10. (1H10 results: 29 July)

+49 89 378-13246

Euro Credit Pilot
Utilities (Marketweight)
Weight in iBoxx NFI: 25.2% Sector drivers: Major spread drivers of this sector are M&A activities, as well as regulatory risk and the development
of fuel prices and emission certificates. The bulk of M&A transactions has already occurred (Enel/Endesa, Suez/GdF,
Current ASW spread: 100.0bp National Grid/KeySpan, Iberdrola/Scottish Power/East Energy, RWE/Essent, Gas Natural/Union Fenosa). Nevertheless, for 2010
change mom/YTD: +3.4 / +25.3 we expect M&A activities to continue, primarily driven by asset disposal programs (e.g., E.ON, EDF, Enel, Gas Natural, Veolia).
Last month's recap: In June, the average spread level in the utility sector widened by around 5bp. This development
Euro STOXX UTS YTD: -22.7% was primarily influenced by Southern European names being adversely affected by spread pressure on their respective sovereign.

(Moody's/S&P/Fitch) Profile Comment Utilities sector
A3s/BBB+wn/--- Stable A2A (AEMSPA): Marketweight 1.2%
1Q10 results were significantly below consensus and UniCredit's expectations. EBITDA was down by EUR 82mn to
EUR 351mn, whereby ca. EUR 30mn will be absorbed during the forthcoming quarters of FY10 (due to time-related
accounting reasons). The credit profile remained almost stable during 1Q10, with adj. net debt to EBITDA of 5.9x
(FY09: 5.7x) and adj. FFO to net debt of 12.9% (12.2%). Credit ratios are weak for the current rating category,
however, the credit profile should be supported by the disposal of non-core assets. Furthermore, the reduction of the
dividend by 28% yoy for FY09 should help to restore A2A's credit profile during FY10. Based on the business plan
2010-2014, an amount of EUR 1.9bn will remain for dividend payments and reduction of net debt. With dividends of ca.
EUR 300mn p.a., an amount of EUR 400mn is left to reduce net debt in the period to 2014. The company targets to
achieve a net debt to EBITDA ratio of below 3x, which should be achievable assuming an additional cash inflow of
EUR 900mn from the disposal of the Edison stake. However, there has been no newsflow about the potential disposal
of the 15.6% stake held in Edison. Bonds slightly underperformed the index in June. We keep our marketweight
recommendation on the name.(1H10 results: 6 August)
A3s/---/--- Stable Abu Dhabi National Energy Company (TAQAUH): No recommendation (event-driven coverage) 0.4%
TAQA, headquartered in Abu Dhabi, is the holding company, with majority stakes, in six of the nine Independent Water
and Power Producers (IWPP) in the Emirates. It provides about 85% and 90% of Abu Dhabi's power generation and
water desalination needs. TAQA was established in June 2005 to consolidate the government's shareholding in Abu Dhabi's
domestic water and power generation assets. Since then, TAQA has grown as a global energy company and is the
government's investment conduit in the global energy sector. TAQA's main goal is to own and invest in power
generation, water desalination, oil and gas, and infrastructure sectors across the Middle East, North Africa, India,
Europe and North America. TAQA is 75% owned by the government of Abu Dhabi, through the Abu Dhabi Water and
Electricity Authority (ADWEA) and through the Farmer's Fund (51% and 24.9% stakes, respectively), the remaining
capital is held by private shareholders (ownership limited to UAE nationals). In December 2009, Moody's put TAQA's
rating on watch negative as the implicit government support currently implemented in the rating has to be re-validated.
Aa3s/As/--- Stable Alliander Finance BV (ALLRNV): Marketweight 1.1%
Moody's upgraded the ratings of Alliander from A2 to Aa3 with stable outlook. The upgrade is a consequence of the
unbundling process, the sale of the generation and supply activities to Vattenfall, and the concentration on regulated
activities. Furthermore, the new rating reflects a higher level of support from its municipal shareholders (Alliander is
owned by 58 Dutch provinces and municipalities, with the four largest provinces holding 77% of the company's stock).
Alliander reported improved FY09 figures, influenced by asset disposals. In FY09, sales increased by 2.3% to EUR 1,750mn,
whereas EBIT rose 26% yoy to EUR 491mn (2H09: +13% to EUR 167mn). FFO to net debt stands unchanged at 25.4%,
better than the YE08 value. Our favorite bond is the ALLRNV 04/16, trading at around 55bp (ASW). Spread levels are
tight, but should discount all risks.
A3s/A-s/A-s Stable Anglian Water Services (AWLN): Overweight 0.7%
UK water utility AWS is a subsidiary of AWG Plc, which was taken over by a consortium of financial investors. We think
that the ringfenced structure as well as the existing high leverage of AWS provides sufficient protection for its
bondholders. In October 2009, Moody's confirmed the rating with a stable outlook, whereas for other UK water utilities
the rating outlook has been put on watch negative due to regulatory risk stemming from the new regulatory period (AMP5)
starting in April 2010 for a 5-year period. In the past few weeks, AWLN bonds performed in line with the index. We still
regard current spread levels as attractive.
A2s/A-s/-- Stable Bord Gais Eireann (BOGAEI): Marketweight 0.3%
S&P lowered its rating on Irish gas distributor Bord Gas Eireann (Irish Gas Board) by one notch to A-s, following the
acquisition of the Irish wind power generator SWS Natural Resources for an EV of ca. EUR 500mn. Given the strong
link to the Irish government, which holds 98.5% in the company, BOGAEI receives a one-notch uplift as the stand-
alone credit profile (SACP) is BBB+ at S&P. The acquisition is considered to have only a limited impact on the
company's stable, low-risk and highly regulated business profile, with a dominant market position in Ireland. S&P
expects adj. FFO to net debt of ca. 13% by FY11 (FY08: 17%), which is quite weak for the current ratings. According to
S&P, a recovery of credit metrics is necessary in the medium term to prevent further negative rating actions. The
BOGAEI 06/16/14, which is currently trading at around 180bp (ASW), performed in line with the index in the past few
weeks. However, the bond exhibited some volatility linked to the sovereign spread. The 5Y Ireland CDS is currently at
around 260bp. We assume that at these levels, correlation between BOGAEI bonds and sovereign spreads will
remain high. Nevertheless, we assume the bond to be fairly priced.
A3s/A-s/As Stable Centrica (CENTRI): Marketweight 0.5% (member of the iTraxx NFI)
Centrica released weaker FY09 figures, with adjusted operating profit falling by 7% to GBP 1,857mn (despite higher
revenues), due to lower gas prices, and tough market conditions for the American business. Operating profit was still
above the consensus of GBP 1,816mn. Centrica also announced the purchase of Suncor's Trinidad and Tobago
portfolio of gas assets for USD 380mn (GBP 246mn) in cash. Cash-flow generation improved, with FFO rising by 15.1% to
GBP 1,541mn. However, net debt increased due to the purchase of Venture production (GBP 1.1bn) and now stands
at GBP 3.4bn vs. GBP 0.7bn a year earlier. However, the ratio of FFO to net debt is still at around 35%, which should
be in line with the rating. In the past few weeks, Centrica's EUR-denominated bonds slightly underperformed the index
but are still trading at fair levels.

Euro Credit Pilot

A2s/A-s/A-s Weakening CEZ (CEZCO): Marketweight 2.6%
CEZ released weaker 1Q10 figures that were below expectations. Sales were flat yoy at CZK 53.9bn, but EBITDA fell
by 9.6% or CZK 2.9bn yoy to CZK 27.3bn (EUR 1.1bn). EBITDA was below market estimates of CZK 29.5bn. The bulk
of this decline is linked to the power production unit, where EBITDA fell by 19% yoy to CZK 18.7bn, despite higher
production. This development is related to the drop in electricity prices, which was only partially offset by forward sales
in previous periods. Cash flow generation was also weaker yoy, but credit ratios slightly improved due to lower
investments. FFO dropped by 13% yoy to CZK 24.9bn, whereas free cash flow was positive (also due to seasonally
low capex) and net debt rep. fell to CZK 113bn from CZK 130bn at YE09. This leads to a strong FFO to net ratio (adj.)
of 51%, which is significantly above rating agencies' requirements under the current rating (35% at S&P). Spreads on
CEZCO bonds slightly widened in the past few weeks, but in line with the index and still trade at fair levels. (2Q10
results: 13 August)
Baa1s/A-s/BBB+n Weakening Dong (DANGAS): Marketweight (Senior)/Marketweight (Subordinated) 2.2%
Dong published better 1Q10 results yoy, benefitting from higher power prices and timing differences related to volatile
markets for oil, gas and coal. Revenues increased by 4% yoy to DKK 16.2bn, while EBITDA even surged by 64% yoy
to DKK 4.3bn. The Generation unit contributed the largest portion to EBITDA where EBITDA was up by DKK 1.3bn to
DKK 1.8bn, reflecting the increased power generation, higher power prices and lower fuel costs. Despite higher
working capital, operating cash flow improved from DKK 3.5bn to DKK 3.9bn, enough to fully finance capex. Net debt
was down by DKK 1.5bn to DKK 25.4bn. With respect to the outlook for FY10, the company affirmed its guidance
released earlier this year. As management expects a significant improvement of EBITDA yoy, we expect a slight
improvement of credit ratios by YE10. Net debt/EBITDA should drop slightly below 4.0x, and FFO should be around 25%.
This is in line with S&P's requirements (e.g., S&P expects FFO to net debt of 25% in 2010, and 25%-30% thereafter). Spreads
of DANGAS bonds remained stable in the past few weeks, (including the hybrid bond), and are all trading at fair levels.
A2s/As/As Improving E.ON (EOANGR): Overweight 10.2% (member of the iTraxx NFI)
E.ON released 1Q10 figures roughly in line with expectations. Sales were up by 1% yoy to EUR 26.2bn. Adj. EBITDA
of EUR 4.66bn was 17% above the prior year's figure, and in line with market consensus and UniCredit expectations.
Adj. EBIT stood at EUR 3.71bn, +20% yoy vs. UniCredit expectations of EUR 3.73bn. EBIT strongly increased in the
UK division and in Energy Trading, whereas the performance of the gas business remains weak. Cash-flow generation
deteriorated somewhat, with FFO down 4% yoy to EUR 4.1bn. We calculate an adj. net debt figure of EUR 44.6bn
versus EUR 45.5bn at YE09. FFO to net debt at 18% is unchanged to YE09, and still below rating agencies'
requirement of 20%. Rating pressure should diminish after the completion of the recently announced US disposal
which is expected for December 2010 or January 2011 (will be sold to PPL Corp for an enterprise value of EUR 5.7bn).
We expect the ratio of FFO to net debt to exceed 20% by YE10 (which is S&P's requirement for the current rating).
EOANGR bonds are no longer trading at a premium to its peers, but we still like the name due to its sound operational
performance and the high diversification of earnings.
Aa3s/A+s/A+s Weakening EDF (EDF): Marketweight 10.6% (member of the iTraxx NFI)
EDF released improved sales figures for 1Q10 in line with expectations, but the results were influenced by
consolidation and currency effects. Sales increased by 4.3% yoy to EUR 21bn. Around 1% of the growth is related to
consolidation effects, in particular the acquisition of SPE in Belgium and of the 49.99% stake in Constellation Energy in
the US. Excluding consolidation and currency effects, organic sales growth was negative at -1.6%. This was primarily
due to weaker sales in the UK due to a decline in both wholesale and retail prices. The group confirmed its FY10
guidance: 1. Organic EBITDA growth between 3% and 5%, and 2. Net debt between 2.5x and 3.0x. EDF bonds have
slightly tightened in the past few weeks, outperforming the market and are trading at fair levels.
Baa2n/BBB+n/BBB+n Stable Edison (EDNIM): Overweight 0.7% (member of the iTraxx NFI)
1Q10 results were fully in line with UniCredit expectations in terms of EBITDA, supported by slightly higher demand for
electricity and higher gas volume sold. 1Q10 sales were up by 1.2% yoy to EUR 2,742mn, while EBITDA improved by
8.8% yoy to EUR 321mn (UniCredit: EUR 324mn). The positive development was supported by higher domestic
demand for electricity and stronger demand for gas by end-customers. However, margins in the gas business
remained on a weak level, given the supply overhang and still existing pressure on gas prices. Operating cash flow
was EUR 65mn (1Q09: EUR -63mn), fully offset by capex (EUR 161mn), resulting in a higher net debt of EUR 4.0bn
vs. EUR 3.9bn at FYE09. With respect to the outlook for FY10, the company expects to achieve results in line with
those reported for FY09. For 1Q10, we calculate adj. net debt to EBITDA of 3.3x and adj. FFO to net debt of 26.7%,
both ratios at the same level reported for FY09. In comparison to other Italian names, Edison bonds showed a better
performance. In our view, the performance in line with the iBoxx utilities was supported by the potential full takeover by
EDF. We keep our overweight recommendation on the name. (1H10 results: 23 July)
A3s/A-n/A-s Stable EDP (ELEPOR): Underweight 2.7% (member of the iTraxx NFI)
1Q10 EBITDA increased by 10% yoy to EUR 940mn (UniCredit (E): EUR 910mn), supported by the stronger Brazilian
activities, and the higher installed capacities in its wind business. Furthermore, acquired network assets from Gas
Natural also propelled 1Q10 earnings as these activities were consolidated for the first time. Operating cash flow
dropped by 70% yoy to EUR 460mn as 1Q09 cash flow was supported by the cash inflow from the sale of receivables
stemming from the Portuguese tariff deficit. As capex remained high, reported net debt increased by EUR 624mn to
EUR 14.6bn. On a reported basis, net debt to EBITDA was 3.9x, down from 4.2x (FYE09 and 4.4x in FY08). According
to press reports, the government plans to sell further exchangeable bonds. If that were to happen, Moody's might
reconsider its current rating approach on EDP as a government related issuer (currently: one notch uplift), eventually
resulting in negative rating actions in the foreseeable future. In June, EDP bonds outperformed the index. However,
given the economic uncertainties in the countries based in the European periphery and a potential reduction of the
government stake, we keep our underweight recommendation on EDP. (1H10 results: 30 July)
---/A-wn/--- Stable Elia (ELIASO): Underweight 1.3%
In June, Elia successfully placed a capital increase of EUR 300mn to finance the acquisition of 60% in Vattenfall's
German high voltage grid. However, existing capex commitments of ca. EUR 3bn for the connection of off-shore wind
power plants with the rest of the German grid and additional capex requirements at its existing grid network will result
in negative free cash flows over the next few years. This is likely to result in a weaker credit profile, assuming an
unchanged shareholder-friendly dividend policy. Given the already stretched credit profile with adj. net debt to EBITDA
of 7.9x and adj. FFO to net debt of 8.2%, we expect further negative rating action at S&P. In June, Elia bonds
underperformed the index. As we still regard current spread levels as too tight, we keep our underweight recommendation on
the name. (1H10 results: 27 August)

Euro Credit Pilot

A2s/AA-s/A+s Stable Enagas (ENGSM): Underweight 0.6%
1Q10 results were above market expectations in terms of EBITDA, which was up by almost 17% yoy to EUR 163mn,
supported by additional assets coming into operation during 3Q09 and 4Q09. Total transported gas volume increased
by 6.5% yoy to 112,022 GWh, whereby conventional demand for heating and industrial consumption was up by 12% yoy,
while demand for power generation dropped by 6% yoy due to higher power generation through wind and hydro power
plants. The credit profile slightly improved during 1Q10, with adj. net debt to EBITDA of 4.1x (FY09: 4.4x) and adj. FFO
to net debt of 19.7% (18%), fully in line with the current rating. However, the planned capex of EUR 700mn in FY10
and the already acquired underground storage facilities from Repsol for EUR 71mn will result in negative free cash flow
in FY10. Despite the widening during the last few weeks, we regard current spread levels as too tight. We therefore
keep our underweight recommendation. (1H09 results: 28 July)
A2s/A-n/As Stable EnBW (ENBW): Overweight 3.2% (member of the iTraxx NFI)
EnBW released sound 1Q10 figures, but still sticks to its cautious guidance. Adj. EBIT rose by 26% yoy to EUR 876mn, due to
strong performances across most sectors. The electricity division benefited from favorable hedges in previous periods,
as well as the higher generation capacity following the asset purchases from E.ON. The gas segment benefited from
the cold weather conditions in the first three months of 2010. Cash flow generation was really strong in 1Q10. FFO
rose by 56% yoy to EUR 1.2bn. We still regard EnBW bonds as attractive for relative value reasons, and as we regard
the name as a safe haven in the current environment. Furthermore, we expect a gradual improvement of the
company's credit profile in the next two years. There is some uncertainty with regards to future M&A activities but
EnBW's investment program is quite flexible, especially as around 30% of the program is linked to acquisitions.
A3n/A-s/A-s Stable Endesa (ELESM): Marketweight 0.4%
On 1 July, Endesa announced the disposal of its high voltage transmission network to Red Electrica for EUR 1.5bn.
The transaction includes the assets already in service and the assets currently under construction expected to go into
service in 2010. We regard the transaction, which is part of Enel's EUR 7bn asset disposal program, as credit positive
for Endesa. The credit profile is quite good for the current rating but headroom for any upgrades is limited to the rating
of Enel. With the existing concerns about rising short-term borrowing costs in Spain and potential impacts on the
Spanish banking system, the securitization of the Spanish tariff deficit might be in danger. A full securitization of
Endesa's receivables stemming the tariff deficit would result in a debt reduction of 36%. The ELESM 13 underperformed the
index in June but still trades at fair levels. (1H10 results: 28 July)
A2n/A-s/A-s Improving Enel (ENEL): Marketweight 5.9% (member of the iTraxx NFI)
With the announced disposal of Endesa's Spanish transmission network, Enel is well underway to meet its target of
reducing its net debt position to EUR 45bn by FYE10 (reported net debt was EUR 52bn at 1Q10). With the disposal of
the Spanish high voltage grid, an amount of EUR 5.5bn out of Enel's EUR 7.0bn asset disposal program is still
outstanding. The majority of proceeds from asset disposals will come from the IPO of Enel Green Power, expected to
occur in September/October this year, and which is likely to generate ca. EUR 4bn. For 1Q10, we calculate adj. net
debt to EBITDA of 3.7x (FYE09: 3.9x) and adj. FFO to net debt of 16.5% (16.5%) at Enel, both ratios are fully
commensurable with the current A- rating at S&P and Fitch. Adjusted net leverage should come down to ca. 3.2x once
the asset disposal program is completed and proceeds from the securitization of the Spanish tariff deficit flow in.
However, given the concerns about increasing short-term funding cost in the Spanish banking system, a delay of the
Spanish tariff deficit securitization might occur, resulting in a slower pace of deleveraging. In May, Enel bonds with
longer maturities underperformed the iBoxx Utilities while bonds with a shorter duration outperformed the index. As we
think that the de-leveraging story is still intact, we keep our marketweight recommendation on Enel. (1H10 results: 29 July)
A2s/A-wn/--- Stable EWE (EWE): Marketweight 1.3%
EWE released FY09 results which were surprisingly weak given the strong performance in the first half. Sales
increased by 9% yoy to EUR 5,798mn, whereas (reported) EBIT fell by 3% yoy to EUR 414mn (includes income from
at-equity investments). This was influenced by a weak performance in the telecommunication segment (intensified
competition, costs for streamlining measures). Earnings also fell in the Energy segment due to lower gas demand from
industrial and municipal customers as a consequence of the recession. The newly consolidated swb (Stadtwerke Bremen)
also contributed EUR 49mn to EBIT. Credit metrics slightly improved versus FY 2008, despite high cash outflows for
acquisitions. Net debt fell to EUR 2.2bn from EUR 2.5bn one year earlier, influenced by the EUR 1.3bn capital increase
from the new shareholder EnBW. Leverage net debt/EBITDA stands at 2.6x, which should be fine for the rating. Credit ratios
in 2H09 benefited from the capital increase subscribed by EnBW. Therefore, ratings should be safe, despite the weaker
operational performance. In March 2010, S&P had removed the A- rating of EWE from credit watch status where it had
been placed with negative implications in April 2009. Current spread levels should discount all uncertainties.
A2s/As/A-s Stable Fortum (FRTUM): Marketweight 1.8% (member of the iTraxx NFI)
Fortum reported 1Q10 figures above UniCredit expectations. Sales in 1Q10 were EUR 1.9bn (+19% yoy), whereas
comparable operating profit was EUR 651mn, EUR 49mn higher compared to 1Q09. Within the various segments, the
highest contribution came from Power (record sales power price of EUR 54.5/MWh), Distribution and Heat (both
benefiting from the cold weather). For the remainder of 2010, the company has hedged 75% of its output at
approximately EUR 44/MWh (2011: 45% at EUR 43/MWh). With respect to the outlook for FY10, the company expects
energy demand in the Nordics to recover until 2014/15 (previously not before 2019/20). The ratio of FFO to net debt is
now 30% vs. 34% at YE09, due to lower cash-flow generation. Credit ratios might deteriorate further in the next few
quarters, but we see good chances that the group will keep its current ratings. We regard M&A risk as low. Spreads of
Fortum bonds tightened in the past few weeks, outperforming the index, but still appear fair.
Baa2s/BBB+n/A-n Improving Gas Natural (GASSM): Marketweight 4.0% (member of the iTraxx NFI)
1Q10 results were largely influenced by consolidation effects from the Union Fenosa (UF) acquisition, which was
completed in the middle of 2009. While EBITDA was up by 77.8% yoy to EUR 1.3bn on a reported basis, EBITDA on a
pro-forma basis remained stable yoy. Operating cash flow was EUR 1.1bn, up from EUR 1.0bn. Reported net debt was
EUR 21.1bn (FY09: EUR 20.9bn), which will decline to EUR 17.9bn once cash from disposals (EUR 1.8bn) and from
the securitization of the Spanish tariff deficit (EUR 1.4bn) is received. On a reported basis (pro-forma), net debt to
EBITDA is 3.7x (including expected proceeds from disposals and the securitization of the Spanish tariff deficit, the
latter amounting to EUR 1.4bn for Gas Natural). Based on the expected annual synergies of EUR 550mn from FY10
onwards and a capex of between EUR 1.6bn to EUR 1.8bn in FY10, the company should be able to generate a sizable
positive free cash flow to further improve credit metrics. Volatility remained high for issuers based in the European
periphery. Among others, Gas Natural again underperformed the iBoxx in June. (1H10 results: 27 July)

Euro Credit Pilot

Aa3n/As/--- Stable GDF Suez (GSZFP): Marketweight 7.5% (member of the iTraxx NFI)
S&P has affirmed the A rating of GDF Suez but revised the outlook from positive to stable. S&P now assumes that the
company is unlikely to maintain a financial profile that would be commensurate with a higher rating. The decision was
influenced by the extensive investment program of the group, and its increasing exposure to fast-growing but more
competitive markets. Furthermore, S&P noted the decoupling of gas prices (from oil prices). The decision does not
come as a surprise, also performance in FY09 figures had been weaker (taking consolidation effects into account). Net
debt at YE09 was EUR 30bn, which compares to EUR 29.0bn at FYE08. On a reported basis, net debt to EBITDA was 2.2x.
With respect to FY10, the company expects a higher EBITDA than reported for FY09. EBITDA for FY11 is expected to
be at least 15% higher compared to FY09. Group capex is around EUR 10bn p.a. for the next two years. We assume
that most of this can be covered by operating cash flow and that the group will maintain a robust financial profile. There
is some M&A risk linked to the name (rumors about talks with International Power) but current spreads should discount
for all risks. (1H10 results: August 10)
A2n/BBB+s/--- Stable Hera SpA (HERIM): Marketweight 0.6%
In June, S&P lowered Hera's rating one notch to BBB+, having a stable outlook on the name. The rating action reflects
S&P's concerns about a sufficient recovery of Hera's credit profile in 2010 due to the macroeconomic environment in its
main market Italy and higher working capital needs. Adj. FFO to net debt was 14.9% in FY09, down from 15.6% in FY08,
both ratios below the threshold of 20% required to keep the A- rating. However, S&P still regards Hera to have a strong
business profile with regulated activities contributing ca. 60% to its EBITDA. The rating agency notes that headroom
under current ratings is very limited as the new BBB+ rating incorporates a minimum adj. FFO to net debt ratio of 15%.
FY10 earnings should benefit from new capacities coming on stream, particularly the waste-to-energy plant in Rimini,
and from consolidation effects from acquired businesses. We keep our marketweight recommendation, as the
downgrade risk has been already incorporated in spread levels. (1H10 results: 26 August)
A3s/A-s/A-s Improving Iberdrola (IBESM): Overweight 4.9% (member of the iTraxx NFI)
Iberdrola released strong 1Q10 results that were above UniCredit expectations. Sales in 1Q10 increased by 0.6% yoy
to EUR 7.7bn and EBITDA was 28% higher at EUR 2,178mn. This was 3.8% above UniCredit expectations (EUR 2,098mn).
Earnings benefited from the improved performance of the Spanish liberalized business (higher margins due to higher
volumes & low CO2 charges) and higher generation capacity at Iberdrola Renovables. We have calculated a FFO
figure of EUR 1.39bn, +21% yoy. Net debt adj. decreased by EUR 0.2bn versus YE09 to EUR 30.8bn. We calculate a
FFO to net debt ratio (adj.) of 15.6% vs. 15.3% at YE09. Based on the company's definition, it is 17.8% (20.5%
excluding the tariff deficit). Although current ratios are relatively weak, we see good chances for Iberdrola to maintain a
single A rating if the securitization of the tariff deficit is successful. S&P recently confirmed its A- rating on the name.
Credit spreads of Iberdrola continue to be affected by the sovereign debt crisis, but are trading below the sovereign.
We regard this gap as justified as Iberdrola generates more than 60% of its revenue abroad, and we still regard
spreads as attractive.
Baa1s/A-s/BBBs Stable National Grid Plc (NGGLN): Marketweight 3.0% (member of the iTraxx NFI)
National Grid released improved results for FY09/10, while also announcing a rights issue of approximately GBP 3.2bn. This
should explicitly stabilize the single A rating for the UK opcos. Operating profit in the period was GBP 3,121mn (+7% yoy),
2% above market expectations. While all UK activities showed a good performance, operating profit in US transmission
and US gas distribution declined by 13% qoq (to GBP 153mn) and 32% yoy to GBP 414mn, respectively. Cash-flow
generation strongly improved versus the prior year. FFO increased by 30% yoy to GBP 3,088mn. However, due to
currency effects, net debt fell to GBP 23.0bn compared with GBP 23.9bn at the end of March 2009. FFO to net debt
stands at 11.3% compared to 8.5% in FY08/09. For YE09/10, we expect the FFO/net debt ratio to stay close to the
S&P short-term requirement of 10%. We see a good chance that National Grid could even reach the medium-term
threshold, set by S&P at 12%, in the coming financial year. Regarding the rights issue, we do not see any real M&A
ambitions behind the transaction, especially as the company has pulled out of the bidding process for EDF's regulated
UK business. Bonds trade fair.
Aa2n/AA-s/-- Weakening Nederlandse Gas (NEDG): Marketweight 1.9%
In September 2009, Moody's changed the outlook on the Aa2 issuer rating of Dutch gas transmission company
Gasunie from stable to negative. The rating action reflects concerns that the combination of a possible further
decrease in rates in Germany from 2010 onwards – based on current decisions by the German regulator – and an
ongoing ambitious investment program may result in credit metrics weakly positioned within the current rating category.
Moody's had previously indicated that it expects the company to demonstrate FFO to net debt at least in the low teens
and FFO interest cover above 3.5x on a sustainable basis to support the current Aa2 ratings. As of 30 June 2009, this
ratio was still 21.0% versus 21.5% at YE08. In March 2010, Gasunie withdrew from a bid for RWE's gas distribution
network in Germany. The BEB network is geographically contiguous to that of Gasunie. NEDG bonds are trading at
tight but fair levels.
A2n/AA-n/A+s Weakening Red Electrica (REDELE): Underweight 0.5%
With the announced purely debt-financed acquisition of Endesa's Spanish transmission assets, the credit profile of
REDELE is expected to weaken. Based on a transaction volume of EUR 1.5bn, we expect adj. net leverage to increase
to ca. 4.5x by FYE10, up from 3.8x at FYE09. Moody's and S&P immediately reacted on the transaction and changed
their outlook to negative from stable. In addition to the transaction, the planned review of the electricity remuneration
system announced by the Spanish government might result in a delay of the recovery of REDELE's credit profile. For FY10,
S&P expects an adj. FFO to net debt of 14%, down from a formerly expected range of between 15% to 17%. Besides
Endesa, Red Electrica showed the weakest performance in June. We keep our underweight recommendation on the name.
A2wn/A-n/--- Stable REN Redes Energeticas (RENEPL): Marketweight 0.5%
Following the downgrade of the state of Portugal by S&P by two notches to A-, S&P also downgraded RENEPL by two
notches to A- having a negative outlook on the name. The rating action reflects the ownership structure with Portugal
holding 51% of the company. Further negative rating actions at the government level would immediately result in lower
ratings at RENEPL. For FY09, the company reported solid figures. However, given the huge capex program, net debt
increased and the credit profile slightly weakened during FY09. As capex in FY10 will be close to the level of FY09, net
debt should continue to increase, reaching a level of up to EUR 2.8bn-2.9bn by FYE14, with a leverage of 4.8x by
FYE14. For FY09, we calculate net debt to EBITDA of 5.7x (FY08: 5.4x) on a reported basis. In June, the RENEPL 13
outperformed the iBoxx Utilities but still shows a weak performance since April when Portugal's CDS started to rocket.
We keep our marketweight recommendation.

Euro Credit Pilot

--/A+s/-- Weakening RTE EDF Transport SA (RTE): Marketweight 2.1%
RTE, a 100% subsidiary of EDF, owns and operates the French transmission grid, which is by far the largest
transmission network in Europe (100,000 km). S&P put the AA- rating of RTE on watch negative. This rating action
reflects the negative impact of the new TURP 3 regulation on the financial profile of RTE. The new regulation is valid
for the period 1 August 2009 to 31 July 2013 and will lead to weaker profitability, while on other hand huge capex
obligations will increase leverage. In any case, the business profile could benefit from a more predictable regulatory
framework. On a relative value basis, current pricing of RTE bonds appears fair (but not attractive), if compared to
those of parent company EDF and those of other grid companies (e.g. REDELE, RENEPL).
A2n/An/A+s Weakening RWE (RWE): Marketweight 7.4% (member of the iTraxx NFI)
RWE reported improved figures for 1Q10 that were above expectations. Revenues decreased by 3.4% yoy to EUR 14.5bn,
while EBITDA surged by 15.7% to EUR 3,574mn versus UniCredit estimates of EUR 3,364mn. However, more than 90% of
the EBITDA increase is related to consolidation effects, in particular the integration of Essent's activities. Excluding
consolidation and currency effects, earnings were more or less stable. Cash flow generation improved: FFO rose by 21% yoy to
EUR 2,362mn, mainly due to a positive earnings trend and the Essent contribution. Net debt adj. went down by EUR 1.1bn to
EUR 25.8bn. This leads to an FFO to net debt ratio of 26% (YE09: 23%). Net debt/EBITDA is at around 2.8x. We
regard the news as credit neutral despite the flat performance in the traditional business. Given the ambitious capex
program, we expect this ratio to remain in the low 20s in the next two years, leaving little financial headroom under
current ratings. However, with the new leverage commitment and moderate M&A plans, agencies should keep their
current ratings. A revision of the negative outlooks appears less likely at this stage. RWE bonds trade at tight but fair levels.
A3s/A-s/An Weakening Scottish & Southern Energy (SSELN): Underweight 0.4%
Scottish & Southern reported slightly improved key figures for FY09/10 (ending 31 March). Adj. profit before tax
increased by 2.9% yoy to GBP 1.29bn, reflecting improved performance across all major activities (generation,
networks, retail). Around 37% of adj. PBT stems from regulated activities. Total capex of GBP 1.31bn had been in line
with the 5Y investment plan of GBP 6.7bn until 2013, and brought net debt to GBP 5.3bn, up from GBP 4.8bn a year
earlier. This results in a net debt/EBITDA ratio of 2.9x. Given the previously released capex plan, the increase in net
debt does not come as unexpected. As S&P had already lowered the rating in August 2009 following a deterioration in
credit ratios, we assume the current financial headroom to be big enough to digest the increase in debt. However, we
are still concerned about potential M&A risk, as SSE submitted an indicative bid for EDF's UK distribution grid in March 2010.
We therefore remain cautious about the name. The SSELN 07/13 underperformed the index in the past few weeks,
and is trading at levels of around 90bp (which we assume do not fully cover all risks).
Baa1s/BBB-s/--- Stable Severn Trent Water Utilities Finance PLC (SEVTRE): No recommendation (event-driven coverage) 0.5%
S&P downgraded Severn Trent by one notch too BBB+ with a stable outlook. This comes as no surprise. Following the
initial announcement in July by British regulator Ofwat (Office of Water Services) regarding the conditions for the next
regulatory period AMP5 (starting in April 2010), S&P had put the ratings of Severn Trent on watch negative (together
with Sutton and East Surrey Water PLC and United Utilities. The rating agency viewed the proposal as more
challenging than the conditions in the current period (AMP4) and the issuers affected by the rating action have the
lowest financial headroom of all UK water utilities. The SEVTRE 03/16 bond trades at fair levels.
Baa1s/A-n/BBB+s Stable Statkraft (STATK): Marketweight 1.1%
Statkraft released improved 1Q10 results, confirming its 2010 outlook with earnings remaining at the prior-year level. In 1Q10,
net revenues of the Norwegian power generator rose by 37% yoy to NOK 7.8bn, whereas underlying EBITDA was
NOK 5,922mn, a 45% decrease versus 1Q09. The company benefited from higher sales revenues as a result of high
prices in the Nordic region and increased production compared with 1Q09. Net debt decreased on the back of higher
cash flow generation to NOK 33.3bn, down from NOK 39.0bn at YE09. Ratios should still be in line with the rating (e.g.,
FFO to net debt was 20% in 1Q10 up from 21% at YE09). Bonds have performed quite well in the last few weeks, but
we still regard spreads as attractive (bonds are still trading at a premium, no negative sovereign influence, growing
diversification of activities will reduce cash flow volatility).
A3n/--/-- Stable Suez Environnement (SEVFP): Marketweight 2.0%
Suez Environnement released improved 1Q10 (key) figures, slightly below (-1%) UniCredit expectations. EBITDA was
EUR 460mn, representing a 5.5% increase yoy (-4.0% at constant FX rates, +0.5% organic growth) versus UniCredit
estimates of EUR 466mn and consensus estimates of EUR 469mn. Growth (on a revenue basis) was achieved in all
segments (water, waste and international). (Rep.) Net debt amounted to EUR 6.6bn versus EUR 6.3bn at YE09,
leading to a slightly weaker net debt/EBITDA ratio of 3.14x (versus 3.02x at YE09). The company reiterated its
earnings targets for 2010, as well as closing of the Agbar takeover by the middle of this year. The EU Commission had
approved this transaction on 27 April 2010. Although the leverage ratio is now slightly above the target of 3.0x, we do
not expect any further rating pressure from the earnings release, as Moody's already had reacted to the Agbar
purchase in October 2009 (which increased the group's share from 45.9% to 75%) and put the rating on negative
outlook. SEVFP bonds trade at fair levels.
A3s/A-wn/A-n Weakening TenneT Holding B.V. (TENN): Marketweight 0.9%
TenneT is the electricity transmission systems operator (TSO) in the Netherlands, and 100% government-owned. The
company recently bought the German High-Voltage grid of E.ON (transpower) for EUR 885mn. The group enjoys a
very stable business profile with stable cash-flows from its regulated activities. These strengths are offset by an
expected high leverage following the purchase of the German assets, and the realization of the EUR 2.1bn investment
program for the three years 2010-2012. Nevertheless, the company managed to stabilize its ratings, as part of the
funding (EUR 0.5bn out of total EUR 1.5bn bond issues in 02/2010) had been realized via a hybrid issue. The new
TenneT bonds have performed quite well since issuance, but trade at fair values.
--/--/A-s Stable Teollisuuden Voima Oyi (TVO) (TVO): No recommendation (event-driven coverage) 0.5%
TVO is a Finnish nuclear operator which generates electricity at cost for its shareholders. The largest shareholder with
a 58% stake is PVO, which itself is a power generator and owned by a consortium of Finnish industrials, municipal
utilities and Fortum. TVO operates two nuclear power plants (OL1 & OL2 with 860 MW capacity each) and a smaller
coal-fired plant. A third plant (OL3) with 1,600 MW is currently under construction and shall start operations by 2012.
TVO has very low operating cost production (EUR 15.9/MWh in 2008), which compares favorably with the average
price in Nord Pool (EUR 45/MWh in 2008). Credit ratios are weak as cash flow generation is limited and capex is very
high due to the construction of OL3. Free cash flow consequently was a negative EUR 560mn in 2008, whereas FFO
was just EUR 20mn. However, the figures are not very meaningful due to the full-cost pass-through mechanism. If any
of the offtakers defaults, electricity could be sold at favorable prices at Nord Pool. Fitch assigns an A- rating to TVO,
also due to the absence of dividend payments and M&A risk. The company issued a 7Y bond in June.

Euro Credit Pilot

A2s/A+s/As Stable Terna (TRNIM): Underweight 1.3%
1Q10 were results fully in line with UniCredit's forecast in terms of EBITDA and EBIT. EBITDA improved by 19% yoy to
EUR 274mn, supported by the higher tariffs charged for electricity transmission and consolidation effects from the
acquired high voltage grid from Enel. For 1Q10, we calculate adj. net debt to EBITDA of 3.8x (3.9x) and adj. FFO to net
debt of 31.3% (29%), which is fully commensurate with the current rating category. However, based on Terna's
business plan, the credit profile should deteriorate over the planning period as between 2010 and 2014, the company
intends to invest EUR 4.6bn. Key projects are the Italy-Montenegro interconnection and the extension of photovoltaic
capacities. As we expect EBITDA to increase by 7% p.a. over the planning period, reaching a level of EUR 1.4bn by FY14,
net debt to EBITDA will increase to ca. 5.0x. Given the negative free cash flows over the entire planning period, we
keep our underweight recommendation on the name. In June, Terna bonds moved in line with that of other Italian
issues, underperforming the iBoxx Utilities. (1H10 results: 28 July)
A3s/--/--- Stable Thames Water Utilities (THAMES): No recommendation (event-driven coverage) 0.3%
Thames Water Utilities (TWU) is the largest regulated water and sewerage company in the UK. The group's operating
area is Greater London and the Thames Valley. The UK water sector benefits from a stable and transparent regulatory
framework and limited exposure to competition. The EUR 500mn bond issued in February 2009 by Thames Water
Utilities Cayman Finance Ltd. is guaranteed by Thames Water Utilities Finance Ltd. and Thames Water Utilities Ltd.
These three companies are ringfenced from the rest of the group.
Aa2s/AAn/--- Stable Tokyo Electric Power (TOKELP): No recommendation (event-driven coverage) 0.6%
Tokyo Electric Power is the largest electric power utility in Japan, supplying about one-third of the country's total
electricity. It operates mainly in the Kanto region, Japan's largest economic zone, which includes the Tokyo
metropolitan area. The company's core business is the electric power business, which includes electricity generation,
transmission and distribution activities. Other strategic businesses are: 1. Information and Telecommunications,
including telecommunication and data processing services, software development and maintenance and CATV
broadcasting, 2. Energy and Environment: includes facility construction and maintenance, supply and shipping of gas
and materials, equipment and energy and environment solutions, 3. Living Environment and Lifestyle-Related
business: Real estate and property management and services; 4. Overseas Business, which includes power plant
projects. We note as positive that the company started to generate electricity at the Kashiwazaki-Kariwa Nuclear
Power Station in May 2009. The power plant had been shut down due to an earthquake in 2007, eventually leading to
operating losses in the last two years.
A3s/BBB+s/BBB+s Stable United Utilities Water PLC (UU): Marketweight 0.3% (member of the iTraxx NFI)
As expected, S&P lowered the rating on United Utilities Water by one notch from A-wn to BBB+, but with a stable
outlook. At the same time, the rating on the holding company United Utilities Plc was also downgraded by two notches
to BBB- stable. The rating action follows the assessment of UU's draft business plan for the next regulatory period
between 1 April 2010 and 31 March 2015 (asset management period 5, or AMP5). The rating action comes as no
surprise, and was more or less announced by UU's management in the recent conference call. We still assume that the
company should be able to keep its FFO/net debt ratio above the old S&P requirement of 13% (ratio was 15.2% at the
end of September 2009). Nevertheless, the rating agency has changed its adjustment methodology and now expects
this ratio to be in the range of 10%-11% for the upcoming regulatory period. UU spreads are trading at tight levels, but
should discount all risks.
A2s/An/An Weakening Vattenfall (VATFAL): Marketweight (Senior)/Overweight (Subordinated) 4.9% (member of the iTraxx NFI)
Vattenfall released improved 1Q10 figures on a like-for-like basis. The figures were influenced by the consolidation of
Dutch utility Nuon from 1 July 2009, as well as impairments on the sale of the German transmission business. Net
sales increased by 35% yoy to SEK 70.7bn, whereas reported EBIT was SEK 10.1bn, 21% lower yoy. However, this is
primarily related to one-off effects. The most prominent of these was an impairment of SEK 5.3bn, which was obviously
booked as other operating expenses, and related to the sale of the German transmission grid to a consortium of
Belgian Elia (60%) and Australian fund IFM (40%). Positive effects from higher electricity prices (SEK 1.8bn) and from
the consolidation of Nuon (SEK 2.3bn) partially offset this development. Excluding the one-off items, clean EBIT rose
by 19.6% yoy to SEK 15.4bn. Overall, cash-flow generation in 1Q was weak, with FFO falling by 48% yoy to SEK 9.8bn,
primarily related to huge swings in the tax position. Due to the weak FFO, credit ratios have deteriorated versus YE09.
The ratio of FFO/net debt adj. at the end of 1Q10 was 13.8% (15.5% if corrected by one-off tax payment) versus 19.5%
at YE09. Given the extraordinary tax effect on cash flow in the first quarter, we now expect FFO to net debt to reach
around 16%-17% by YE10, which is below S&P's threshold for the current rating of 20% for FFO/net debt. However,
we do not see the current rating as being in danger (despite the negative outlook). Bonds still trade at fair levels.
A3n/BBB+s/A-s Stable Veolia Environnement (VIEFP): Marketweight 5.8% (member of the iTraxx NFI)
Veolia published sound 1Q10 figures which were above expectations. Revenues decreased by 4.0% yoy to EUR 8.8bn,
while EBITDA increased by 4.3% yoy to EUR 1,035mn. Earnings benefited from the cold weather in the first two
months in 2010, higher recycled material prices and cost efficiency measures. Free cash flow in the quarter was
positive and reported net debt was EUR 15.1bn compared to EUR 15.1bn at YE09. The group confirmed its objectives
for 2010: 1) to generate free cash flow after payment of recurring dividend, and 2) to achieve growth in recurrent
operating income. The group should manage to keep net debt stable in 2010 with the help of asset disposals. The ratio
of FFO to net debt was 17.8% at YE09. Taking the cash flow effects from the asset disposal and the transportation
spin-off into consideration, we expect no deterioration of this ratio by YE10. As S&P wants this ratio to remain in the
high tens under the current rating and has recently assigned a stable outlook, we do not see its BBB rating as
endangered. Veolia is not impacted by the sovereign spreads, and the positive trend in earnings seems to continue.
We have, therefore, changed our recommendation from underweight to marketweight

Euro Credit Pilot

A2n/A-n/--- Stable VERBUND-International Finance BV (VERBND): Marketweight 1.2%
Verbund issued an announcement saying that the company is planning a capital increase of EUR 1.0bn in 2H10. The
share sale shall be realized this year and funds are to be used for the long-term investment plan, not for acquisitions.
We regard the transaction as credit positive, especially as there is still some rating pressure on the name as indicated
by the negative outlook at both agencies. Verbund has not fully digested the purchase of 13 run-of-river power plants,
and the plans to sell a 30% stake in these assets to Bavarian municipalities have not (yet) been fully realized (just
3.4% sold). S&P just assigns a A- rating to the Austrian utility (which already includes a one-notch upgrade for state
ownership), and wants the company to reach a ratio of FFO to net debt above 20% in 2011-2012. The failure to realize
the planned asset disposals would have brought the ratios very close to that threshold. With the announced capital
increase, the ratio might be comfortably positioned in the high 20s area (27%- 30%), stabilizing the rating. Both
agencies might even revise their negative outlooks after a successful capital increase. Verbund bonds trade at fair
levels, also if compared to peers.
Christian Kleindienst (UniCredit Bank)

+49 89 378-12650
christian.kleindienst@unicreditgroup.de
Rocco Schilling (UniCredit Bank)

+49 89 378-15449
rocco.schilling@unicreditgroup.de
Oil & Gas (Overweight)

Weight in iBoxx NFI: 7.4% Sector drivers: Although spreads are impacted by political risks, the recently rising oil and gas prices support the
companies. In particular large issuers with global activities (e.g., Total) are able to offset political risks by geographic
Current ASW spread: 124.6bp diversification of operations. Credit profiles of all companies will improve in the coming quarters if oil prices continue to
change mom/YTD: +9.3 / +38.2 rise. Moreover, the companies gained strong financial reserves in the past two years. If an IG-rated oil company
refrains from excessive shareholder remuneration or large and risky debt-financed acquisitions, it has good chances of
keeping its rating.
Euro STOXX OIG YTD: -15.2%
Last month's recap: In June, spreads in the oil & gas sector widened by 9bp on average, primarily driven by the
development of BP bonds. Gazprom and Pemex bonds showed a good performance. Credit spreads of oil majors
widened on concerns about potential spill-over effects from the BP disaster.

(Moody's/S&P/Fitch) Profile Comment Oil & Gas sector
A2s/As/A+s Stable BG Energy Holdings (BGGRP): Marketweight 1.5%
BG Group plc, the parent company of BG Energy Holdings, released improved 1Q10 figures, but below expectations.
(Underlying) operating profit in 1Q rose by 9% yoy to USD 1,995mn (market consensus: USD 2,075mn). Declining gas
prices were at least partially offset by a 6% increase in production volume in the E&P business. Cash-flow generation
was weak in the last quarter, and consequently credit ratios further deteriorated: FFO in 1Q10 was 15% higher yoy at
USD 1.9bn and free cash flow was positive. Net debt fell from USD 4.9bn at YE09 to USD 5.1bn. Credit ratios are still
very strong for the rating. We also note the positive growth in reserves last year with a 1Y RRR (reserve replacement ratio)
of 119% and a 3Y RRR of 132%. The bulk of the reserve increase stems from the development of own resources. In
March 2010, the company sold its US power plants, which it regards as non-core assets. BG Energy Holdings' July 2013 bond
(issued in July 2009) is still trading at fair levels. (2Q10 results: July 27)
A2wn/Awn/BBBwd Weakening BP (BPLN): Overweight 2.0% (member of the iTraxx NFI)
As a consequence of the oil spill in the GoM, BP has been downgraded by all three agencies. The board of the UK-
based oil majors agreed on the creation of a USD 20bn claims fund and also decided to suspend dividend payments.
We regard this news as credit positive, especially as there is certainty about the timing of the compensation payments
in the short to medium term. We assume that at least for the next few years, the fund should cover most of the claims.
We also assume that due to this rapid acceptance by BP, the Obama administration might show more restraint with
regard to penalties. Mr. Obama also called the meeting "constructive". Given this new information, we have changed
our recommendation to overweight. The spill has not been controlled yet, but there is now much more certainty about
the distribution of compensation payments. In its latest note, Fitch said that it would regard a quick solution regarding
the fund as positive. The BPLN 11/12 bond is trading are levels around 400bp which we regard as attractive (prior to
the GoM event the bonds were trading in negative spread terrain).
Aa2n/AA-n/AA-n Stable Eni (ENIIM): Marketweight 17.1%
Eni's 1Q10 figures were well above UniCredit expectations. Revenues increased by 4.5% yoy (+12.0% qoq) to EUR 24.8bn,
and clean EBIT rose by 15.4% yoy to EUR 4,331mn, which was above the UniCredit estimate of EUR 4,244mn.
Earnings were primarily influenced by the upstream business, driven by higher crude oil prices and production growth.
Production increased by 2.1% yoy to 1,816 kboe/d, influenced by higher gas production. Free cash flow (after capex &
dividends) in 1Q10 was positive at EUR 1.8bn. Net borrowings therefore stood at EUR 20.9bn (versus EUR 22.8bn at YE09).
FFO to net debt (adj.) was 46% (YE09: 41%). RCF/net debt (adj.) improved to 31% from 27% at YE09, but is still below
the Moody's requirement (40%). Despite positive free cash-flow generation, credit metrics are currently not in line with
the ratings. Nevertheless, they should improve over the following quarters due to the recovery in oil prices. We expect
RCF/net debt above 30% by YE10. As just 34% of FY09 revenues were generated in Italy, we regard the influence of
sovereign risk to be low. Eni bonds trade at fair levels.

Euro Credit Pilot

Baa1s/BBBn/BBBn Improving Gazprom (GAZPRU): Overweight 13.7%
Gazprom released sound 4Q09 results slightly above consensus, and with an improvement in credit ratios. Sales in the
fourth quarter fell 18% yoy to RUB 589bn, but operating profit was RUB 268bn, a 13% increase yoy. On a FY basis,
OP was 32% lower yoy at RUB 857bn (consensus RUB 855bn). Cash-flow generation in FY09 was also weaker than
in the prior year. FFO dropped by 16% yoy to RUB 928bn. Additionally, cash flow was charged with RUB 246bn in
acquisitions. Net debt increased from RUB 1.0tn at YE08 to RUB 1.3tn, but is already below the peak level reached on
30 September 2009 (RUB 1.4tn). Credit ratios have started to improve again and move away from the company's limit
(which is net debt/EBITDA of 1.5x). This ratio stood at 1.4x at YE09 (YE08: 0.8x) which is in line with our expectations.
FFO to net debt was 57% versus 89% at YE08. Going forward, there should be a positive trend in financial ratios in 2010
due to improved cash-flow generation, but leverage will stay above 1.0x (our expectation is 1.2x for YE10). Given this
trend, we regard the rating as quite stable (the rating is linked to the sovereign anyway). Gazprom bonds outperformed
the index in the past few weeks, but still trade at attractive levels.
A3s/--/A-s Weakening OMV (OMV): Marketweight 3.3%
OMV released sound 1Q10 figures that were above expectations. Sales increased by 23% yoy to EUR 5,285mn, and
also rose 10.2% qoq. Clean EBIT was EUR 694mn, 169% above the prior year's level, and with a strong qoq increase (+46%).
FFO in 1Q10 was a strong EUR 732mn, versus just EUR 399mn a year before. This cash flow was fully sufficient to
cover capex of EUR 0.5mn. Net debt fell from EUR 3.2bn at FYE09 to EUR 3.0bn. Credit ratios improved. The ratio of
FFO to net debt (adjusted) was 60%, versus 48% in 2009. (The adjusted ratio for FYE08 was 61%). The outlook for 2010 is
unchanged. Management expects high volatility in refining margins and oil prices, however, production is expected to
grow to 325,000 boe/d due to the ramp-up of new fields. OMV has hedged this production via floors, meaning that its
achieved prices will stay between USD 54 and 75 per barrel. Therefore, if higher prices materialize in 2010, it will not
be able to fully benefit. However, even with the price cap at USD 75 p/b, the Austrian group should deliver sound
results. OMV bonds trade at fair levels.
Baa1s/BBBs/BBBs Weakening Pemex Project Funding Master Trust (PEMEX): No recommendation (event-driven coverage) 6.8%
Pemex (Petroleos Mexicanos) is the largest company in Mexico. The company has a monopoly status in the Mexican
petroleum industry, and has fully integrated operations. It is also the leading crude oil exporter to the US (over 50% of
its crude production is exported). Pemex still has sizable hydrocarbon reserves but the reserve replacement rate is
very poor. The Mexican government wants to substantially increase the reserve replacement, potentially with the help
of foreign oil companies. The company is 100% owned by the Mexican Federation and its rating is directly linked to
that of the sovereign (also due to its significant contribution to government revenue).
Baa1n/BBBs/BBB+s Improving Repsol YPF (REPSM): Marketweight 8.1% (member of the iTraxx NFI)
Repsol released sound 1Q10 results above market expectations on the back of higher oil prices, and also showed a
stable trend versus the fourth quarter of 2009. Sales increased by 20% yoy (+ 1.7% qoq) to EUR 13.6bn, whereas
reported EBITDA surged by 63% to EUR 2,397mn. FFO in FY09 rose by 62% yoy to EUR 1.8bn. Net debt reported
(including preferred shares and finance leases) increased from EUR 18.0bn at FYE09 to EUR 18.2bn, affected by
negative working capital movements (EUR 0.8bn) and exchange effects (EUR 0.4bn). Due to the higher cash-flow
generation, the ratio of FFO to net debt (adj.) stands at 27% versus 24% at FYE09. If adjusted for approximately EUR 5.5bn
in non-recourse debt at the Gas Natural level, this ratio is around 37%. This should be in line with the rating requirement. In
January, S&P confirmed the stable outlook, also providing the group with some additional leeway for the recovery of its
financial metrics. S&P requires Repsol to reach a target ratio of FFO to net debt ratio in the high 30s in 2010, and of
40% by 2011 (excluding GN). We regard these targets as achievable. We regard credit spreads of Repsol as still fair
for the rating, although there is some correlation with the sovereign spreads (Kingdom of Spain).
A1s/A+s/-- Improving Schlumberger (SLB): Marketweight 3.2%
Schlumberger released weaker figures for 1Q10, but slightly missed expectations on a net income level. Sales fell by
6.7% yoy to USD 5.6bn, whereas EBIT was USD 869mn, a decline of 16% yoy. Cash-flow generation also
deteriorated. FFO was USD 1,373mn, 11% lower than in 1Q09. However, as free cash-flow generation was positive,
net debt slightly fell. The ratio of FFO to net debt still stands 193% compared to 191% at YE09. Management provided a
positive outlook for 2010, also revising its forecast for international margins. Hence, we keep our marketweight
recommendation for the name. So far, figures have not been influenced by the takeover of Smith International Inc.
(non-cash offer, purchase price of USD 11bn is being paid for from the issuance of new shares) as it is subject to
various regulatory approvals (e.g. Hart-Scott-Rodino), as well as the approval of Smith's shareholders. SLB bonds
trade at fair levels.
Aa1s/AA+s/AA+s Improving Shell International (RDSALN): Marketweight 20.1%
1Q10 Shell figures were strong, impacted by the higher oil price and beating market expectation. Sales increased by
48% yoy to USD 86.1bn, whereas clean operating profit (CCS earnings) rose by 49% yoy to USD 4.9bn. Earnings
were primarily influenced by higher oil prices and slightly improved production in the upstream business, whereas the
downstream segment was affected by the industry-wide weak refining margins. Net debt increased to USD 28.9bn
versus USD 25.3bn at YE09, due to continuing high capex. We keep our marketweight recommendation for the name.
Shell bonds have underperformed the index in the past few weeks, maybe due to the BP incident (and a potential
purchase of BP assets). Current levels still appear to be fair.
Aa2s/AA-s/--- Improving StatoilHydro (STOIL): Marketweight 6.7%
StatoilHydro released sound 1Q10 results above expectations. Revenues in 1Q rose by 14% yoy to NOK 129bn,
whereas EBIT was 11% higher yoy at NOK 39.6bn (consensus of NOK 38.5bn). The increase was mainly due to a
strong performance of the International E&P division, benefiting from higher crude prices as well as higher production
due to the ramp-up of a field in the Gulf of Mexico. The company had a net debt position of NOK 66bn versus NOK 72bn at
FYE09, so financial ratios should still be in line with the rating. Production in 1Q10 decreased by 2% yoy to 1,929 mboe/d.
Management confirmed the production outlook for 2010 (production is to be at levels of 1,950 +/-15 mboe/d). The
group benefits from a strong business profile and high support from the Kingdom of Norway. STOIL bonds trade at
tight but fair levels.

Euro Credit Pilot

Aa1s/AAn/AAs Weakening Total (TOTAL): Overweight 16.0% (member of the iTraxx NFI)
Total reported stronger 1Q10 results but slightly missed market expectations in terms of net profit, which was EUR 2.30bn
(consensus: EUR 2.37bn) before extraordinary items, compared with EUR 2.1bn in 4Q09. Upstream production slightly
improved to 2,427 kboe/d in 1Q10, up from 2,377 kboe/d in 4Q09 and even yoy (1Q09: 2,322 kboe/d), due to the
ramp-up of new capacities and lower level of disruptions in Nigeria, despite a negative price effect. Group clean
operating income rose by 44% yoy to EUR 4,161mn, and also improved qoq (+6.5%). Total's performance benefited
from the increased oil price in 1Q10, which was up to USD 76 per barrel, but spot gas prices and refining margins
stood at low levels, reflecting the existing overcapacity. Credit ratios are still strong despite weaker cash flow. Net debt
decreased to EUR 13.0bn from EUR 14.6bn at YE09. FFO to net debt (adj.) stood at 82% (YE09: 75%). Credit metrics
and operational ratios are still commensurate with an AA rating level. Bond spreads (as well as CDS) of Total are
trading in line with those of peers. However, we still prefer the French name due to its operational excellence. We keep
our overweight recommendation for the name.
Baa1s/BBBs/-- Weakening Transneft (TNEFT): Marketweight 1.4%
Transneft released strong 4Q09 results, benefiting from tariff indexation. Sales increased by 31% yoy to RUB 95bn, at
an improved EBITDA margin of 79% (4Q08: 57%, 3Q09: 64%). Cash flow generation also improved. In FY09, FFO
increased by 18% to RUB 152bn. However, cash flow was charged with higher capex, leading to a negative FCF of
RUB -37bn. Net debt increased from RUB 195bn at FYE08 to RUB 270bn, also due to currency effects. The ratio of
FFO to net debt stands at 42% (YE08: 48%), which is strong for the rating. Credit ratios of Transneft will weaken due to
further investments in the ESPO project, but this is already reflected in current ratings. Financing of the ESPO project
is still secured by the RUB 145bn facility with Sberbank maturing in 2014 (currently undrawn), plus an additional USD
10bn loan with a 20Y maturity from China Development Bank (signed in February 2009). Transneft is likely to benefit
from higher transit fees (e.g., +3.5% from 1 July 2010), but the high investment levels are likely to persist for the next
few years. The TNEFT 06/12 outperformed in the past few weeks, but spreads are still trading at fair levels
Christian Kleindienst (UniCredit Bank)

+49 89 378-12650
Industrial Goods & Services (Core) (Underweight)

Weight in iBoxx NFI: 6.5% Sector drivers: As the sector consists of names that are active in various industries, the diversification factor is
relatively high. However, the business of most companies mainly depends on general economic developments, with
Current ASW spread: 119.9bp forecasts indicating GDP growth for 2010. While the sustainability of the economic recovery remains uncertain, credit
change mom/YTD: -7.7 / -0.3 metrics should generally stabilize or even gradually improve in FY10 vs. FY09, assuming no further major setback in
demand. This should be first of all a result of the accelerating benefits of the implemented capacity adjustments in
some of the industries and cost savings measures. And, given current economic data and forecasts, demand for our
Euro STOXX IGS YTD: +5.1% companies' products/services will also improve in 2010.
Last month's recap: In June, the IGS sector spread tightened by about 3bp, with the prior-quarter underperformer
(i.e., TKAGR issues) now being the main outperformer.

(Moody's/S&P/Fitch) Profile Comment Industrial Goods & Services (Core) sector
Aa2s/AA-s/-- Stable 3M Company (MMM): No recommendation (event-driven coverage) 2.5%
3M is a global diversified technology company operating in six segments: 1. Consumer and Office, 2. Display and
Graphics, 3. Electro and Communications, 4. Health Care, 5. Industrial and Transportation and 6. Safety, Security and
Protection Services. The company benefits from a highly diversified product portfolio and customer base as well as
from a global presence. Generally, 3M's profitability and its cash flow generation capabilities are strong.
A3s/As/BBB+p Stable ABB (ABB): Overweight 3.2%
In the bidding contest for UK-based Chloride, ABB announced that it has decided not to match the 15% higher
counterbid made by Emerson. The move highlights the company's prudent approach of its recently accelerated
expansion activities. The latter includes the acquisition of Ventyx for USD 1bn and the intention to increase ABB's
stake in its subsidiary ABB Ltd. in India for about USD 1bn. With a net cash position of USD 7bn at the end of 1Q, ABB
has enough financial flexibility to digest these transactions within its ratings. The latter was upgraded by S&P in June
from A- to A, reflecting the proven resilience of the company's operating performance and strong credit metrics in the
weak market conditions, as well as the above average profitability of the company. In terms of near-term prospects,
ABB was cautiously optimistic at the release of its 1Q figures about a continuing positive momentum in its short-cycle
businesses, supported by brightened macroeconomic conditions, which should be followed by an improvement in
some of its late-cycle businesses later in the year. In the short term, however, demand in the power sector will be
weighed down by restrained spending, delays in project awards and increasing competition. We keep our overweight
recommendation on the name.

Euro Credit Pilot

Baa3s/BBB-s/--- Improving Adecco (ADENVX): Marketweight 2.4% (member of the iTraxx NFI)
Adecco released 1Q10 figures that reflected the improved trading conditions in most of the company's markets, with
the organic revenue decline decelerating sequentially to -1% in 1Q vs. -18% in 4Q09. Demand in particular rebounded
in the company's main markets France (29% of revenues) and North America (19%) in the general staffing segment,
with organic sales up by 6% and 2%, respectively. Revenues were EUR 3,972mn in the quarter. Adjusted EBITA
improved by 13% (organically and adjusted) to EUR 113mn, translating into a margin of 2.8% (vs. 2.5% a year ago).
Cash flow generation lost the support from working capital-related cash releases that boosted prior-year results, with
FOCF down from EUR 179mn to EUR 48mn. Reflecting the cash outflow for the acquisition of MPS, net debt surged
from EUR 110mn at FYE09 to EUR 898mn. Following the sharp sales drop in 2009, the positive revenue momentum
seems to be continuing for Adecco into the second quarter. Driven by improving demand trends, a lower cost basis
following implemented cost reduction measures and continued pricing discipline, the company's operating performance
is expected to gradually improve in the coming quarters. This should be further supported by the higher share of the
better-margin professional staffing exposure following the full integration of MPS. Adecco confirmed that it is fully
committed to its medium-term EBITA margin target of over 5.5%. In view of the improved business prospects and
current spread levels, we change our recommendation to marketweight from underweight.
Baa1n/BBB+n/-- Weakening Alstom (ALOFP): Marketweight 4.6% (member of the iTraxx NFI)
Alstom reported strong FY09/10 results (ending 31 March). By working down its strong order book, sales rose by 5% yoy
to EUR 19.7bn, attributable to a 6% increase in Power and 1% increase in Transport. Given the company's focus on
project execution and cost control, income from operations advanced by 16% to EUR 1.8bn, with the margin climbing
from 8.2% to 9.1%, which was slightly above the targeted 9%. Free cash-flow generation suffered from the strong
decline in new orders (-39% yoy) and the resulting working capital-related cash outflow (EUR 960mn), but remained in
positive territory (EUR 127mn vs. EUR 1.5bn). Although the decline in new orders decelerated slightly in 2H and tender
activity remains active, management remained cautious about the timing and the magnitude of the recovery in its end
markets. For FY10/11, the strong order backlog (EUR 42.6bn) should continue to secure a certain "base load", but due
to the lower level of new orders, sales will be down yoy (before the impact of the Transmission integration). Likewise,
margins should come under pressure going forward, with Alstom forecasting a new operating margin of between 7%-8%
over the next two years. When considering the acquisition cash outflow, credit metrics will hence weaken in the current
FY and rating pressure could increase should the recovery be too slow or not sustainable. The bonds trade fair but we
see value in selling 5Y CDS on the name.
--/BBB+s/-- Improving Areva (CEIFP): Marketweight 7.1%
S&P lowered its rating for Areva from A to BBB+. The two-notch downgrade reflects the agency's view that Areva's
profitability will remain depressed over the next couple of years. As a result, S&P now assess Areva's stand-alone
credit profile as BBB-, down from BBB+. The agency stated further that it does not see any rating upside potential
before 2012, given the uncertainty surrounding the completion of the OL-3 project and the company's huge investment
program. However, the stable outlook incorporates the agency's expectation that the company will improve its highly
leveraged financial profile as a result of asset disposals and proposed capital increase. Earlier, Areva provided an
update on its outlook for 2010. Basically, the company confirmed its expectations of significant backlog and revenue
growth, while operating income should also increase (before provisions, dilution capital gains and the possible impact
of shutdown conditions for the Georges Besse1). Net income will be up sharply, particularly driven by the gain on the
disposal of T&D. The company also provided indications for 1H, with the backlog expected to reach more than EUR 43bn,
up EUR 1bn yoy. Due to an additional provision of about EUR 400mn on OL3, 1H will be loss-making. Excluding this
provision and any impacts from Georges Besse1, the group's operating margin is forecasted at around 4%. We keep
our marketweight recommendation on the name.
A3s/A-s/-- Stable Atlas Copco AB (ATCOA): Overweight 1.5%
Atlas Copco released 1Q10 figures that revealed a better-than-expected operating result. Lower volumes in
Compressor as well as Construction and Mining Technique weighed on revenues that declined by 3% organically yoy
(reported by -8% to SEK 15.3bn). This was, however, more than offset by cost and efficiency measures, a positive
sales mix and a still positive price effect, resulting in an improvement of operating profit before restructuring costs
(booked in 1Q09) by 9% to SEK 2.6bn. Despite the fading support from working capital-related cash releases, Atlas
continued to show strong cash generation in the quarter, supported by its robust profitability, with FOCF totaling SEK 2.2bn
(SEK 3.0bn). The company's financial profile remained strong with adj. FFO to adj. net debt at about 60%, providing it
also with sound financial flexibility under its ratings. In the short term, demand for the company's products is expected
to improve further from current levels, mainly driven by emerging markets as well as a gradual recovery in North
America. Already in the first quarter, demand was up strongly, primarily in emerging markets and for mining equipment,
but also for industrial and construction equipment. This was also visible in a strong surge in new orders, albeit from low
levels, by 20% (22% organically) to SEK 17.3bn. Overall, business prospects remain positive for Atlas in the near term
and its performance should be further supported by the implemented cost savings measures. Bonds offer value.
A2n/As/As Stable Caterpillar (CAT): Underweight 1.2%
Together with the announcement of 1Q10 results, Caterpillar increased its 2010 outlook for sales to USD 38-42bn and
for EPS to USD 2.50-3.25 given robust growth in Asia-Pacific and Latin America and continued improvement in mining
and energy globally. We calculated that industrial net debt/EBITDA (adj.) in LTM 1Q10 improved to 5.7x vs. 6.6x qoq.
Industrial FCF in 1Q10 (after dividends) improved to USD 456mn vs. USD -757mn yoy. S&P noted that should the
company demonstrate a lack of notable progress in credit metrics in 2010, e.g., EBITA/interest <3x, Debt/EBITDA >4x
and FCF USD <2bn, a rating downgrade is likely. We do not see relative value in the CAT Eurobonds, although the
necessary improvement to keep current ratings has already started in 1Q10 (2Q10 results: 22 July)
A2s/A+s/--- Stable Danaher (DHR): No recommendation (event-driven coverage) 1.2%
US-based Danaher is a diversified manufacturing company that designs, manufactures and markets professional
instrumentation, industrial technologies and tools and components. The company has a strong free cash flow
generation capability, but we also note the high level of event risk associated with its willingness to drive growth
through debt-financed acquisitions.

Euro Credit Pilot

Baa1/BBB+/--- Stable Experian (EXPNLN): Marketweight 1.2% (member of the iTraxx NFI)
Experian is a leading consumer credit reporting agency present in more than 65 countries. It provides data-based
credit services (42% of sales), interactive services (25%), marketing solutions (20%), and decision analytics (13%),
enabling its customers to prevent defaults, target marketing offers and automate decision making. The company, which
had sales of USD 3.9bn as of FYE08/09, shows solid growth rates in the mid-single-digit range, especially in Latin
America (12% of sales) and EMEA/Asia-Pacific (11%), while its operations in North America (55%) and the UK (22%)
currently see declining growth rates. Experian boasts solid EBITDA margins in the mid-to-high twenties and generates
strong free cash flow as a result of limited capex needs for its IP-driven business. We note that the majority of total
assets (USD 6.1bn) comprises intangibles (goodwill USD 3.1bn, others USD 1.2bn), which more than offset equity of
USD 1.9bn. Its rating could come under pressure if FFO to debt were to fall below 30% (43% by FYE08/09) as a result
of accelerating M&A activity or if market conditions were to worsen. Bonds trade fair in our view.
A3n/A-s/A-s Stable Hutchison Whampoa (HUWHY): No recommendation (event-driven coverage) 9.5%
Hong-Kong based Hutchison Whampoa is an industrial conglomerate with holdings ranging from some of the world's
biggest port operators and retailers to property development and infrastructure to telecommunication operators.
Hutchison is 49.9% owned by Cheung Kong Holdings, which, in turn, is 37% owned by a family trust of Mr. Li Ka-shing.
The company's core businesses include ports and related services, property and hotels, retails, energy, infrastructure,
investments and others, and telecommunication. In FY09, Hutchison generated revenues of HKD 300.5bn and an EBIT
from established businesses of HKD 48.3bn. The company's operating performance continues, albeit diminishing, to
be burdened by the weak performance of its third-generation (3G) operations (loss of HKD 5.3bn in FY09).
A1s/A+s/-- Stable Illinois Tool Works (ITW): No recommendation (event-driven coverage) 1.8%
Illinois Tool Works is a diversified manufacturer of advanced industrial technology. It designs and produces an array of
highly engineered fasteners and components, equipment and consumable systems, and specialty products and
equipment for customers around the world. We note the company's relatively large exposure to cyclical end-markets
(i.e., construction, automotive and general industrial).
A2s/As/-- Improving John Deere (DE): Marketweight 1.6%
LTM 1H10 industrial net debt/EBITDA (adj.) improved to 3.5x from 4.3x in FY09, which is still too high for the rating.
Deere improved its FY10 (31 Oct) guidance and expects net sales in FY10 to be up by about 11%-13% (previously:
+6%-8%). This includes a favorable FX-translation impact of about 3pp and price realization of +1.5pp. The company
guides for net income of approximately USD 1.6bn for 2010 (previously: USD 1.3bn). Mainly due to lower discount
rates, Deere expects post-retirement benefit costs to be about USD 300mn higher on a pretax basis in 2010 yoy
(previously: USD +400mn). We see fair value in the bond as Deere's more important and stable agricultural business
somewhat offsets its construction-related business. Nevertheless, a significant improvement in credit metrics is
discounted in rather tight spread levels (3Q10 results: mid-August).
A3s/BBB+s Weakening MAN (MANAG): Overweight 3.8%
On 7 April, S&P downgraded MAN by one notch to BBB+ with a stable outlook given the weak FY09 results and a
lower assessment of MAN's business risk profile. S&P's hurdle ratios for MAN now are a group industrial operating
margin to a mid-single-digit level in 2010, markedly improved debt protection measures with industrial FFO/industrial
debt of about 40% and industrial debt/EBITDA ≤ 2.0x. Moody's expects: (a) the company to achieve an average EBIT
margin of around 6.0% through the business cycle and generate FCF over such a period, and (b) debt/EBITDA ≤ 2.0x.
We note that after MAN's 1Q10 results, credit metrics are well within these hurdle ratios in LTM 1Q10 and we see no
further rating pressure. We continue to have an overweight recommendation for MAN bonds in the IGS portfolio based
on: (a) the positive credit profile momentum, and (b) as we believe that if VW (A3s/A-n/BBB+s) were to increase its
shareholding in MAN to a majority, this would mean tightening potential for MAN bonds. (2Q10 results: 29 July)
---/BBB-n/--- Improving Rentokil (RENTKL): Marketweight 1.2%
Rentokil released 1Q10 results that revealed further progress in the company's efforts to improve its operating
performance. Continuously challenging market conditions in most of its divisions weighed on sales, which declined by
3.7% yoy (at constant exchange rates, CER), with only Pest Control reporting higher sales (+2%) yoy. Operating profit
rebounded by 44.9% yoy at CER, mirroring further improvements in the company's struggling businesses, in particular
UK Pest, and cost savings. Cash generation, although lower yoy (operating cash flow down by 51.5% to GBP 29mn),
remained ahead of plan. For FY10, Rentokil expects the revenue momentum to improve and continued profit
enhancement. In view of the progress made so far, rating pressure has eased for the company, with management
even targeting a BBB credit rating. At the same time, Rentokil indicated recently that it will restart M&A activities. We
keep our marketweight recommendation on the name.
Baa3s/BBB-s/--- Stable Rexam Plc (REXLN): Marketweight 1.6%
Rexam released a trading update stating that 1Q results were above its expectations, driven by better volumes in the
beverage cans business in Europe and North America, which resulted in better-than-expected profits. Driven by a
strong performance in specialty cans, Beverage Cans volumes increased in Europe, while volumes were down in North
America, in line with the market (-1%) and continued to grow strongly in South America. Uncertainty remains, however,
in Russia. Overall, the operating performance in this segment will be supported by implemented cost reductions of
about GBP 19mn. The performance in Plastic Packaging remains in line with expectations. Volumes in Personal Care
are showing initial signs of improvement, while Closures continued to decline. Cost savings remain on track to deliver
the targeted GBP 24mn in this segment. Net debt increased compared to FYE09 to just under GBP 2bn, due to the
normal seasonal fluctuations and negative FX effects. The net debt to EBITDA ratio stood at 2.2x (2.9x in 1Q09).
Rexam also successfully refinanced its committed bank facilities. We keep our marketweight recommendation on the name.
--/BBBs/-- Improving Sandvik (SANDVK): Marketweight 1.5%
Sandvik reported 1Q results above market expectations. Reflecting the benefits of the cost-cutting measures and
higher capacity utilization, operating profit improved strongly from the lows of SEK 115mn to SEK 1.9bn. Sales stood at
SEK 18.5bn in the quarter, i.e., only stable yoy on a like-for-like basis, as revenues were still weighed down by lower
sales in Mining and Construction as well as Materials Technology. Driven by strong demand from Asia as well as North
and South America, new orders, however, increased by 25% (30% lfl) to SEK 22.3bn. Demand increased in all three
divisions. Cash flow generation was strong in the quarter, given the better operating performance, and lower capex
spending, with FOCF at SEK 1.7bn. The company's credit profile hence improved sequentially (FFO to net debt
trended higher to 10%), but still remains far below the requirements for the company's ratings. However, on the back of
further production increases in the coming quarter, we expect the gradual recovery to continue. Spread levels of the
SANDVK 02/14 already mirror the weaker financial performance compared to its peers. Following S&P's two-notch
downgrade, rating pressure has eased for the time being, and we keep our marketweight recommendation.

Euro Credit Pilot

A3n/A-s/A-s Weakening Schneider Electric SA (SUFP): Marketweight 7.4%
Schneider released solid sales figures for 1Q10, with sales up by 2.3% yoy organically after five quarters of
no/negative growth. Reported sales stood at EUR 3,910mn (+2.3%). Growth was mainly driven by a good performance
of the Industry (+18.7%) and IT businesses (+6.4%), while Power (-2.7%) and Buildings (-3.6%) were impacted by
weak construction markets. Regionally, the company continued to benefit from its good exposure to new economies
(34% of group sales) which were the growth drivers (+12%) in 1Q, primarily the Asia-Pacific region. Schneider
confirmed its full-year guidance of organic sales growth in the low single-digit area and an EBITA margin improvement
to 14% before restructuring costs (targeted at around EUR 150-200mn) and the Areva Distribution integration impact.
Bonds trade fair.
--/BBB+s/-- Stable Securitas AB (SECURI): Marketweight 1.2%
Securitas continued to show a resilient performance in 1Q10. Sales totaled SEK 14.9bn, with organic sales being down
by 1% yoy, due to an ongoing weak market in North America. The operating margin advanced to 5.5% from 5.3% a
year ago, mirroring the merits of the company's continued focus on profitability and lower bad debt. While not providing
quantitative guidance, Securitas stated that demand for security services seems to have stabilized at current levels.
Overall, we forecast a stable operating performance in FY10. The company will continue to exploit M&A opportunities,
which, however, we expect to remain mainly limited to bolt-on transactions. We keep our marketweight recommendation on
the name.
A1s/A+s/A+s Stable Siemens AG (SIEGR): Marketweight 26.9% (member of the iTraxx NFI)
On the occasion of its capital markets day "Energy", Siemens provided a positive outlook for its 3Q10 results, ending
June 30. Helped by continuing cost productivity, the company indicated strong profitability at its Sectors, closely
approaching a Sector profit of EUR 2.1bn as in 2Q10. Driven by a recovery in the company's short-cycle businesses
and strong demand in emerging countries, new orders and revenues are likely to exceed the prior year (EUR 16.2bn
and EUR 17.4bn, respectively ) and previous quarter figures (EUR 17.1bn and EUR 17.5bn, respectively). For the
Energy sector, the company furthermore reported on improved business prospects with signs of an upturn in the
energy technology market. Overall, the news was positive, indicating further upside potential for the company's full-
year guidance of a Total Sector profit of above EUR 7.5bn. We keep our marketweight recommendation on the name
as the positive momentum is already reflected in current spread levels.
Baa3n/BB+s/BBB-n Improving ThyssenKrupp AG (TKAGR): Marketweight 9.2% (member of the iTraxx XOVER)
TK released a solid set of 2Q results. Benefiting from implemented cost savings measures, 2Q EBIT rebounded
strongly yoy from a loss of EUR 276mn to a profit of EUR 353mn on sales growth of 3% to EUR 10.1bn. Cash
generation was weighed down by higher working capital needs, resulting in a cash burn in FOCF terms of EUR 726mn
(vs. an inflow of EUR 584mn in 2Q08/09). After discounting for dividend payments, net debt stood at EUR 2.9bn, up by
EUR 0.8bn compared to 1Q09/10. TK reiterated its full-year guidance, anticipating a moderate stabilization of sales,
while earnings are expected to improve significantly, with adjusted EBT forecasted in the low triple-digit million EUR
range (EUR 443mn at the end of 1H). In the coming quarters, earnings will be burdened by accelerating costs from the
planned ramp-up of the Americas projects that are targeted in the mid triple-digit EUR mn range (EUR 36mn loss in 1H). In
addition, notably increasing raw material costs, such as for iron, are likely to squeeze margins due to the time lag in
passing on these costs to customers. That said, uncertainties still persist regarding how long the company will be able
to pass on these cost increases. We also fear that steel prices could experience downward pressure in the latter part of
the year in view of the ongoing capacity ramp-ups and still only modest real demand improvements in many steel-
consuming sectors. Nevertheless, TK's operating performance in FY09/10 should improve significantly. Despite
expected rising net debt due to continued high capex spending (EUR 3.0-3.5bn in FY09/10) and increasing working
capital needs, we foresee adj. FFO to adj. net debt improve to above 15% by FYE09/10. We changed our
recommendation to marketweight from overweight.
A1s/A-s/A+s Weakening Urenco Ltd. (URENCO): No recommendation (event-driven coverage) 2.4%
Urenco is among the world's four leading uranium enrichment companies, with about 90% of its cash flow stemming
from uranium enrichment tolling services. The company is one-third owned by the UK government, one-third by the Dutch
state and one-third by RWE and E.ON. Urenco benefits from strong profitability and cash flow generation capabilities.
In addition, long contract tenors (up to 2020) provide for high revenue visibility. Going forward, the company will
expand its enrichment capacity from currently 9.600 TSW/p.a. to 15.000 TSW/p.a., which will push up debt levels.
Baa2s/--/-- Stable Voith AG (JMVOIT): Overweight 1.4%
Voith published solid 1H09/10 results, which demonstrated again the advantages of the company's diversified product
portfolio, but also revealed the benefits of the initiated restructuring measures. In 1H09/10, the group's operating profit
improved by 11% to EUR 145mn, despite a drop in sales by 6% to EUR 2.3bn. The margin hence advanced from 5.3% to 6.2%.
Cash generation improved markedly yoy with FOCF at EUR 65mn (vs. cash consumption of EUR 134mn), primarily
driven by the better operating result and a working capital-related cash inflow of EUR 81mn (vs. an outflow of EUR 71mn in
1H08/09), with the latter reflecting mainly cash inflows from customer advances. Total debt remained largely stable
compared to FYE08/09 at EUR 1.4bn, but net debt decreased from EUR 374mn to EUR 304mn. We calculate an
improvement of credit metrics with adj. FFO/net debt at 37% vs. 32% at FYE. For FY09/10, Voith confirmed its
expectations of a stable business development with orders received and earnings at around FY08/09 levels. At the end
of 1H, new orders totaled EUR 2.6bn, up by 39% compared to 2H08/09 but still down 14% compared to 1H08/09. Voith
Hydro reported the sharpest drop (-65% yoy) since - as expected - no major hydro power projects were "up for award".
This was somewhat counterbalanced by a strong rebound in new orders in Voith Paper (+46%). Voith hinted that there
are indications of additional large projects coming to the market in 2010 that could also result in higher new orders for
Voith Hydro in 2H10. The book-to-bill ratio for the group remained robust at 1.1x at the end of 1H. Overall, following
Moody's rating downgrade to Baa2, we expect a stable credit profile and rating development. The bond offers value.

Euro Credit Pilot

Baa2s/BBB-n/BBB-n Weakening Volvo (VLVY): Marketweight 5.4% (member of the iTraxx XOVER)
Volvo's 2010 outlook is unchanged: both the European and US truck markets will increase by approximately 10% and
20%-30%, respectively. The forecast for the construction equipment market is still for growth of 0%-10% in Europe and
North America, but now for growth in Asia of approximately 20% (previous forecast 10%-20%) and in other markets of
about 20% (previous forecast 10%-20%). We note that both Moody's and S&P give Volvo time until 2010 and 2011 to
restore its credit metrics to debt/EBITDA of 4x and FFO/debt of 20%-25% in FY10 and 30%-35% in FY11, respectively.
This assumes a sharp improvement in Volvo's credit metrics. We believe that a downgrade to junk status is rather
unlikely as Volvo would – in a worst case scenario – repair its (industrial) equity ratio with capital measures. We note
that Volvo's industrial FCF (after dividends) in LTM 1Q10 was already (pro-forma) positive with SEK 900mn excluding
dividends, as Volvo will not pay a dividend in FY10 (FY09: SEK 4.1bn). We recently upgraded our recommendation for
Volvo bonds to marketweight from underweight for IG investors, as the recovery of Volvo's credit metrics has now
begun. Nevertheless, there is still a risk that the recovery is not strong enough in FY10/11, depending on the macro
environment, to regain the necessary IG metrics. (2Q10 results: 22 July)
Jana Arndt, CFA (UniCredit Bank)

+49 89 378-13211
jana.arndt@unicreditgroup.de

+49 89 378-13246
Aerospace & Defense (Marketweight)

Weight in iBoxx NFI: 0.9% Sector drivers: The momentum for commercial aerospace is turning positive, supported by improving industry
indicators such as traffic growth, despite the setback in April due to the volcanic ash disruptions. European defense
Current ASW spread: 144.7bp companies, on the other hand, might face increasing pressure on defense budgets in view of the rather stressed
change mom/YTD: +7.1 / +48.0 government budgets following various fiscal stimulus packages.
Last month's recap: In June, spreads of the AED sector widened by about 7bp, underperforming the IGS sector. The
Euro STOXX IGS YTD: +5.1% main underperformers were FNCIM issues.

(Moody's/S&P/Fitch) Profile Comment Aerospace & Defense sector
A1s/BBB+s/BBB+s Weakening EADS NV (EADFP): Marketweight 27.3% (member of the iTraxx NFI)
EADS released 1Q10 figures, with the operating performance being weighed down by a deterioration of hedge rates as
well as the A380 program. Revenues advanced by 6% yoy to EUR 9bn, while EBIT before one-offs dropped by 63% to
EUR 0.15bn. Cash generation was further trimmed by the usual seasonal working capital-related cash outflow,
resulting in cash consumption before customer financing of EUR 972mn (EUR 600mn in 1Q09). Hence, the company's
net cash position declined from EUR 5.8bn at FYE09 to a still robust EUR 4.3bn. For 2010, EADS reiterated its
guidance, expecting i) roughly stable revenues, ii) 250-300 gross orders at Airbus and iii) an EBIT before one-offs of
about EUR 1bn. The latter will be held back by deteriorating hedge rates (about EUR 1bn negative impact) and the
A380 program, although program execution is improving slightly. In the coming quarters, positive impetus on profit will
stem from an accelerating better aircraft pricing and continued cost savings effects. EADS also confirmed its
expectations of FCF before customer financing at breakeven levels, but seemed more confident about customer
financing needs, which could be lower than the guided EUR 1bn given the improved market conditions. While the credit
profile trend for 2010 is negative given the expected lower profit, it should be digested within the company's ratings due
to its currently strong financial profile. In addition, headline risk has declined over the last few months, with the reached
agreement in principle with the customer nations concerning its A400M program and with current exchange rate developments
currently being favorable for the company. We changed our recommendation from underweight to marketweight.
A3s/BBBs/BBB+s Stable Finmeccanica SpA (FNCIM): Overweight 48.2% (member of the iTraxx NFI)
Finmeccanica released unspectacular 1Q10 results. Backed by growth in Helicopters and military Aeronautics,
revenues advanced by 3% to EUR 4,039mn. Profitability remained stable yoy with an adjusted EBITA margin of 6.2%.
Reflecting the seasonal business pattern and normal 1Q cash burn (EUR 1.1bn), net debt trended higher in the quarter
from EUR 3.2bn at FYE09 to EUR 4.4bn (EUR 4.5bn at the end of 1Q09). The company confirmed its forecast for
FY10, expecting revenues of between EUR 17.8-18.6bn, an adjusted EBITA of between EUR 1,520mn-1,600mn as
well as positive free cash flow of EUR 200mn. This should be supported by the strong order backlog of more than EUR 45bn
that is anticipated to secure production of over 80% in the current FY. Overall, we expect a rather stable operating
performance going forward. Positive headline risk could stem in the near term from any progress made in the planned
stake sale/IPO of Ansaldo Energia. By acknowledging the risk of spread volatility given the current sovereign risk
debate, we confirm our overweight recommendation on the name. We continue to like the credit based on our
expectation of a stable credit profile trend, which is also supported by the company's defensive business features. We
also note the company's reduced dependency on its home market (share of new orders from Italy only represents 20%)
following the acquisition of US-based DRS.

Euro Credit Pilot

(Moody's/S&P/Fitch) Profile Comment Aerospace & Defense sector
A1s/BBB+s/A-n Improving Thales SA (HOFP): Marketweight 24.5%
S&P resolved its credit watch placement and downgraded its rating for Thales from A- to BBB+ with a stable outlook.
The rating action mainly reflects the company's deteriorating financial performance during 2009 (and likely in 2010) to
levels below the rating requirements. It also reflects the agency's expectations that Thales' profitability will remain
below that of industry peers over the next few years. Earlier, Thales released a solid 1Q10 trading statement, revealing
sales growth to EUR 2.5bn (+8% on a reported basis and 5% organically) as well as a 5% rebound in new orders to
EUR 2.4bn (+4% organically). The book-to-bill ratio declined, as anticipated, to below 1x, i.e. 0.95x. The company
confirmed its FY10 forecast, expecting stable revenues, supported by its strong order backlog (EUR 25bn), as well as
an improvement of its currently weak profitability level towards an EBIT margin of between 3%-4%. New orders are
forecasted to be lower yoy. We keep our marketweight recommendation on the name.

+49 89 378-13211
Industrial Transportation (Overweight)

Weight in iBoxx NFI: 3.3% Sector drivers: iBoxx Industrial Transportation is a sub-segment of the iBoxx Industrial Goods & Services sector. The
sub-index includes five toll road operators, three airport operators and two logistics companies. The main drivers for
Current ASW spread: 139.6bp the pure toll road operators are traffic volumes and tariff reviews. Traffic volumes are correlated with GDP growth and
change mom/YTD: +2.0 / +25.8 also influenced by weather conditions. Toll road tariffs include adjustment mechanisms that protect revenues from
certain risks (e.g., inflation, unplanned investments, etc.). Despite the weak traffic during 1H09, toll road operators'
operating performance remained on track during 2009, supported by the recovered traffic volume in 2H09 and
Euro STOXX IGS YTD: +5.1% increased tariffs. High predictable cash flows from long-term concessions in a regulated environment should support
toll road operators to at least perform in line with the economy. Regarding M&A, we expect a number of smaller
transactions stemming from portfolio adjustments to use the proceeds to repay existing debt, eventually preventing
further negative rating actions. Larger multi-billion deals are currently not on the agenda.
Last month's recap: In June, spreads of iBoxx Industrial Transportation bonds slightly underperformed compared with
the iBoxx Industrial Goods & Services, widening only by 7bp vs. 1bp.

(Moody's/S&P/Fitch) Profile Comment Industrial Transportation sector
---/BBB+s/A-s Stable Abertis Infraestructuras S.A. (ABESM): Underweight 16.2%
According to FT, the private equity company CVC, together with Abertis' major shareholder ACS and Criteria, plans to
fully acquire outstanding shares of the Spanish toll road operator Abertis. As FT reported, the Spanish construction
company ACS (not rated; 25.8% in Abertis) and La Caixa's investment vehicle Criteria Caixacorp (28.5%) together
controlling 54.3% in Abertis, might consider the creation of an SPV together with the private equity company CVC. At 1Q10,
Abertis had a net debt position of EUR 14.6bn (FYE09: EUR 1.48bn), while the current market cap is ca. EUR 10bn.
Mediabanca and other banks are likely to provide a club loan of EUR 8bn to finance the deal. Assuming a fully debt-
financed acquisition of the outstanding shares (45%), currently valued at EUR 4.5bn, net leverage at Abertis would
increase from 6.0x at 1Q10 to 7.8x. In case of a full reallocation of Abertis' shareholder base (ACS and Criteria would
bring their shares into a newco), net leverage might even rocket to a level close to 9.0x, assuming a financing of
Abertis' equity (current market cap of EUR 10bn) via 30% of equity and 70% of debt. This net leverage would be in line
with that of Autoroutes Paris-Rhin-Rhone, which is rated with Baa3s/BBB-n/---. We note that bonds issued by Abertis
Infraestructuras S.A. are rated with ---/BBB+s/A-s while the bond issued by Abertis subsidiary HIT Finance, in which
Abertis holds a 52.55% stake, is rated with BBB at S&P. A downgrade of Abertis Infraestructuras S.A. by two notches
would likely result in a downgrade of the HIT Finance bond (due in 2021) below the investment grade area. We change
our recommendation on Abertis bonds to underweight from overweight given the expected weakening credit profile and
expected negative rating actions in case of a successful takeover by CVC and its partners. Based on the details of the
deal released by FT, we see good chances for the transaction, which would be supported by the stable and predictable
cash flows of the Abertis' business model. (1H10 results: 29 July)
--/AA-n/A+s Weakening Aeroports de Paris (ADPFP): No recommendation (event-driven coverage) 4.8%
ADP is the French owner and operator of Paris' airports. In October 2008, the company entered into a long-term
cooperative agreement with Schiphol Nederland B.V. in the course of which it also purchased an 8% stake in Schiphol
for EUR 370mn.

Euro Credit Pilot

A3s/A-s/A-s Stable Atlantia SpA (ATLIM): Marketweight 25.9%
1Q10 EBITDA surged by 16.4% yoy to EUR 500mn, benefiting from the higher traffic volume (+1.4% yoy) and higher
toll fees at its main concession Autostrade per l'Italia. While less cyclical light vehicle traffic reported a 2.8% increase yoy,
heavy vehicle traffic remained in the red (-1.5%). Operating cash flow improved to EUR 365mn from EUR 242mn,
supported by cash inflow from reduced working capital. As a dividend payout for FY09 has not yet taken place, Atlantia
reported a lower net debt for 1Q10 (EUR 9.6bn vs. EUR 9.7bn at FYE09). Liquidity remained strong during 1Q10 as
Atlantia had cash reserves of EUR 4.7bn, thereof cash and cash equivalents of EUR 1.3bn. For 1Q10, we calculate
adj. net debt to EBITDA of 5.0x (FY09: 5.2x) and adj. FFO to net debt of 12.3% (11.8%), both ratios in line with the
required thresholds of the rating agencies. Assuming a stable dividend policy and keeping in mind Atlantia's EUR 17bn
capex plan until 2021, the adj. net debt to EBITDA ratio should remain at a level close to 5.0x until FY15. According to
the company, leverage should reach a level of 3.0x by FYE21. Furthermore, management affirmed that one of the
company's targets is to keep its current ratings, leaving headroom for further acquisitions of ca. EUR 100-200mn. We
keep our marketweight recommendation on Atlantia's cash bonds. In June, Atlantia bonds moved in line with the iBoxx IGS.
We prefer the ATLIM 16. (1H10 results: 3 August)
Baa1s/BBB+s/--- Stable Autoroutes du Sud de la France (VINCI): Marketweight 26.8% (member of the iTraxx NFI)
FY09 traffic volumes at ASF and Escota increased by 1.4% yoy, with traffic of heavy vehicles dropping by 10% yoy,
fully offset by the less cyclical light vehicle traffic (+3.6% yoy), which accounts for more than 85% of total traffic volume.
EBITDA of the toll road business was up by 5% yoy to EUR 2.0bn, also reflecting tariff increases and the expansion of
the network. Net debt remained stable at EUR 10.2bn compared to FYE08, despite the shareholder-friendly dividend
policy, with a payout ratio of ca. 80% for FY08. The credit profile remained stable since FYE08, with estimated adj.
FFO to net debt of >11% and adj. net debt to EBITDA of 5.1x, both ratios quite good for a Baa1/BBB+ rating. An
upgrade is prevented by the parent company's rating (Vinci S.A.), which controls ASF. With capex commitments of
EUR 3.5bn between 2009 and 2011, generating positive free cash flows while keeping the dividend payout ratios at the
level already seen in previous years is an ambitious target. However, given the headroom under current ratings, we do
not expect negative rating actions triggered by the capex commitments and the dividend policy. We keep our
marketweight recommendation on the name. Please also see our comment on Vinci.
Baa3s/BBB-n/--- Stable Autoroutes Paris-Rhin-Rhone (ARRFP): Marketweight 3.6%
On 16 June 2010, the ultimate shareholders of APRR announced that they will buy all outstanding shares (18.5%) that
are not held by APRR's holding company Eiffarie (not rated). With the planned transaction, Eiffarie will gain full access
to APRR's dividend payments, likely resulting in an improvement of its financial position. The transaction (valued at ca.
EUR 1.1bn) will be financed by additional equity provided by the ultimate shareholders Eiffage (not rated) and infrastructure
funds of Macquarie. Once the transaction is completed, highly leveraged Eiffarie has full access to APRR's cash flows,
with dividend payments, used to meet its debt obligations, solely flowing to Eiffarie and not to any other shareholders.
The combined entity (APRR and its holding company Eiffarie) had a net leverage of 9.0x at FYE09, which is weak for
the current rating category. Assuming a declining capex volume over the next few years, APRR should be able to
generate positive free cash flows used to reduce debt at Eiffairie's and APRR's level. We upgraded APRR to
marketweight from underweight due to fundamental and relative value reasons. During the last few weeks, the ARRFP 15
underperformed the iBoxx Industrial Goods & Services as well as the Industrial Transportation index. Based on the
conservative financing of the outstanding shares, APRR should be able to keep its (low) investment grade rating.
Baa1wn/BBB-s/BBB+n Improving Brisa (BRIPL): Marketweight 4.9%
In May, S&P downgraded Brisa by one notch to BBB- and removed the rating from credit watch negative status. The
rating action is based on recent traffic figures, S&P's revised economic prospects for Portugal and Brisa' potential
inability to reduce the outstanding debt. However, in June, Brisa announced the disposal of the 16.35% stake in Brazil-
based toll road operator CCR for EUR 1.2bn. With the disposal of CCR, net debt will decline from EUR 3.3bn to EUR 2.1bn,
eventually resulting in a better liquidity situation and an improved credit profile. Once the disposal proceeds are
received by Brisa, net leverage would fall from 7.0x at 1Q10 to ca. 5.0x, which is quite good for the current rating
category, especially at S&P. We keep our marketweight recommendation on the name given the strong cash-flow
generating business and the expected improvement of the credit profile. However, bonds underperformed the iBoxx
Transportation in June, mainly driven by the spread development of the Portugal government. (1H10 results: 28 July)
---/BBB+s/--- Stable Cofiroute (VINCI): Marketweight 26.8% (member of the iTraxx NFI)
Cofiroute's principal shareholders are France's main construction companies, Vinci S.A. with 82% and Colas (part of
Bouygues Group) with 17%. Traffic volume in 2009 was up by 1.1% yoy, reflecting Cofiroute's high portion of less
cyclical light traffic at its toll road network. EBITDA increased by 3.9% yoy to EUR 800mn. On a stand-alone basis,
Cofiroute's credit metrics are strong for the current rating. For FY09, we calculate net debt to EBITDA of 4.0x (FY08: 4.3x).
Adj. FFO to net debt should have remained above 15% (FY08: 14.7%). Both ratios are above the thresholds required
for a flat single A rating. However, given the fact that Vinci holds more than two thirds of the voting rights of Cofiroute,
the rating is capped by that of Vinci as long as the latter retains control of Cofiroute. S&P's stable outlook on Cofiroute is directly
linked to that of Vinci. As Vinci is currently more focused on a stabilization of margins rather than on top-line growth, S&P is
confident that Vinci will keep a credit profile in line with the current BBB+ rating. In June, Cofiroute bonds performed broadly in line
with the iBoxx IGS and trade at fair levels. We keep our marketweight recommendation. Please also see our comment on Vinci.
Baa1s/BBB+s/-- Improving Deutsche Post Worldnet (DPW): Underweight 7.7% (member of the iTraxx NFI)
DP released 1Q10 results above market expectations. Driven by the continuing recovery of macroeconomic conditions
and consequently rising transport volumes, group revenues advanced by 4.4% yoy to EUR 12bn. Further boosted by
the successfully implemented efficiency measures, underlying EBIT jumped by 81% to EUR 566mn. The strong
improvement was mainly attributable to the Express business (underlying EBIT moving into the black to EUR 154mn)
and Supply Chain (+52% to EUR 64mn), while underlying EBIT in the Mail business declined, albeit only slightly (-4.2%
to EUR 390mn), due to strict cost management. Despite the better operating result, underlying operating FCF as
reported by the company was negative at EUR 93mn (-EUR 73mn), as a result of Civil Servants Pension payments
(EUR 556mn) and a higher working capital build-up due to the increased business activity. DP's financial profile
remained strong, with the company reporting a net cash position of EUR 1.4bn at the end of March. DP provided a
positive outlook for 2010, expecting a continued recovery in global transport volumes. This is now forecasted to drive
underlying EBIT towards the upper end of its reiterated EUR 1.6-1.9bn guidance. While also benefiting from the
forecasted better operating performance, cash generation in FY10 will be weighed down by restructuring charges of
EUR 1bn and slightly higher capex spending of EUR 1.4bn. DP also anticipates that the positive net earnings trend will
be sustained in 2011. Generally, the company will focus on achieving a stable result in its structurally declining Mail
business, while the DHL business should become the driving force of growth. For relative value reasons, we keep our
underweight recommendation on the name.

Euro Credit Pilot

--/A-n/-- Weakening Dublin Airport (DAAFIN): No recommendation (event-driven coverage) 2.7%
Dublin Airport Authority (DAA) is a state-owned company that currently owns, manages and develops Ireland's three
main airports – Dublin, Shannon and Cork. The bond proceeds will be used to partly finance the company's EUR 2bn
investment program (which includes the construction of a new passenger terminal, pier and runway). On the back of
increasing capex and hence debt levels, credit metrics of the company should deteriorate going forward.
A1s/As/-- Weakening Luchthaven Schiphol (LUCSHI): No recommendation (event-driven coverage) 4.1%
Luchthaven Schiphol (Schiphol) operates the Amsterdam, Rotterdam, Groningen, and Lelystad Airports in the
Netherlands, and owns a stake in Eindhoven Airport NV. Schiphol also develops and maintains the airport
infrastructure. The LUCSHI 01/14 will be used to finance part of the "super dividend" of EUR 500mn in FY08 and a
second "super dividend" of EUR 500mn in FY09. These shareholder returns will put major pressure on the company's
credit protection ratios, as they will be fully debt-financed.
A3n/BBB+s/--- Improving TNT (TNTNA): Underweight 3.2% (member of the iTraxx NFI)
TNT released 1Q10 results above market expectations. By benefiting from improving trading conditions, cost saving
measures but also extra working days, revenues increased by 12.4% to EUR 2,747mn (underlying growth of 5.1%),
while EBITDA surged by 34.3% to EUR 329mn (underlying growth of 15.7%). The Express division reported the
strongest growth momentum in revenues (underlying +9.1%) and EBITDA (+42.7%), the latter on the back of higher
volumes, lower unit cost and despite yield pressure. Underlying revenues in Mail were roughly stable yoy as the fall in
addressed mail volumes in the Netherlands was offset by organic growth in Emerging Mail & Parcels. Underlying
EBITDA improved by 5.1%. For the remainder of 2010, TNT assumes a modestly improving business environment, but
given that the recovery remains fragile, the company's focus will remain on costs and cash. On the back of continued
volume growth, Express results should increase yoy, despite pressure from price/mix effects, wage increases and cost
inflation. Mail results, on the other hand, are forecasted to be below 2009 levels. Going forward, main driver for
spreads will, however, be the planned separation of the Mail business and any resulting impact for bondholders. We
keep our underweight recommendation on the name.

+49 89 378-13211

+49 89 378-15449
Basic Resources (Marketweight)

Weight in iBoxx NFI: 2.2% Sector drivers: Amid fears of an economic slowdown in China and deflationary risks, the positive price momentum for
commodities is at risk and might abate (in particular for industrial metals), we reduce our weighing on BAS from OW to
Current ASW spread: 210.7bp MW. In addition, the risk of further economic setbacks is rising in view of the current sovereign debt crisis. Prospects
change mom/YTD: -10.0 / +64.9 for steel producers are also darkening in view of the increase in production costs, in particular for iron ore and coking
coal, and the accelerating ramp-up of capacities while real end-user demand remains moderate at best. This could
imply margin pressure going forward. Nevertheless, the credit profiles of our covered steelmakers should improve,
Euro STOXX BAS YTD: -17.8% albeit from very weak levels.
Last month's recap: In June, the BAS sector spread tightened by 11bp, with the MTNA 11/14, the GLEINT 10/13 and
the MTNA 06/13 being the main outperformers.

(Moody's/S&P/Fitch) Profile Comment Basic Resources sector
Baa1s/BBBs/BBB+s Improving Anglo American (AALLN): Marketweight 17.6% (member of the iTraxx NFI)
Anglo announced that it has agreed to sell its zinc assets to Vedanta Resources for USD 1.34bn. With this transaction,
the company is further delivering on its strategy to focus on core assets. Proceeds are likely to be invested in Anglo's
organic growth projects. Earlier, Anglo reported FY09 results with EBITDA beating market expectations. FY09 EBITDA
was down by 42% yoy to USD 6.93bn (consensus: USD 6.4bn). Main contributor to operating profit (USD 5.0bn) was
copper, delivering USD 2.0bn (+6% yoy), driven by higher production and a lowered cost base. Thanks to lower capex
and several asset disposals, net debt excl. hedging activities remained at USD 11bn. Leverage on a reported basis
was 1.6x. The company provided only a vague outlook for FY10. While expecting constrained demand in advanced
economies, Anglo American is more confident regarding demand from emerging markets, especially from China and
India. We keep our marketweight recommendation on the name.

Euro Credit Pilot

(Moody's/S&P/Fitch) Profile Comment Basic Resources sector
Baa3s/BBBn/BBBn Improving ArcelorMittal (MTNA): Overweight 22.7% (member of the iTraxx NFI)
ArcelorMittal released 1Q10 results in line with its guidance. Reported EBITDA of USD 1.9bn was lower than in 4Q09
(USD 2.1bn), despite higher shipments (+8%). This is attributable to lower selling prices (-3%), higher costs as fixed
cost savings reversed and the loss of one-off effects that supported 4Q earnings. Cash generation was negatively
impacted by the higher business activity, resulting in a working capital-related cash outflow of USD 1.7bn and negative
FOCF of USD 1.3bn. The net debt to LTM EBITDA ratio nevertheless declined from 3.2x at FYE09 to 3.0x. For 2Q10,
the company anticipates an EBITDA improvement to USD 2.8-3.2bn, driven by higher volumes and higher average
steel prices. This increase should more than offset higher costs. Net debt is forecast to increase further, owing to
increasing working capital financing needs. Overall, the business environment for steelmakers is progressively
improving. However, uncertainties persist in view of strongly rising raw material costs and in view of the sustainability
and strength of the demand recovery going into 2H. By FYE10, we foresee adj. FFO/net debt to improve to above 25%,
which is still below the required 30% threshold at S&P for its BBB rating. In general, we believe that AM would make
use of capex cuts, asset disposals or even a further capital increase to defend its investment grade ratings, if
necessary. Bonds offer value.
A1s/A+s/--- Stable BHP Billiton Ltd. (BHP): Underweight 20.7%
BHP released weaker 1H09/10 figures but above expectations. Underlying EBITDA dropped by 22% to USD 10.9bn,
affected by lower commodity prices and exchange rate effects. The outlook for commodity prices remains cautious,
although BHP experienced a strong price recovery in December 2009. Nevertheless, the future trend is largely
dependent on Chinese and Indian demand, as real commodity demand in developed economies remains restrained.
Cash-flow generation in 1H09/10 was weaker, and net debt increased by USD 2.3bn to USD 7.9bn. However, credit
ratios still appear to be strong. The company also enjoys high financial flexibility due to its USD 8.3bn cash position
(30 June 2009: USD 10.8bn). We keep our underweight recommendation for the name, due to the tight spread levels
and increasing M&A risk.
Baa2n/BBB-s/--- Stable Glencore (GLEINT): Overweight 22.6% (member of the iTraxx NFI)
Glencore released a solid set of 1Q10 figures. EBITDA jumped by 92% to USD 1,389mn on revenues of USD 31,729mn
(+59% yoy). Net debt as reported by Glencore increased only moderately compared to FYE09 from USD 10.2bn to
USD 10.7bn, with the adj. FFO/net debt ratio improving from 17% to 21%. Glencore's operating performance in 2Q
should continue to be boosted by yoy improved market conditions. In addition, the financial profile will be impacted by
the exercised option to repurchase its Prodeco business for USD 2.4bn. The transaction should initially drive debt
levels higher until the company realizes the planned USD 1bn in proceeds from asset disposals. Looking at 2H10, the
positive price momentum for commodities might abate if the feared strong slowdown in Chinese imports materialize.
However, currently we still expect an ongoing robust performance of the company during the remainder of the year and
assume a stable credit profile and rating development. Main spread driver in the medium term could be a potential IPO
of the company, which is targeted within the next 3 years (base-case assumption), or a potential merger with Xstrata
with rumors resurfacing lately. Both scenarios – depending on the final structure – should have positive implications for
bondholders. Bonds offer value.
Baa2s/BBB+s/BBB+s Stable Vale (VALEBZ): Marketweight 5.1%
Vale announced that it has acquired a 51% interest in BSG Resources Guinea, which holds iron ore concession rights
in Guinea, for USD 2.5bn. The all-cash transaction includes a USD 500mn upfront payment, while the remaining USD 2bn
will be payable on a phased basis upon the achievement of specific milestones. In addition, Vale entered into an
agreement with Norsk Hydro to transfer all its primary aluminum and bauxite & alumina assets for an initial
consideration of USD 4.9bn, consisting of a cash payment of USD 1.1bn, a 22% ownership in Hydro (after a rights
issue to be made by Hydro) as well as the assumption of USD 700mn in debt. The transaction is part of the company's active
portfolio management initiatives and should enable it to participate in the growth potential of its aluminum assets via its
22% stake in one of the world's largest aluminum companies. We keep our marketweight recommendation on the name.
Baa2s/BBBn/-- Stable Xstrata (XTALN): Overweight 11.2% (member of the iTraxx NFI)
Xstrata released its 1Q trading update, revealing production increases across all its commodities. In particular,
ferrochrome production increased strongly (more than 300%). The company confirmed a strong operating and financial
performance since 1 January 2010 and an ongoing robust financial position. Main spread driver in the near-term
should be the renewed rumors about a potential merger with Glencore, with recent newspaper reports suggesting that
discussions are ongoing. Depending on the final deal structure, we currently do not expect a significant negative
impact on Xstrata's credit profile from such a transaction. We keep our overweight recommendation on the name.

+49 89 378-13211

Euro Credit Pilot
Chemicals (Underweight)
Weight in iBoxx NFI: 4.4% Sector drivers: The start into 2010 was promising, with all companies reporting a significant recovery. Given the
rigorous cost-cutting and efficiency measures earnings, too, showed a significant rebound. However, persisting
Current ASW spread: 89.9bp overcapacities will haunt the industry for the foreseeable future. Pricing power and thus margins will therefore remain
change mom/YTD: -7.2 / +0.8 under pressure in the medium term. Against this background, we expect all industry players to continue to focus on
cash flow generation, while benefits from working capital related cash releases should diminish. Capex budgets should
continue to be controlled tightly. With regard to ratings, we expect a "cease fire" for the time being, while rating
Euro STOXX CHE YTD: -1.4% pressure could re-emerge should volumes in 2010 fall short of expectations or if margins start to come under pressure as a
result of waning pricing power. The VCI expects industrial production to increase by 4.5% and chemical production to
gain 5.0% in 2010. Against this background, M&A activity remains a key credit driver for the chemical industry.
Last month's recap: In June, Linde's perp, K+S and Lanxess issues were the main outperformers, while Solvay, DSM
and Air Liquide underperformed the iBoxx Chemicals index.

(Moody's/S&P/Fitch) Profile Comment Chemicals sector
--/As/A+s Stable Air Liquide (AIFP): Underweight 6.2% (member of the iTraxx NFI)
1Q10 sales figures confirmed the return to growth with sales increasing 5.2%, driven, among others, by start-ups. For
FY10, Air Liquide (AL) expects the start-up of 20 on-site projects (vs. 15 in 2009; 15-16 in 2011) as well as the
continuing recovery in Emerging Markets. AL targets additional cost savings in excess of EUR 200mn under its ALMA
program, which, together with the structural cost savings already realized, should support further margin expansion in
the long term. Cash flow-wise, we expect continuously strong FFO generation, while investment-related cash outflows
are expected to accelerate going forward. Apart from capex related to its project portfolio, we also expect continuing
bolt-on acquisition activity. The targeted takeover of Airgas by Air Products may open opportunities, while another
important area for external growth will remain Healthcare. FY09 net debt stood at EUR 4.9bn, translating into an adj.
leverage based on FY08 adjustments of 2.7x vs. 2.5x yoy and a gearing ratio of 63% (vs. 80% yoy; AL's "target range"
is 50%-80%). Looking at the yoy improvement in its credit metrics, we do not expect rating pressure. (2Q results: 2 August)
Baa1n/BBB+n/BBB+s Stable Akzo Nobel (AKZANA): Underweight 7.8% (member of the iTraxx NFI)
In June, Akzo announced the long-awaited disposal of its National Starch unit for USD 1.35bn. Earlier in the quarter,
Akzo confirmed its margin target of 14% by 2011. Board member Frohn was quoted as saying that regaining a A-/A3
rating has priority over bigger purchases. Operationally, the qoq volume growth continued in 1Q10 with +10% (after
4Q09 +1%), notably because of improved volumes in Specialty Chemicals. Margins were supported by the delivery of
synergies and cost savings, with the company's EUR 540mn FY11 target still in place. EBITDA margins recovered to
12.3%, up from 11.9% at FYE09 and to 13.6% on a rolling basis, with management seeing itself as being on track to
reach its target of 14% by YE11. Credit metrics look comparatively weak for the rating category, with FFO to adj. debt
of below 15%. Akzo's progressive dividend policy (payout ratio with fourth consecutive increase), potential M&A
activity, as well as its pension deficit (EUR 1.8bn at YE09) are key risks. Following the bond issues in FY09, Akzo has
no significant refinancing needs until June 2011. (2Q10 results: 23 July)
A1s/A+n/A+n Improving BASF (BASGR): Marketweight 28.2% (member of the iTraxx NFI)
BASF announced its intention to acquire Cognis for a cash purchase price of EUR 700mn (EUR 3.1bn EV; EBITDA
multiple of 7.3x). Synergies of at least EUR 130mn by 2012 (5% of FY09 sales) at a total cost of up to EUR 250mn are
anticipated. While we expect credit metrics to remain largely stable in FY10 (expected closing in 2H10), S&P
downgraded BASF by one notch and we expect Moody's to follow suit given that its balance sheet profile remained
below the requirements for an A1/A+ rating. RCF and FFO to net adj. debt stood at around 25% and 40% at 1Q10.
Management remains committed to an "A rating" and announced that it would abstain from larger acquisitions for the
foreseeable future ("beyond two years"). Fundamentally, BASF's operating performance continued to improve in 1Q10
with a strong volume recovery and sales and EBITDA rising by 27% and 66% yoy (to EUR 15.5bn and EUR 2.6bn,
respectively). For 2010, BASF expects sales and earnings before special items to be up yoy, driven by Emerging
Markets as well as the ramp-up of Ciba synergies. BASF is confident that it can earn its cost of capital again in 2010
after it fell short of its target in FY09. (2Q10 results: 30 July)
A3s/A-n/A-s Stable Bayer (BAYNGR): Underweight (Senior)/Underweight (Subordinated) 19.6% (member of the iTraxx NFI)
1Q10 sales rose 6.2% like-for-like to EUR 8.3bn, predominately due to the volume- and price-driven rebound in sales
in its MaterialScience unit. EBITDA before special items also increased, by 13% to EUR 1.9bn at a significantly
improved margin of 23.1% versus 21.5% yoy. For 2010, Bayer raised its guidance for its EBITDA before special items,
now saying that it expects EBITDA to be more than EUR 7bn rather than expecting "an increase towards EUR 7bn".
However, the weak spot in Bayer's business portfolio remains the HealthCare unit, whose sales development is
disappointing and below the average for the pharma sector (around 4%-5% p.a.), in our view. Hence, we would not be
surprised to see Bayer engage in a large-scale acquisition to foster growth in its HealthCare unit. The company already
sought to strengthen its animal health business through a larger acquisition already in FY09, but the desired assets
were not for sale eventually. On the positive side, we note that there should be significant interest for Bayer's
MaterialScience from Middle East sovereign funds and Bayer may use the business as "acquisition currency" at some
point in the future. Against this background, we see little value in Bayer's bonds. (2Q10 results: 29 July)
A3s/A-s/A-n Stable DSM (DSM): Underweight 6.5% (member of the iTraxx NFI)
DSM continued to show solid growth in most of its markets in 1Q10, with the company's core businesses returning to
the strong 1Q08 level. Sales increased 24% to EUR 2,088mn, while EBITDA surged from EUR 142mn to EUR 304mn yoy.
Cash-flow generation remained solid, with a positive free cash flow of EUR 40mn. At a gearing of 14%, the company's
balance sheet remains underleveraged given improving market conditions. Not surprisingly, management will adopt a
more shareholder-friendly stance going forward, thereby prioritizing growth investments (organic growth investments,
selective acquisitions) and shareholder remuneration (stable and preferably rising dividend, share buybacks) over
balance sheet discipline. DSM expects FY10 to be a good year, with a good performance in Nutrition, Performance
Materials and Polymer Intermediates and a clearly positive result of the non-core Base Chemicals and Materials. Only
the Pharma result is expected to be weaker yoy (1Q10 sales -6% and EBITDA -40%). Liquidity is comfortable with no
near-term maturities and little short-term debt. Bonds trade dear. (2Q10 results: 3 August)

Euro Credit Pilot

(Moody's/S&P/Fitch) Profile Comment Chemicals sector
Baa2n/BBBs/-- Stable K+S (SDFGR): Underweight 2.7%
K+S is a leading European fertilizer (potash) and salt producer. In 2009, K+S generated sales of EUR 3.6bn, with
around 18% being generated in Germany, 10% in France, 25% in the Rest of Europe, US 14%, Brazil 10% and 23%
"Overseas". Following the acquisition of Morton Salt (USD 1.7bn), K+S' main business segments are Potash and
Magnesium Products (40% of sales), Nitrogen Fertilizers (28%) and Salt (28%). In 1Q10, sales increased 43% yoy to
EUR 1.5bn, supported by strong demand for deicing salt as a result of the harsh winter, while EBITDA rebounded to
EUR 333mn. For 2010, K+S increased its potash volumes forecast of 6 mmt to 6.5 mmt but prices remain substantially
below the peak levels of 2008. Given the M&A talk in the fertilizer industry, K+S' credit profile development largely
depends on its participation in industry consolidation (Tessenderlo's sulfate activities rumored as target). More
positively, K+S announced its intention to dispose of its "home and garden" business Compo (~EUR 400mn in FY09
sales). Given the heightened event risk, we see little value in spreads. (1H10 results: 12 August)
Baa2s/BBBs/BBBs Stable Lanxess AG (LXSGR): Marketweight 1.9% (member of the iTraxx NFI)
We changed our overweight recommendation to marketweight on the back of strong 1Q10 results. Driven by a strong
rebound in volumes (+50%) in all regions and the emerging markets of China and Brazil in particular, sales rose 53%
to EUR 1.6bn. EBITDA pre-exceptionals reached EUR 233mn compared to EUR 66mn a year ago, taking the
company's LTM EBITDA to EUR 632mn. Leverage based on EBITDA before exceptionals stood at 1.4x, up from 1.8x
in FY09. The company reiterated its outlook again, expecting an EBITDA of EUR 650-700mn for FY10, driven by its
exposure to the BRIC countries (20% in FY09). Main risks seem to be rising raw material costs. Capex is set to rise (up
to EUR 430mn), with the focus being emerging markets (plant in Singapore). While M&A is on the agenda again, we
remain convinced that Lanxess will stick to its disciplined approach with a focus on bolt-on deals. Liquidity is safe,
resting on EUR 613mn in cash (to fund growth investments) and an undrawn credit facility of EUR 1.4bn (Leverage
covenant of 3.5x). Near-term debt maturities are negligible. (2Q10 results: 6 August)
A3s/A-s/-- Stable Linde (LINGR): Marketweight (Senior)/ Overweight (Subordinated) 12.1% (member of the iTraxx NFI)
Moody's and S&P both raised Linde's ratings by one notch on the back of the proven resilience of Linde's business
model and a good start into 2010. 1Q10 sales and EBITDA rose by 7% and 19% (to EUR 2.9bn and EUR 641mn,
respectively) due to a revival in demand. Linde's ratings are weakly positioned in their rating categories. While Linde's
net debt in 1Q10 was further reduced to EUR 6.0bn (vs. EUR 6.0bn at FYE09) and leverage of 2.6x remained well
within management's target range of 2.5x-3.0x, the ratios of FFO and RCF to net adj. debt of around 27% and 23% fell
short of the hurdle rates set for the ratings (30%-35% and around 27%, respectively). For FY10, earnings in Gases are
expected to exceed the record levels of 2008 (EUR 2,417mn), while Engineering should show stable sales and
margins, with the order book standing at EUR 4.2bn (margin target 8%; FY09: >9%). Linde ruled out larger acquisitions
but a selective strengthening of its portfolio in Healthcare as well as purchases in regions where it does not have a
minimum 30% market share is likely. (2Q10 results: 2 August)
A1/A+/As Stable SABIC Europe BV (SABIC): Event driven coverage 2.6%
SABIC, the parent company of SABIC Europe, set up SABIC Capital I B.V. and exchanged the outstanding EUR 750mn bond
previously issued by SABIC Europe, with a bond with similar issues, in an effort to centralize its funding. As a result,
the ratings on the new bond are aligned with those of the parent company at all three rating agencies. Our
recommendation for the illiquid issue is mostly based on the implied parent support (the Kingdom of Saudi Arabia is
70% majority owner of the parent).
A3n/An/A-cwn Weakening Solvay (SOLBBB): Underweight (Senior)/ Underweight (Subordinated) 7.1% (member of the iTraxx NFI)
Following the closure of the disposal of its pharma unit to US-based Abbott (EV: EUR 5.2bn), Solvay announced a
share buyback program for around 6% of its outstanding shares worth ca. EUR 360-400mn at current share prices.
The remaining cash proceeds will be reinvested in internal and external growth, Solvay said. While management
stressed that it will maintain its long-term financial discipline with leverage targets at conservative levels, the exit from
the non-cyclical pharma business will evidently alter the business risk profile of the group to the downside, and might
eventually result in a realignment of its financial profile, too. We note that some of Solvay's direct peers are currently
rated in the BBB range. 1Q10 sales recovered 18% to EUR 1.6bn (excl. pharmaceuticals) while REBIT improved to
EUR 115mn (nearly doubling yoy), driven by volume increases as well as cost savings measures initiated in response
to the market downturn. The company continues to be on the lookout for small- to mid-sized acquisitions. Overall, we
remain reluctant to build exposure to Solvay. (1H10 results: 29 July)
A2s/As/--- Stable Syngenta (SYNNVX): Marketweight 5.3%
FY09 sales dropped by 5% to USD 10.99bn due to negative FX effects. On the back of higher price increases, EBITDA
improved by 9% (at CER) to USD 2.4bn at a margin of 21.6%. The strong profitability was also supported by a better
performance of the Seeds business (EBITDA margin up from 5.5% to 9.5%, respectively, 11.2% at CER) that made
further progress towards its 15% EBITDA margin by 2011. Syngenta generated strong free operating cash flow of USD 670mn
(USD 904mn in FY08) with its gearing (25% at FYE09) remaining well within its target range of 25%-35%. Following a
drop in sales for 1Q10, Syngenta expects volumes to rise in 2Q. The company also foresees growth in full-year EPS as
lower raw material costs and favorable FX effects are expected to offset higher growth investments and a higher tax
rate. Furthermore, it anticipates substantial free cash-flow generation in 2010 that should largely cover the proposed
stable dividend payment and a planned share repurchase (up to 10% of share capital). (1H10 results: 22 July)
Jochen Schlachter (UniCredit Bank)

+49 89 378-13212
jochen.schlachter@unicreditgroup.de

Euro Credit Pilot
Construction & Materials (Underweight)

Weight in iBoxx NFI: 3.3% Sector drivers: Despite the volume recovery witnessed over the past couple of months, there was little evidence so
far that government infrastructure programs showed a meaningful impact on demand of heavy building material
Current ASW spread: 193.6bp players. However, industry players expect stimulus programs to kick in 2010, especially in the mature markets of North
change mom/YTD: -6.2 / +53.0 America and Europe. Still, it is unlikely that stimulus programs will lead to a significant increase in construction activity
overall. According to the Portland Cement Association, North American construction is anticipated to decline by around 2.9%
in 2010, with potentially slow growth in civil engineering, offset by continued weakness in residential and commercial
Euro STOXX CNS YTD: -17.2% construction. For Europe, Euroconstruct expects construction output to fall by 4.4% in 2010 versus a decline of 9.3% in
2009. Both industry think tanks expect construction industries to return on a growth path in 2011 (+0.6%). However, in
Asia the building materials industry continues to benefit from buoyant demand, while the overall prospects for emerging
markets in Latin America, Africa and the Middle East also remain broadly positive. Another key driver will remain
pricing discipline in the industry. So far, prices have proved resilient, but as the industry emerges from recession, some
players may scramble for market share at the expense of pricing. However, up until today, there is no indication of a
substantial erosion of prices. Given that most industry participants entered the downturn with significant debt loads, we
expect the industry to remain in a deleveraging mode. M&A may become a topic for players like Holcim and CRH.
Last month's recap: In June, Saint Gobain and Lafarge issues outperformed, while CRH was the biggest underperformer
in the sector.

(Moody's/S&P/Fitch) Profile Comment Construction & Materials sector
---/A-s/BBB+n Weakening Bouygues (BOUY): Underweight 24.7% (member of the iTraxx NFI)
Bouygues' operating performance benefits from its diversified business portfolio with assets in construction, real estate,
telecom and media. 1Q10 sales and operating profit were down around 2% to EUR 6.5bn and EUR 162mn,
respectively, despite a marked improvement in 2H10. Bouygues' balance sheet remains healthy, and with net debt at
EUR 3.2bn, leverage stood at 0.8x (vs. 1.0x at FY09). Looking ahead, Bouygues will work down its order book in Coals
(+4% yoy EUR 7bn) and expects to further benefit from increasing contributions from stimulus projects. The order book
in Construction remains healthy (EUR 12.7bn, which is more than one year sales for the segment), while Immobilier's
order book (EUR 2.0bn) continued to decline (-29% yoy) in 1Q10, affected by weak commercial construction markets.
All in all, Bouygues targets sales of EUR 30.1bn (-4%) in 2010. With regard to its media and telecom operations,
Bouygues has in the past repeatedly stated that it does not intend to sell either. The company owns a 30% stake in
French capital goods giant Alstom.
Baa2n/BBB-s/-- Weakening Ciments Francais (CMFP): Marketweight 2.2%
Ciments Francais is majority-owned by Italcementi of Italy. The stand-alone credit quality of CF is better than that of its
parent, but weighed down by the latter's aggressively leveraged financial profile. CF's FY09 results reflected
weakening construction activity in the key markets of France (together with Belgium 36% of FY09 sales), Spain (5%)
and North America (10%), which could be offset by buoyant activities in emerging markets like Egypt (19%) or Morocco (8%).
FY09 sales and recurring EBITDA dropped by 12% and 11% yoy, respectively, to EUR 4.2bn and EUR 909mn.
Gearing and leverage stood at 40% (46% in FY08) and 1.7x (1.9x FY08). Given its limited diversification, CF's credit
profile remains vulnerable to a significant slowdown in one or a few of its markets. The company launched a tender
offer for its USPP, presumably in an effort to centralize financing at the level of its Italian parent company Italcementi.
(1H10 results: 30 July)
Baa1n/BBB+n/BBB+n Stable CRH (CRHID): Overweight 3.8%
CRH released a trading statement saying sales in the first four months of 2010 declined by 14% yoy, largely as a result
of harsh winter weather as well as weak economic activity. 1H10 sales are expected to come in 10% below the 1H09
level of EUR 8.3bn, with EBITDA potentially dropping to as low as EUR ~530mn. Taking into account CRH's guidance
for a yoy improvement in its 2H EBITDA (2H09 EUR 1.15bn), the company's EBITDA in 2010 might remain broadly
unchanged yoy (EUR 1.8bn). The development of CRH's leverage (FY09: net adj. debt to EBITDA 2.4x according to
our model) is thus largely linked to the amount spent on external growth. M&A targets are likely to be small-to-mid-
sized. CRH's overall acquisition capacity is seen at around EUR 1.5bn for the next 12-18 months. Growth investments
in excess of that amount could lead to rating pressure, S&P indicated in a note in April. (1H10 results: 24 August)
Baa2s/BBBs/BBB+s Stable Holcim (HOLZSW): Overweight 6.2% (member of the iTraxx NFI)
Holcim reported continuous growth in cement volumes, driven by emerging markets in Africa, Middle East, and Asia
Pacific (in particular India). Operating EBITDA rose 19.1% to CHF 909mn, helped by stringent cost control. Net debt
showed the seasonal increase to CHF 14.5bn (CHF 13.8bn qoq), while leverage remained stable qoq at 3.0x and was
down from 3.5x yoy. In 2010, Holcim's operating performance should continue to benefit from cost reduction measures
and capacity adjustments carried out in response to the crisis, while in faster growing emerging markets (~50% of
FY09 sales) additional impetus should stem from the commissioning of around 8mn tons of new capacity over the
course of the year. Expansion investments will thus be lower than in FY09 and should contribute to free operating
cash-flow generation. Hence, Holcim's balance sheet profile and credit metrics should gradually improve going forward.
Key risks could stem from larger debt-financed acquisitions, which we believe are currently not on the agenda. Liquidity
is CHF 8.8bn in cash and available credit facilities, which compares to short-term debt of CHF 4.6bn. (1H10 results: 20 August)
Baa3s/--/-- Weakening Imerys (NK): Underweight 2.2%
Imerys' is a leading supplier of minerals to a wide range of customer industries. The company generated 49% of its
1Q10 sales in Western Europe, 21% in North America, 5% in Japan and Australia and 25% in Emerging markets.
Through its Materials & Monolithics (31% of FY09 sales), Minerals for Ceramics, Refractories, Abrasives & Foundry (28%),
Performance & Filtration (18%) and Pigment for Paper (23%) business lines, it supplies the construction, personal
care, paper, paint, plastic, ceramics, telecommunications and beverage industries. In 1Q10, Imerys benefited from the
ongoing recovery in industrial production, especially in emerging economies, while the performance in the Northern
Hemisphere was impacted by adverse weather conditions. 1Q10 sales increased 8% to EUR 752mn, driven by
demand from industrial production and resulting better volumes. Operating margins recovered from a mere 6.4% in 1Q09 to
11.2% as a result of implemented cost savings measures and better capacity utilization. Net debt remained relatively
unchanged versus FY09, when Imerys reported net debt of EUR 964mn and leverage of 2.3x. (1H10 results: 30 July)

Euro Credit Pilot

(Moody's/S&P/Fitch) Profile Comment Construction & Materials sector
Baa2n/BBB-s/-- Stable Italcementi (ITCIT): Marketweight 3.3%
Italcementi is the world's fifth largest cement producer and parent company of Ciments Francais (CF), with leading
market positions in France (27% of FY09 sales), Italy (17%), Egypt (16%) and Morocco (6%). All international activities
are consolidated at CF level, while only the Italian operations and some smaller other activities (trading) are
consolidated at Italcementi. 1Q10 sales were down 11% to EUR 1,073mnm (vs. EUR 1,201mn yoy), while "Recurring
EBITDA" collapsed by 28% to EUR 136mn. Net debt, however, continued to decrease by EUR 69mn as a result of the
strong cash flow focus and rigorous working capital management. At 1Q10, the company reported a gearing of 48.7%
(vs. 51.6% at FYE09) and a leverage of 2.6x vs. 2.5x at FYE09. Mirroring similar statements of its peers, the company
said that the outlook remains highly uncertain. (1H10 results: 30 July)
Baa3n/BBB-n/BBBn Improving Lafarge (LGFP): Marketweight 28.5% (member of the iTraxx XOVER)
Lafarge reported 1Q10 sales of EUR 3.3bn, down 10% blamed on the adverse weather conditions and continuously
low volumes in North America, Western Europe as well as Eastern Europe. Current operating income dropped 30% to
EUR 236mn. Net debt showed a seasonal increase and leverage of 4.2x was up from 3.9x at FY09 while FFO to net
adj. debt at 14.6%remained stable qoq. For 2010, group cement volume is expected to increase by up to 5%, driven by
Asia, Latin America and Middle East and Africa. While price trends vary from region to region, they are expected to
remain stable overall. Following the significant cost reduction achieved in FY09, earnings will be supported by an
additional EUR 200mn in cost savings targeted for 2010. The capex guidance remains unchanged at EUR 1.3bn.
Credit metrics, which remain below thresholds for the rating category, will benefit from the EUR 78mn cash inflow
following due to the newly formed JV with Austrian Strabag in Central Europe. Ratings will come under pressure and a
downgrade cannot be ruled out should credit metrics fail to recover significantly from 2Q onwards. (1H10 results: 30 July)
Baa2n/BBBs/BBB+ Stable Saint Gobain (SGOFP): Marketweight 23.7% (member of the iTraxx NFI)
Saint Gobain reported a sales decline of 14% to EUR 37.8bn for 2009 as all business units, except for Packaging,
were hit by the economic downturn. Despite the earnings recovery in 2H09 (chiefly driven by cost cuts), EBITDA fell by
28% to EUR 3.7bn. Free operating cash-flow generation reached the targeted EUR 1bn and, together with the EUR 1.5bn
rights issue carried out in 1H09, reduced net debt levels to EUR 8.6bn. Leverage stands at 2.3x. Looking forward,
trading conditions in emerging markets should continue to support volumes, while more mature markets should at least
have bottomed out. SGO has identified another EUR 200mn in cost savings for 2010, which will take total accumulated
cost savings to EUR 2.1bn based on its 2007 cost structure. In addition, free cash-flow generation will also remain in
the focus (target of EUR 1bn) and M&A activity should remain on hold. Of the unchanged dividend for 2009, EUR 142mn will
be payable in cash and the remainder as a stock dividend. SGO is targeting a disposal of its Packaging unit at a later
stage and has disposed of its Ceramics business for ~EUR 200mn. (1H10 results: 29 July)
Baa1s/BBB+s/BBB+s Stable Vinci (VINCI): Marketweight 2.1% (member of the iTraxx NFI)
Vinci’s consolidated FY09 sales and operating profit were down 4.6% and 5.5% yoy to EUR 31.9bn and EUR 3.2bn,
respectively, while cash flow from operations stood at EUR 3.3bn (+1.8%). The continuing slowdown of organic growth
can be attributed to lower levels of activity in the contracting business lines (-6.8/%), while the concessions units
reported a slight increase (+2.8%) as light vehicle traffic continued to recover in 2H. Vinci's net debt further declined to
EUR 13.7bn (vs. EUR 15.7bn at 1H09 and EUR 15.4bn at FYE08). Liquidity remains healthy with EUR 13bn in
available cash and credit lines covering only limited debt maturities until FY10 (EUR 1.1bn) and FY11 (EUR 0.9bn). For 2010,
Vinci expects a slight increase in its motorway concession business and a slight decline in its contracting businesses.
Its order book remained healthy at FY09, amounting to EUR 24bn, up 4% yoy. Sales will further benefit from the
acquisition of Tarmac and Cegelec's electrical and mechanical engineering, which are currently under review by the
European competition authorities. Qatari Diar will become the biggest shareholder in Vinci as a result of the
transaction. (1H10 results: 8 August)
Baa3/BBB/BBB- Stable Voto-Votorantim (VOTORA): Event-driven coverage 3.3%
Brazilian Votorantim group ranks among the largest Brazilian conglomerates comprising industrial activities including
cement, metals, steel, chemicals (accounting for 70% of sales) as well as financial services (30%). Voto Votorantim'
notes are jointly and severally guaranteed by Votorantim, as well as its subsidiaries Votorantim Cimentos Brasil and
Companhia Brasileira de Aluminio. Votorantim had BRL 22.8bn in adjusted debt at FY09, taking leverage (in terms of
debt/EBITDA) to 4.9x from 4.7x yoy, a level which is considered high for the rating category. However, leverage is
expected to improve in 2010 owing to new capacities and improved market conditions for commodities. Owing to
management's focus on free cash-flow generation, Moody's expects leverage to trend towards 2.5x over the near term.
Jochen Schlachter (UniCredit Bank)

+49 89 378-13212

Euro Credit Pilot
Health Care (Underweight)

Weight in iBoxx NFI: 6.3% Sector drivers: The quality of 1Q10 results was two-fold. On the one side, only a small number of companies with
strong organic growth beat market expectations (e.g., ROSW, NOVART), on the other hand, there was a decline in
Current ASW spread: 51.0bp sales volumes or flat sales at least (e.g., JNJ, SANFP). The outlook for FY10 is anything but rosy for pharma
change mom/YTD: -6.3 / +3.9 companies and therefore also for debtholders. The phase of debtholder-friendly measures came to an end as
AstraZeneca and Sanofi already started to repurchase own shares and should continue to do so in the course of 2010.
Following several multi-billion USD transactions with a total deal volume of more than USD 150bn during 2009, it is
Euro STOXX HCA YTD: -1.4% very likely that we will see further mid-to-large size M&A deals during the year. Most prominent companies should be
JNJ, BMY, AZN and SANFP. Due to the fact that covered pharma iBoxx companies will lose USD 70bn in sales
caused by expiring patents between 2010 and 2012, there is intense pressure on pharma players to keep up the pace
of growth exhibited in the past or even to keep their current top-line. The impact of the initiated reform of the healthcare
system in the US may not be substantial for pharma companies. Pharma companies (mainly US based companies)
only slightly revised their guidance for FY10 due to the US healthcare reform. Besides aforementioned challenging
factors, main drivers for further growth perspectives (e.g., the aging population and the often unhealthy lifestyle in the
Western Hemisphere, growing GDP and wealth in emerging markets) are still valid. For further details and key drivers
in the pharma industry, please refer to our pharma Sector Report "The Patent Cliff" published on 1 July.
Last month's recap: In June, bonds with a shorter duration underperformed the index while issues with a maturity of
>5 years outperformed the iBoxx Health Care, regardless of the issuing company.

(Moody's/S&P/Fitch) Profile Comment Health Care sector
A1s/AA-s/AA-s Stable AstraZeneca (AZN): Underweight 2.0%
Good news for AstraZeneca came from a favorable ruling in the US, preventing the launch of generic versions of AZN's
cholesterol reducer Crestor (FY09 sales: USD 4.5bn) before 2016. We regard the decision of the US District Court as
credit positive for the company as Crestor is AZN's second largest blockbuster, generating almost 14% of total sales in
FY09. However, given the relatively mature product portfolio and the high product concentration (top 5 products
contributed more than 56% of total sales, which is a weak figure compared to its peers), the company might seek
external opportunities to offset the weakening top-line. In April, AZN affirmed its guidance that top-line will decline at up
to a mid-single digit rate in FY10 and expects a sales volume of USD 28-34bn between 2010 and 2014, reflecting a
bleak outlook when looking at sales volume in FY09 (USD 32.8bn). For 1Q10, we calculate adj. total debt to EBITDA of
0.9x (FY09:1.0x) and adj. FFO to total debt of 81% (72%), offering headroom in the low single-digit USD billion area for
debt-financed acquisitions. Given the tight level of outstanding bonds and the elevated event risk, we keep our
underweight recommendation. (1H10 results: 29 July)
A2s/A+s/A+s Stable Bristol-Myers Squibb (BMY): Underweight 2.5%
Bristol-Myers Squibb reported solid 1Q10 results with strong top-line performance, but lowered, however, its guidance
for FY10. 1Q10 sales were up by 8% yoy to USD 4.8bn (at constant FX rates), showing some of the best growth
momentum within the pharma sector during the 1Q earnings season. Having a look at BMS' top-10 products, sales
volumes of each product have improved, a very rare picture in the pharma sector at a time of maturing product
portfolios. Operating profit was USD 1.3bn, which compares to USD 1.1bn in 1Q10. Operating cash flow of USD 464mn was
only slightly above that of 1Q09 and was fully consumed by capex and dividend payments. For FY10, the company
expects to increase sales in the mid-single digit area. However, due to the health care reform and higher R&D and
rationalization costs, guidance for net profit was lowered by ca. USD 170mn to a range of USD 3.3bn to USD 3.5bn
(FY09: USD 3.2bn after minorities). The credit profile did not change during 1Q10. We calculate adj. total debt to
EBITDA of 1.2x (FY09: 1.3x). On a reported basis, BMS had a net cash position of USD 0.5bn (gross cash position
was USD 10bn!), making the company an attractive unleveraged target for larger competitors. At the same time, bolt-
on acquisitions should arise in the near future given the huge cash position at the company. We keep our underweight
recommendation on the name. (1H10 results: 23 July)
A1s/A+s/A+s Stable GlaxoSmithKline (GSK): Marketweight 16.5%
1Q10 results were above market expectations in terms of operating profit before one-off items. 1Q10 sales increased
by 13% yoy to GBP 7.4bn, supported by the strong top-line performance in its pharma business. However, this was
mainly due to higher sales volume of pandemic influenza products. Without these more cyclical products, sales were
only up by 4%, more or less in line with growth of the global pharma market. The portion of revenues stemming from
products with already expired patents or patents expiring over the next two years account for ca. 22% of total sales,
which is quite a good ratio and well below the level of competitors like Sanofi or AstraZeneca. Operating profit was up
by 21% yoy to GBP 2.4bn at constant FX rates, supported by the initiated restructuring process and lower R&D. In our
view, lower margins in the US due to the health care reform and generic competition should be partly offset by the
increasing number of insured persons in the US. The credit profile slightly improved during 1Q10, with adj. net debt to
EBITDA decreasing to 1.2x from 1.3x at FYE09 and adj. FFO to net debt of 59% (53%). We keep our marketweight
recommendation on the name given the existing headroom under current ratings (GBP 4-5bn at least) and the lower
event risk compared to other companies in the pharma sector. (1H10 results: 22 July)
Aaas/AAAs/AAAs Stable Johnson & Johnson (JNJ): Underweight 2.7%
1Q10 results suffered from the weak performance in the US market where JNJ faced massive competition from
generics manufacturers. 1Q10 sales were down by 0.1% yoy to USD 15.6bn at constant FX rates, while operating
profit (before one-offs) improved from USD 4.8bn to USD 5.6bn. Thanks to the international activities and the strong
Medical Devices & Diagnostics business, lower sales volumes at the weakening US pharma activities (1Q10 sales:
-5.7% yoy) were almost fully offset. For example, the former blockbusters Risperdal and Topamax (both neuroscience
drugs) generated almost USD 4.9bn in FY08, while sales in 1Q10 dropped to USD 63mn. During 1Q10, the credit
profile improved with adj. total debt to EBITDA of 0.9x (FYE09: 1.0x) and adj. FFO to total debt of 96% (72%). As
company's CEO is on the way "to make acquisitions at any price if the right deal comes along", we recommend staying
away from the name. However, the company still has headroom under its current AAA rating of a high single-digit
billion amount. (1H10 results: 14 July)

Euro Credit Pilot

(Moody's/S&P/Fitch) Profile Comment Health Care sector
Aa3s/AA-p/A+s) Improving Merck & Co. (MRK): Marketweight 3.9%
1Q10 results benefited from Schering-Plough, acquired in October 2009. Sales were up from USD 5.4bn to USD 11.4bn while
adj. EBITDA was up from USD 1.7bn to USD 2.7bn. After the completed acquisition of Schering-Plough in 4Q09,
Merck's credit profile completely altered. While 1Q09 adj. total debt to EBITDA was 1.0x, the ratio increased to 2.4x at 1Q10,
which is quite aggressive for the current rating category. However, given the improved business profile through the
Schering-Plough acquisition and its capability to generate positive free cash flow to reduce its debt position, ratings are
not in danger. For FY10, Merck expects sales of between USD 45.4bn and USD 46.4bn, which compares to an
aggregated sales volume of ca. USD 47bn in FY09. However, the top-line should benefit from the significantly improved
product pipeline through the merger over the next few years. The MRK 14 performed in line with the index in June. We do
not see further larger M&A activity at the company and therefore keep our marketweight recommendation on the name.
(1H10 results: 21 July)
A3wn/BBB+s/--- Improving Merck KGaA (MRKGR): Overweight 10.9%
1Q10 sales increased by 13% yoy to EUR 2.1bn, while core operating profit (before acquisition-related one-off items
from the Serono acquisition) even surged by 26% yoy to EUR 423mn (consensus: EUR 378mn), eventually resulting in
a margin of 20.6% vs. 18.5% in 1Q09. Despite higher royalty and commission expenses from in-licensed products and
higher R&D costs at Merck Serono, Merck's pharma business showed a slightly weaker core operating profit yoy. The
key earnings driver was the Liquid Crystals (LC) business where sales rocketed by 85% yoy and operating profit
jumped from EUR 13mn to EUR 112mn yoy. Despite investment in working capital, operating cash flow remained
almost stable yoy at EUR 279mn. Free cash flow was positive, eventually leading to net debt of EUR 82mn vs. EUR 263mn.
Merck slightly raised its guidance for the whole group and expects operating profit to now grow by 5%-15% yoy
(previous: 3%-13%) given the confident outlook for the LC business. Following the announced acquisition of Millipore
for EUR 5.3bn, we expect adj. net debt to EBITDA to increase up to 3.2x by FYE10, while adj. FFO to net debt should drop to
ca. 25%. S&P already reacted to the Millipore acquisition and downgraded Merck KGaA by one notch to BBB+ with a
stable outlook. With expected free cash flow (after dividend payments) of more than EUR 500mn, Merck is in a position
to deleverage its balance sheet in a timely manner. We stick to our overweight recommendation. (1H10 results: 29 July)
Aa2s/AA-s/AAs Weakening Novartis (NOVART): Underweight 3.8%
In June, the FDA advisory committee unanimously recommended the approval of Novartis' MS drug Gilenia (FTY720)
which is used for oral treatment of relapsing Multiple Sclerosis, as study data showed that Gilenia worked better than
the most commonly prescribed MS drug Avonex. Usually, the FDA follows the recommendation of the FDA advisory
committee. In case of an approval by the FDA, Gilenia would likely become a further blockbuster, and sales estimates
range between USD 1bn and 2.1bn (2014). Currently, up to 2.5mn people worldwide are suffer from Multiple Sclerosis.
At the same time, the news is a further hit for Merck KGaA (A-wn/BBB+s/---) as it is a neck-on-neck race between
Novartis and the German drugmaker (respective MS drug is cladribine), both seeking the approval by the FDA. For 1Q10,
we calculate adj. total debt to EBITDA of 1.3x (FY09: 1.1x) and adj. FFO to total debt of 68.5% (77.4%), which is quite
good for the current rating category. The credit profile will deteriorate once the acquisition of the eye care manufacturer
Alcon is completed. After completion of the Alcon transaction, leverage is expected to stay at ca. 2.0x. Positive for
debtholders should be Novartis' goal to reach a net cash position four years after the completion of the Alcon
transaction (2014). We keep our underweight recommendation for the name given the tight spread levels and the new
supply pressure. (1H10 results: 15 July)
A1s/AAs/AA-s Improving Pfizer (PFE): Marketweight 19.8%
Pfizer's 1Q10 results look very similar to those of Merck & Co. as the company also completed a mega merger in late 2009.
Sales and EBITDA surged by 54% and 20% yoy to USD 16.8bn and USD 5.6bn. The combined entity will generate
annual sales of ca. USD 67-69bn in FY10. However, for FY12, Pfizer is more cautious and only expects sales in the
region of USD 66-68.5bn. Given the bleak outlook for the top-line, cost cutting measures are a highly appreciated
instrument to boost profitability. For example, the company plans to close eight manufacturing plants and scale down
further activities to reduce its workforce by 6,000 employees, out of total 19,000 job cuttings in connection with the
acquisition of Wyeth in 2009. For 1Q10, we calculate adj. total debt to EBITDA of 1.8x and adj. FFO to total debt of 10%, given
the full consolidation of Wyeth from October 2009 onwards. In our view, the credit profile should improve in the course
of 2010 with adj. net debt to EBITDA coming down to ca. 1.2x, more commensurate with the current ratings. We expect
that Pfizer will focus on deleveraging over the next couple of quarters, taking a breather from seeking opportunities for
external growth. Given the very cautious outlook for FY12, such steps are unavoidable. Despite the poor outlook, we
keep our marketweight recommendation on the name as we regard current M&A risk as low. (1H10 results: 22 July)
A2s/AA-s/AA-n Improving Roche (ROSW): Overweight 25.6%
1Q10 sales were organically up by 9% yoy in local currencies (+6% yoy in CHF) to CHF 12.2bn (consensus: CHF 11.8bn),
supported by higher revenues of its cancer blockbusters Avastin (+18% yoy) and MabThera/ Rituxan (+13% yoy). With
respect to its pipeline, Roche currently has ten products in late-stage development and aims to increase this number to
up to 13 by FYE10. Furthermore, it plans to launch at least six new products by the end of 2014. Debt repayment
following the Genentech acquisition made progress, as Roche repaid USD 3bn and EUR 1.5bn during 1Q10,
eventually resulting in an expected net debt (adjusted by pensions and operating leasing) of ca. CHF 24bn. 1Q10 net
leverage should stay at around 1.2x, down from 1.5x at FYE09. Roche confirmed its outlook for FY10 and expects the
group's top-line to increase in the mid single-digit area (before volatile sales of Tamiflu that are expected to decline
from CHF 3.2bn to CHF 1.2bn). Deleveraging will continue as the company expects to have repaid 25% of the debt
raised to finance the Genentech acquisition. Despite the tight levels, we keep our overweight recommendation on the
name, given the low event risk. In June, Roche bonds outperformed the iBoxx Health Care. (1H10 results: 22 July)
A1s/AA-s/AA-s Stable Sanofi-Aventis (SANFP): Underweight 12.3% (member of the iTraxx NFI)
According to press reports, Sanofi is preparing a larger acquisition in the US with an expected deal volume of more
than USD 20bn. Such an acquisition would be a logical step as Sanofi's product portfolio will face massive competition
from generics during the next three years. Based on FY09 figures, 32% of its sales (EUR 10bn) already lost or will lose
the patent until 2012. For FY09 (no detailed figures were provided for 1Q10), we calculated adj. net debt to EBITDA of 0.9x
(FYE08: 0.5x), while adj. FFO to net debt was 105% (137%), the latter well above the required threshold of 60%,
offering Sanofi headroom of more than EUR 5bn for further debt-financed acquisitions. We keep our underweight
recommendation on the name given the elevated M&A risk. (1H10 results: 29 July)

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Euro Credit Pilot
Personal & Household Goods (Core) (Marketweight)

Weight in iBoxx NFI: 2.0% Sector drivers: Companies in the sector are highly dependent on GDP growth and on consumer sentiment. The
development of energy and raw material costs is also crucial for margins. However, several companies recently
Current ASW spread: 80.5bp demonstrated that their cost containment measures have largely mitigated higher costs. Also, depending on the brand
change mom/YTD: -0.1 / -2.3 power (significant at LVMH or at P&G), some costs might be passed on to customers. Most companies in the sector
are geographically highly diversified; hence, while some economies weighed on profitability, others have generated
stronger growth. We anticipate ongoing M&A activities as companies have resumed their search for expansion at a
Euro STOXX PHG YTD: +11.3% faster pace. Moreover, liquidity is good for most market participants, as there is sufficient financing in place and as
most companies gained major headroom in their credit ratings either for sizeable (or bigger) acquisitions or have built a
protective cushion for weaker quarters.
Last month's recap: In May, spreads of the PHG sector (including Tobacco) was virtually stable mom. The weakest
performer (ex Tobacco) was the HENKEL hybrid (+70bp to ca. ASW +350 bp). The best performer (ex Tobacco) was
the PG 12/20 (-15bp to ASW +20bp).

(Moody's/S&P/Fitch) Profile Comment Personal & Household Goods (Core) sector
Baa3s/BBB-n/BBB-s Stable Fortune Brands (FO): No recommendation (event-driven coverage) 3.8%
1Q10 results demonstrate management's commitment and ability to implement cost cuttings and other restructuring
measures, thus delivering on targets for an improved balance sheet structure and higher profitability. Rating pressure
diminished and management is even targeting a higher rating, to be achieved sooner rather than later. The strong
recovery in profitability and last year's debt reduction prompted a major improvement of debt ratios: we calculate 1Q10
LTM (vs. 1Q09 LTM) adj. net debt to EBITDA of 1.6x (2.1x) and adj. FFO to net debt of 46.2% (34.1%). The latter
finally fulfills S&P's requirement of a ratio of "around 40%". Management adopted an optimistic stance towards the
FY10 development and raised its EBIT and EPS growth target to +15% yoy (previously: both at least +10% yoy) on the
expectation of the world economy growing by ca. 3% in FY10. We remain on buy for the hybrid, while for the senior
bonds, we remain on underweight for relative value reasons. (estimated 1H10 results announcement: 23 July)
A3s/A-s/A-p Stable Henkel (HENKEL): Underweight (Senior)/Overweight(Subordinated) 25.4% (member of the iTraxx NFI)
Henkel's FY09 focus on balance sheet consolidation, including the "zero M&A budget", paid off from a credit
profile/rating perspective amid the worst recession in 80 years. However, the exposure to highly cyclical industries will
continue to be a challenge for the financial performance going forward. FY09 sales totaled EUR 13.7bn (-3.5%
organically), while EBIT adjusted for one-offs was EUR 1,364mn (-6.6% yoy). The development was partly due to a
better-than-expected development of the Adhesives Technologies division, where sales and EBIT (adjusted for one-
offs) eventually fell "only" 10.5% and 25.6% yoy. Cash flow generation benefited from cost reduction, working capital
management and the "zero M&A budget", prompting debt reduction to EUR 2.6bn (FYE08: EUR 3.6bn). We calculate
FY09 (FY08) adj. FFO to net debt of around 34% (20%), which is on the edge for rating agencies' requirements. We
change our recommendation to overweight for the hybrid. For the senior bonds, however, we remain on underweight
for relative value reasons. (1H10 results: 4 August)
---/A-s/BBB+s Improving LVMH (MOET): Marketweight 18.3% (member of the iTraxx NFI)
LVMH held up well in FY09 amid a tough economic environment, thanks to its star brands and excellent cost
management, eventually leading to further improvements of its credit profile. FY09 sales fell 1% to EUR 17.1bn yoy,
with its most dominant division, Fashion & Leather Goods, even achieving 2% organic sales growth (EUR 6.3bn), while
Watches & Jewelry (-19% organic sales decline to EUR 879 mn) suffered most. Group EBIT declined 8% yoy to EUR 3.6bn,
but we note that all business divisions were profitable (with the EBIT margin at the weakest division being 8.5% at
Watches & Jewelry). Cash flow generation remained strong (FFO of EUR 2.8bn vs. EUR 3.0bn a year before) and,
thanks to lower capex and the absence of M&A activities, the company managed to reduce net debt to EUR 3.3bn
(FYE08: EUR 4.6bn). Credit ratios are above average for the rating requirements, with FY09 (vs. FY08) adj. FFO to net
debt of 53.0% (46.1%) and adj. net debt to EBITDA of 1.3x (1.5x). LVMH's flexibility in the current rating band has
therefore significantly increased. We have a relative value driven marketweight recommendation on the name.
(estimated 1H10 results announcement: 27 July)
A3n/A-s/A-s Stable Philips (PHG): Underweight 0.0% (member of the iTraxx NFI)
1Q10 results were above consensus in terms of sales (EUR 5.7bn vs. consensus of EUR 5.3bn) and profitability (net
income of EUR 0.2bn vs. consensus of EUR 0.1bn). Cash-flow generation was strong and supported further
deleveraging, with net debt at the end of 1Q10 being only EUR 74mn (FYE09: EUR 533mn). Philips also stated that,
despite the market challenges, it became increasingly optimistic about achieving its 10% EBITA target in FY10 already
(before restructuring charges of EUR 100-125mn in 2Q10). Philips credit ratios are well above the required levels and
we regard M&A as a main risk at the moment. We are on underweight for relative value reasons. (1H10 results: 19 July)
Aa3s/AA-s/--- Weakening Procter & Gamble (PG): Marketweight 52.6%
9M09/10 sales were 2.4% up yoy to USD 60.0bn thanks to a good January-March quarter, driven by higher volumes in
Developing markets. EBIT improved 9% to USD 13.1bn, with the margin being up to 21.8% (9M08/09: 20.5%). Virtually
all divisions contributed to the profitability improvement. Cash flow generation benefited above all from the lower cash-
out for share buybacks (USD 2.9bn vs. USD 5.8bn a year ago). Consequently, debt declined USD 7bn to USD 25.1bn
vs. FYE08/09 (USD 32.2bn). PG confirmed its target for FY09/10 organic sales growth of 3%-5%, while core EPS
guidance was raised to USD 3.62-3.68 (previously: USD 3.53-USD 3.63). Improved credit ratios cement the ratings
and we especially like the perspective of higher profitability. We calculate 9M09/10 (vs. FY08/09) adj. FFO to net debt
of 45.7% (38.0%), which is well in line with the requirements for the rating level. However, the pace of credit profile
improvements is limited going forward after PG plans to repurchase shares for a total value of USD 5bn in the current
FY09/10. We are marketweight on the name for the outstanding issues on relative value reasons. (estimated FY09/10
results announcement: 5 August)

Euro Credit Pilot

(Moody's/S&P/Fitch) Profile Comment Personal & Household Goods (Core) sector
Baa1s/BBB+n/--- Stable SCA (SCACAP): Underweight 0.0% (member of the iTraxx NFI)
Consolidated 1Q10 sales fell 6% yoy to SEK 26.7bn, largely impacted by adverse currency exchange rates, while a
major increase in raw materials also weighed on profitability. EBIT of SEK 1.8bn was thus 16.8% below the level
achieved in 1Q09. Indebtedness, however, benefited from the implemented cost measures, which are bearing fruit:
1Q10 net debt totaled SEK 37.6bn vs. SEK 39bn at FYE09. Debt ratios, e.g. 1Q10 LTM adj. net debt to EBITDA of
2.5x (FYE09: 2.5x) and adj. FFO to net debt LTM of 29% (27.4%), still have to improve to keep the current ratings.
S&P, for example, requires FFO to debt of 30%-35% for the assigned BBB+ rating. SCA is "cautiously optimistic" for
FY10. We keep our underweight recommendation. (1H10 results: 21 July)
Carmen Hummel (UniCredit Bank)

+49 89 378-12252
carmen.hummel@unicreditgroup.de
Tobacco (Overweight)
Weight in iBoxx NFI: 2.4% Sector drivers: Reported results for FY09 were not surprising. Organic growth (before FX effects and M&A) of
covered companies was in a range of 1.4% (Japan Tobacco) and 5.3% (Philip Morris). However, organic growth was
Current ASW spread: 95.1bp more supported by higher prices, especially in the Western Hemisphere, rather than by higher sold cigarette volumes.
change mom/YTD: -1.1 / +2.3 However, FX effects burdened top-lines (e.g., Philip Morris, Japan Tobacco), eventually fully offsetting the organic
growth. The market expects sales to rise by ca. 2% in 2010 and by ca. 3% in 2011, which compares to an organic
growth rate of 3.6% in 2009. As tobacco companies are faced with slowing growth and further government measures,
Euro STOXX PHG YTD: +11.3% Imperial together with Japan Tobacco and BAT announced their intention to seek a judicial review of the government's
proposal to introduce a display ban in the UK from October 2011 onwards. In our view, such a ban would be a further
pin-prick for tobaccos' operating performance, which might be spread across other European countries in the medium
term. Even if the protest of tobacco firms is successful, companies can't stop the initiated process of the European
Commission to reduce the number of smokers by 10% in the EU until 2014. As a result, growth perspectives will suffer
from further price increases, mainly driven by additional tax burdens in mature markets in the medium-to-long term.
Nevertheless, tobacco companies are still in the comfortable position to steer their balance sheets as they want as
cash flows are strong enough to finance capex and dividend payouts with ease. Furthermore, the almost fully
consolidated sector does not offer potential larger acquisition targets anymore, eventually resulting in an eased M&A
risk in the tobacco sector. M&A risk might increase again if tobacco firms decide to diversify their activities into other
sectors like food & beverages in the medium-to-long term.
Last month's recap: In June, the iBoxx Personal & Household Goods remained almost unchanged. While almost all
IMTLN issues outperformed the index, issues of PM showed a weaker performance than the index. Bonds moved in a
range between -17bp and +20bp.

(Moody's/S&P/Fitch) Profile Comment Tobacco sector
Baa1s/BBB+s/BBB+s Stable BAT (BATSLN): Overweight 33.4% (member of the iTraxx NFI)
Organic growth during 1Q10 was -4% yoy (only -1% yoy incl. acquisitions) which was broadly in line with BAT's
competitors. However, three out of its four "Global Drive Brands" reported volumes that were up between 8% and 24%.
Total sold volume accounted for 168bn sticks vs. 170bn sticks in 1Q09. For FY09, we calculate adj. net debt to
EBITDA of 2.0x (FY08: 2.6x), very strong for the current rating category. In June, BAT announced a tender offer for two
Eurobonds (EUR 1.75bn) and placed a new one (EUR 600mn) at 115bp over MS. We keep our overweight
recommendation on BAT's cash bonds given its defensive business model, its diversified product portfolio, its strong
cash position and its BBB+ target rating. In the tobacco universe, we prefer issues with a short-to-medium-term
maturity (e.g., BATSLN 15) given the existing uncertainties of tobacco companies in the longer run. (1H10 results: 28 July)
Baa3s/BBBs/BBB-s Improving Imperial Tobacco (IMTLN): Overweight 38.6% (member of the iTraxx NFI)
In June, rumors about further acquisitions came up but Imperial stated that the focus is still on deleveraging. Although
Alison Cooper (CEO) ruled out any multinational transforming deals, the company might acquire single products or
might strengthen its activities in selected markets. 1H09/10 results were above the market consensus, with operating
profit (adjusted by acquisition-related one-off items) increasing by 6% yoy to GBP 1,452mn. Net debt increased from
GBP 12bn to GBP 12.3bn, as operating cash flow of GBP 429mn (company definition) was fully consumed by capex
and dividend payments. For 2H09/10, the company expects cigarette volumes to be stable versus 2H08/09, with a
slight decline for the whole fiscal year. As the majority of its annual cash flows is usually generated in the second half
of Imperial's fiscal year, debt should be reduced again in 2H09/10. We estimate an adj. net debt/EBITDA ratio of ca.
3.5x at FYE09/10, fully commensurate with the current ratings (1H09/10: 4.1x). As credit facilities of GBP 1.7bn are
due in July 2010, Imperial might tap bond markets again in the course of 2010. We keep our overweight
recommendation on the name. Given the challenging regulatory environment, we prefer bonds with a short-to-medium
duration. In our view, the most attractive bond is the IMTLN 14. (FY09/10 results: 10 November)

Euro Credit Pilot

(Moody's/S&P/Fitch) Profile Comment Tobacco sector
Aa3s/A+s/A+s Weakening Japan Tobacco (JAPTOB): Underweight 3.3% (member of the iTraxx NFI)
FY09/10 results were weaker than the previous year but fully in line with the market consensus, with EBITDA dropping
by 20% to JPY 533bn, burdened by weak domestic demand. Given the company's exposure to Russia, Romania, the
Ukraine and Southern European countries, the former strongly performing international tobacco business also suffered
from declining volumes. Operating cash flow improved from JPY 275bn to JPY 320bn, thanks to lower interest
payments and reduced restructuring costs. Net debt increased from JPY 809bn to JPY 856bn due to FX effects – not
caused by negative free cash flow. The outlook for FY10/11 is bleak as the company expects Japanese cigarette
volume to decline by 25% on an annual basis due to the planned JPY 20 per pack tax increase. Finally, EBITDA is
expected to decline by 2.6% yoy to JPY 513bn in FY10/11. For FY09/10, we calculate adj. net debt to EBITDA of 2.1x
(FY08/09: 1.6x) and adj. FFO to net debt of 28% (33.7%), reflecting the weaker EBITDA figure and slightly increased
net debt position. In our view, credit metrics are more commensurate with a flat single A rating. Given the huge tax hike
in Japan from October 2010 onwards, we do not think that the credit profile is likely to improve in FY10/11. In addition
to the weak outlook, event risk (M&A risk, disposal of the 50% stake in the company held by the Japanese
government) might also be a trigger for spread levels. We keep our underweight recommendation on the name.
(1Q10/11 results: 30 July)
A2s/As/As Stable Philip Morris International Inc. (PM): Marketweight 24.7%
On 23 June, PM revised its guidance for FY10 and now expects USD 3.70-3.80 per share, down from the USD 3.75-3.85
expected in April 2010. Despite the improved business environment and positive one-off tax items, the company's
operating performance will be burdened by the stronger USD. Despite the shareholder-friendly policy (target payout
ratio: 65%), PM stated that it wants to maintain the current leverage and ratings. We note that PM initiated a new share
buyback program (USD 12bn) for the period May 2010 - April 2013 following the USD 13bn share buyback program
completed in April 2010, which should prevent any improvement in PM's credit profile over the next two years. 1Q10
operating profit of USD 2.7bn was broadly in line with market expectations. Sold cigarette volume declined by 2.3% yoy
to 205bn sticks (especially in the EU and the EEMEA region). For 1Q10, we calculate adj. net debt to EBITDA of 1.5x
(FYE09: 1.4x). Given the expected negative free cash flows over the next few years, we anticipate PM to tap bond
markets again during 2010. Next maturing bond (EUR 1.0bn) will come due in September 2011. We keep our
marketweight recommendation on the name. (1H10 results: 22 July)
Baa2s/BBBs/--- Weakening Swedish Match (SWEMAT): Marketweight 0.0% (member of the iTraxx NFI)
1Q10 results did not bear any surprises, with the operating result declining to SEK 755mn from SEK 794mn, burdened
by negative FX effects. Furthermore, 1Q09 results were positively influenced by hoarding effects in the US cigar
business prior to the federal excise tax increases in April 2009. Operating cash flow declined from SEK 583mn to SEK 344mn
due to higher tax payments (unfavorable timing of payments) which was completely offset by capex and share
buybacks. The credit profile remained stable with leverage now at 2.1x (FY09: 2.0x). Even if the company continues its
share buybacks, ratings would not be in danger. On 26 April, the company announced its intention to establish a JV
with privately held Scandinavian Tobacco Group, merging the cigar businesses of both groups in one company. In 2009,
Swedish Match already established a JV with Philip Morris regarding smokeless products. Maybe the relationship
between the smaller Swedish Match and much bigger tobaccos will become closer over time, possibly resulting in a full
acquisition of Swedish Match by the better-rated Philip Morris. There is no iBoxx Eurobond outstanding. We are neutral
on Swedish Match's CDS. (1H10 results: 22 July)

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Euro Credit Pilot
Food & Beverage (Overweight)

Weight in iBoxx NFI: 2.9% Sector drivers: Food & Beverage belongs to the least cyclical sectors overall (after all, people need to eat). However,
sector drivers are consumer sentiment and GDP growth. Concurrently, energy and raw material costs are crucial for
Current ASW spread: 86.4bp margin developments. Currently, Eastern European markets, Asia and Latin America offer scope for growth while
change mom/YTD: +3.1 / -2.8 Western Europe is the most price-sensitive market and the US is currently naturally rather difficult for the industry.
Market conditions for consumer products companies remain sound overall, despite the current market volatility and
ongoing M&A activities. The latter will proceed as companies have resumed their search for expansion at a faster
Euro STOXX FOB YTD: +5.3% pace. Moreover, liquidity is good for most market participants, as there is sufficient financing in place and as many
companies gained major headroom in their credit ratings either for sizeable (or bigger) acquisitions or have built a
protective cushion for weaker quarters.
Last month's recap: In May, spreads in the iBoxx Food & Beverage sector tightened ca. 5bp mom. The best
performance was delivered by the ABIBB 01/17 bond (-15bp to ASW +100bp) and by the BNFP 05/15 (-15bp to ASW +40bp).
The weakest performer was the EEEKGA 01/14 (+40bp to ASW +110bp).

(Moody's/S&P/Fitch) Profile Comment Food & Beverage sector
Baa2p/BBB+p/- Improving Anheuser-Busch InBev (ABIBB): Overweight 16.5%
In 1Q10, ABInBev benefited from the cost cutting program and its profit enhancement plans: EBITDA improved 5% to
USD 3.1bn yoy, while sales increased just 1.6% overall to USD 8.3bn. Thus, the EBITDA margin improved to 37.1%
vs. 35% a year before. The strong business development stemmed mostly from Brazil and China. ABInBev did not
publish any balance sheet or cash flow details, however, management reiterated its long-term goal for a net debt to
EBITDA ratio of 2.0x. This ratio was at ca. 3.6x at FYE09, which was a strong improvement after the acquisition-driven
leverage increase in FY08 (USD 56.9bn from USD7.7bn in FY07). At FYE09, net debt was USD 45bn, thanks to the
strong cash flow generation, divestment proceeds and reduced costs (including lower dividend payments). For FYE09
we also calculate adj. FFO to net debt of 17.2% (FYE08: 9.0%). Until FYE10, S&P expects the group's fully adjusted
FFO to debt to move close to 25% and debt to EBITDA to 3x, which should be feasible, given the company's focus on
debt reduction. We have an overweight recommendation for the issuer as the ABIBB bonds offer value (1H10 results: 12 August)
Baa1s/BBBs/--- Stable Bacardi Ltd (BACARD): No recommendation (event-driven coverage) 3.8%
While the Bacardi brand is very well known, hard facts referring to the company's strategy and financials are rather
difficult to find. Regular public financial information is not available. Some "sobering" facts on Bacardi: it is a privately
owned company (the Bacardi family) headquartered in the Bermudas and founded in 1892. Its brands include a.o.
Martini & Rossi. Its main shareholders as well as senior management are people belonging to the Bacardi family. In
FYE08/09 (ending March), sales totaled USD 4.4bn (FYE07/08: USD 4.5bn) and operating profit remained flat at ca.
USD 1bn. Adj. net debt/EBITDA was 2.8x (2.5x), which is on the edge for the Baa1 ratings assigned by Moody's and
for the BBB rating at S&P. Considering the restricted information flow, our coverage of the name is event-driven.
A2s/As/As Stable Cargill Inc. (CARGIL): No recommendation (event-driven coverage) 12.4%
Cargill provides extremely limited information to the financial community, i.e., it restricts the utilization of information in
such a manner that, to our understanding, an independent analysis is not possible. We do not have access to the
company's financial reports. On its website, Cargill published its sales figures (FY09 ending May: -3% to USD 116.6bn
vs. USD 120.4bn a year before) and net earnings excl. special items (-16% yoy to USD 3.3bn vs. USD 4.0bn).
Referring to business developments, the company stated that FY09 was "a tale of two halves," including record results
through November and with earnings having slowed considerably in the second half. No details referring to cash flow
generation or debt development are public. In the absence of the availability of financial results, and as we do not like
name-lending-based recommendations nor do we like to rely solely on the assessment of rating agencies, we have an
event-driven coverage on the name.
Baa3s/---/BBB-s Improving Carlsberg (CARLB): Marketweight 5.6%
Based in Denmark, Carlsberg is the fourth-largest brewer globally, producing and distributing a wide range of beer
brands including Carlsberg and Tuborg, as well as regional brands (e.g., Baltika, Cardinal, Holsten), soft drinks and
bottled water. In 2009, Carlsberg posted total revenues of DKK 59.4bn (ca. EUR 8bn). The company has a focus on
Northern and Western Europe (ca. 62% of total revenues), Eastern Europe (32%) and Asia (6%). Carlsberg's leverage
is elevated after the purchase of certain assets of Scottish & Newcastle in FY08, which, however, gave the company
full ownership of Baltika, the number one brewer in Russia with a track record of very strong growth and high margins.
Carlsberg concentrated on deleveraging in FY09, as the group is committed to remaining investment grade. Thanks to
severe cost cuttings, Carlsberg reduced debt to DKK 36.7bn (FY08 45.7bn) and achieved adj. debt to EBITDA of 2.9x (4.0x)
and adj. FFO to net debt of 26% (14%), which is solidly in line with the rating. We are marketweight for the name.
A3s/Awn/--- Stable Coca Cola Hellenic (EEEKGA): Marketweight 5.5%
1Q10 results were above consensus in terms of sales and profitability. Sales of EUR 1.4bn (+0.2% yoy) were primarily
affected by a 5% decline in volumes in the Established markets, above all in Greece, where volumes fell by "mid-teen
percentage points" as a reaction to the economic crisis, which prompted a massive loss of consumer confidence and
spending. From a positive standpoint, we note the operations in Greece represent only a minor portion of Coca Cola
Hellenic's business (ca. 8% of sales). 1Q10 EBITDA improved 11% yoy to EUR 145mn, with profitability benefiting
from cost cutting and favorable currency exchange rates. Net debt of EUR 2.2bn was broadly flat compared to FYE09.
We calculate 1Q10 LTM (vs. FYE09) adj. net debt to EBITDA of 2.4.x (2.2x) and adj. FFO to net debt of 39.0% (39.1%), at the
lower end of rating requirements. Coca Cola Hellenic's ratings are relatively inflexible, given their dependency on the
ratings for the Coke System. We are marketweight on the name. (1H10 results: 29 July)

Euro Credit Pilot

(Moody's/S&P/Fitch) Profile Comment Food & Beverage sector
A3s/A-s/--- Improving Danone (BNFP): Overweight 8.0% (member of the iTraxx NFI)
In June, Danone pursued a small acquisition (ca. USD 62mn in cash) of Medical Nutrition USA and, more significantly
from a bondholder perspective, it announced that it would merge its Fresh Dairy Product businesses in the CIS area
with those of Russian company Unimilk to create a new business with annual sales of ca. EUR 1.5 bn. While the
announcement is positive from a business perspective, it does not have any impact on Danone's credit profile or on
spreads. We calculate FY09 (vs. FY08) adj. net debt to EBITDA of 2.4x (4.0x) and adj. FFO to net debt of 30.8% (15.4%).
Danone tendered EUR 1.25bn of bonds in November, thus (1) markedly reducing its total debt and, given the lower
available liquidity, (2) reducing fear of potential bigger M&A moves. Also, the company recently stated that its M&A
appetite would be in the EUR 1bn range, thus reassuring the debt capital market about its commitment to remain in the
single-A rating range. S&P expects Danone to reach adjusted funds from operations (FFO) to debt of ca. 30% by
FYE10 at the latest (and with gradual improvements to be seen before that). We remain on overweight for cash issues
as we regard the name as a safe haven in the bond universe. (1H10 results: 27 July)
A3s/A-s/A-s Weakening Diageo (DIAG): Underweight 12.3% (member of the iTraxx NFI)
1H09/10 results (ending December) were weak as revenues from premium spirits suffered in the depressed consumer
environment. Diageo generated 1H09/10 total sales (after excise duties) of GBP 5.2bn (+2.7% yoy), however, with
volumes being down in several key regions. Operating profit fell 5.8% yoy to GBP 1.5bn (consensus: GBP 1.7bn).
While FFO (funds from operations, i.e., cash flow before working capital changes) of GBP 1.1bn was ca. GBP 200mn
below the prior-year level, Diageo's cash flow generation benefited from an optimization in working capital
management and from the halt of the share buyback program. Thus, net debt of GBP 7.5bn was below the FYE08/09
level (GBP 7.7bn), which, however, is not sufficient to stave off rating pressure. With LTM 1H09/10 (vs. 1H08/09) adj.
net debt to EBITDA of 3.0x (3.0x) and adj. FFO to net debt of 18.5% (20.8%), Diageo's debt ratios are weak even for a
BBB credit. We confirm our underweight recommendation, reflecting rating pressure, profitability deterioration and
reduced management commitment to an "A" rating. (1H10 results: 26 August)
Baa2n/BBBp/BBB-s Improving Kraft Foods (KFT): Underweight 15.7%
1Q10 results were driven by the Cadbury acquisition (consolidation from February onward), with sales jumping 26%yoy
to USD 11.3bn and EBIT increasing only 2.6% to USD 1.2bn. On the other side, net debt surged to USD 27.1bn. We
calculate 1Q10 adj. net debt to EBITDA of 4.3x compared with 2.9x at FYE09. The group will have to strongly focus on
debt reduction going forward in order to keep the current ratings. We anticipate FYE10 lease and pension adj. net debt
to EBITDA of ca. 3.5x and adj. FFO to net debt of ca. 21%, which is in line with the requirements for a weak investment
grade rating. Adj. net debt to EBITDA should be around 3.2x at FYE11 and ca. 2.9x at FYE12. Our assumption relies
on Kraft's statement that no further M&A will occur during the next few years. We have an underweight
recommendation for Kraft bonds. (1H10 results: 4 August)
Aa1n/AAs/AA+s Stable Nestlé (NESTLE): Overweight 0.0% (member of the iTraxx NFI)
In June 2010, Nestlé announced that it completed its CHF 25bn share buyback program and that it would repurchase
further CHF 10bn of shares during FY11, which is no problem from a bondholder's perspective, considering the group's
financial shape. Nestlé's credit ratios remain well in line with the rating requirements. We calculate FY09 (vs. FY08)
adj. net debt to EBITDA of 1.2x (1.2x) and adj. FFO to net debt of 66.9% (65.7%), which is more than adequate for the
ratings. For FY10, Nestlé anticipates further organic growth and an increase of its operating margin despite the
challenging market conditions. The company has no Eurobonds outstanding. Nestlé is a member of iTraxx Consumers.
Baa1s/BBB+s/BBB+s Stable SABMiller (SABLN): Marketweight 5.4% (member of the iTraxx NFI)
FY09/10 results (ending March) were strong with a 4% yoy sales increase to USD 26.4bn and with EBITA being 6%
higher (to USD 4.4bn) yoy, benefiting from strong improvements in Latin America and overall from cost synergies. The
group managed to gain market share in its main markets and it also had costs under control. Cash flow generation
primarily benefited from working capital management and lower capex. Net debt decreased by USD 0.3bn to USD 8.4bn, as
the strong cash flow was partly offset by adverse currencies. S&P calculated adj. debt to EBITDA of ca. 2.6x for 1H09/10
(ending September) and adj. FFO to debt of 31%, which is fully in line with the rating requirements. The SABLN 01/15
is fairly priced. (1H10/11 results: 18 November)
Baa2n/BBBn/-- Stable Südzucker (SUEDZU): Marketweight 2.7% (member of the iTraxx NFI)
Südzucker released its FY09/10 figures with EBIT matching the company's guidance. Although revenues came in 3%
lower yoy (vs. guidance of broadly flat sales) at EUR 5.7bn, the group's operating performance rebounded with EBIT
up by 56% to EUR 403mn. The better EBIT was driven by improved profits in the Sugar segment (+58%), thanks to the
completion of the EU sugar market reform, in the Special Products segment (+28%) and in the Fruit segment (turned
from a loss of EUR 5mn to a profit of EUR 36mn). Full-year EBIT in the CropEnergies segment (EUR 12mn vs. EUR 18mn)
was held back by start-up problems at a new bioethanol facility in Belgium, which were, however, solved meanwhile as
mirrored in a strong performance in 4Q. For FY10/11, Südzucker forecasts a stable top-line development (with
revenues at EUR 5.7bn), while EBIT is expected at EUR 450mn. Driven by the assumed improved operating result and
continuously downscaled investment levels of EUR 250mn, cash generation is likely to improve further, which is
anticipated to translate into further net debt reduction. We expect a further stabilization of the company's financial profile
and eventually also of its ratings. At FYE09/10, we calculate adjusted net debt/EBITDA of 2.9x (4.8x at FYE08/09) and
adjusted FFO/net debt of 30% (vs. 21%). Bonds trade fair. (1Q10/11 results: 14 July)
A1s/A+s/A+s Stable Unilever (UNANA): Underweight 12.2% (member of the iTraxx NFI)
1Q10 sales were EUR 10.1bn, which is a 6.7% increase yoy, but the company still achieved 4.1% underlying sales
growth. The strongest underlying sales development was in Asia, Africa and CEE (+7.6% yoy). Operating profit before
extraordinary items rose by 17% yoy (EUR 1.4bn), resulting in an improved operating margin. Net debt increased to
EUR 7.1bn from EUR 6.4bn at YE09 on capex and dividend payments. We calculated 1Q10 LTM (1Q09 LTM) adj.
FFO/net debt of 42.0% (29.5%) and adj. net debt/EBITDA of 1.5x (1.9x), which is above average for the rating
requirement. Unilever is explicitly committed to a "strong single-A credit rating". While, from a fundamental standpoint,
we continue to like Unilever, we remain on underweight for relative-value reasons. (1H10 results: 5 August)

+49 89 378-12252

Euro Credit Pilot
Travel & Leisure (Underweight)

Weight in iBoxx NFI: 0.6% Sector drivers: The iBoxx Travel & Leisure sector is very small, consisting of six bonds issued by four companies
(Accor, Sodexo, Carnival, and Lottomatica) which operate in various industries (e.g. food services, cruise travel,
Current ASW spread: 181.4bp hotels). Major spread drivers of this sector are GDP growth prospects, consumer sentiment, fuel cost development as
change mom/YTD: -5.8 / -84.1 well as the development of global passenger traffic for airline companies. We continue to believe that spreads in the
rather cyclical business of Travel & Leisure will face more pressure than other sectors in case of an intensifying global
economic downturn.
Euro STOXX TAL YTD: -0.7%
Last month's recap: In May, spreads of the iBoxx Travel & Leisure sector widened ca. 25bp, driven by ACCOR bonds
which widened ca. 35bp.

(Moody's/S&P/Fitch) Profile Comment Travel & Leisure sector
---/BBB-n/BBB-s Stable Accor (ACCOR): Overweight 29.9%
In June, S&P affirmed its ratings for Accor in connection with the company's de-merger from July on and removed the
watch negative status. The rating action reflects Accor's deleveraging plans which are supported by an extensive
divestment program (real estate, sale of the minority stake in Groupe Lucien Barriere). Moreover, the lodging business
environment is recovering, especially in Northern Europe. S&P maintains a negative outlook for the name, reflecting
credit ratios which are weak for the rating. The Services unit, while being highly cash generative (contributing ca. 50%
to the group's pre-demerger free cash flow), will be assigned EUR 0.4bn in net debt. The Hotel unit (Accor) will retain
EUR 1.2bn in net debt, but should deleverage rapidly on planned asset disposals. We think that ACCOR issues offer
value at current levels and thus, we remain on overweight. (1H10 results: 28 August)
A3s/BBB+s/--- Stable Carnival plc (CCL): No recommendation (event-driven coverage) 17.6%
The ratings for Carnival reflect its leading position in the global cruise industry, a solid operating track record, an
experienced management team, a large cash flow base, very high barriers to entry, and the company's strong liquidity
position, despite the re-installment of dividend payments. S&P stated that it is relatively confident about Carnival being
able to achieve low-single-digit EBITDA growth in 2010 and 2011, enabling it to reach adjusted debt to EBITDA (S&P's
calculation) of below 3x by 2011, on a sustainable basis.
Baa3s/BBB-s/--- Stable Lottomatica (LTOIM): Overweight 17.4%
The Italian gaming regulatory body has awarded the new 9-year concession for Scratch & Win to the consortium CLN,
in which Lottomatica holds a 63% stake, which is good for the group's business and financial profile. The move,
however, was not a surprise. Ratings will remain stable going forward. 1Q10 LTM adj. net debt to EBITDA was 3.1x,
which is markedly better than the level achieved one year ago (3.5x). Based on the company's recently published
FY10 guidance (and reflecting the cash-out in connection with the Scratch & Win license), leverage should increase to
ca. 3.5-3.7x by FYE10 (FYE09: 2.9x). This is, however, still fully in line with the levels required for the current ratings,
i.e. 3.5x-4.0x at S&P. The next step in connection with the award of the Scratch & Win license is the payment of the
upfront EUR 800mn fee (Lottomatica's 63% stake: 500mn) in two tranches. The re-financing of the fee has already
been resolved last autumn, when Lottomatica pursued a EUR 350mn capital increase. We have an overweight
recommendation for the LTOIM 12/16. (1H10 results: 29 July)
---/BBB+s/BBB+s Stable Sodexo (EXHO): Overweight 35.0% (member of the iTraxx NFI)
Given a stronger-than-anticipated 1H09/10 performance (ending February), Sodexo raised its full-year profit guidance
to EUR 770-790mn (from EUR 750-770mn). The company benefited from its regional diversification in terms of organic
development, however, unfavorable currency exchange rates offset the good organic growth. Stronger cash flow
generation prompted a debt decline to EUR 1.0bn (1H08/09: EUR 1.2bn, net debt at FYE08/09 was EUR 1.5bn).
Sodexo's key credit ratios remain well in line with the rating requirements, with FY08/09 (vs. FY07/08) adj. net debt to
EBITDA of 1.8x (1.4x) and adj. FFO to net debt of 37.4% (49.9%). The group has the least cyclical business model in
the Travel & Leisure sector and it has demonstrated a reliable track record of keeping the balance between growth and
rating stability. We thus remain on overweight for the name. (FY09/10 sales: 7 July)

+49 89 378-12252

Euro Credit Pilot
Retail (Underweight)
Weight in iBoxx NFI: 3.8% Sector drivers: Consumer sentiment and GDP growth are the main drivers in this sector. However, as iBoxx members
of the Retail sector are mostly well diversified from a regional standpoint, stronger economies (Asia, Latin America)
Current ASW spread: 99.0bp should offset the challenges in the Western countries and the most recent challenges in Eastern Europe. The iTraxx
change mom/YTD: -2.2 / +13.6 members from the UK also lack regional diversification (strong revenue dependence on the home market). Whenever
LBO activities are rumored to be picking up again, spreads of UK retailers are the first to show inquietude in terms of
spread development, reflecting the fact that an LBO is comparatively easy.
Euro STOXX RET YTD: +7.3%
Last month's recap: In May, RET sector spreads widened ca. 10bp, with the TSCO 03/16 (-5bp to ASW +65bp) being
the best performer. The COFP 02/17 bond widened most (+30bp to ASW +150bp).

(Moody's/S&P/Fitch) Profile Comment Retail sector
---/As/--- Weakening Auchan (AUCHAN): Underweight 11.7% (member of the iTraxx NFI)
Auchan published unspectacular FY09 results including virtually flat sales yoy (+0.5% to EUR 39.7bn) and a stable
EBIT margin (3.3%), with the international operations (contributing 53% to group sales) being the main driver of the
resilient performance given tough markets. Reported net debt was flat yoy at EUR 3.0bn, therefore debt ratios
remained stable versus the previous year: We calculate FY09 (vs. FY08) adj. net debt to EBITDA of 1.6x (1.6x) and
adj. FFO to net debt of 42.9% (43.5%). Quantified guidance for full FY10 was not provided. S&P currently assigns a
negative outlook, reflecting the gradual weakening of the group's financial profile, leaving it only limited headroom for
further debt leveraging. Our main concerns are a high degree of intransparency/low and delayed information flow. We
thus remain on underweight. (estimated 1H10 results announcement: October 2010)
A3n/A-s/A-s Stable Carrefour (CAFP): Underweight 23.4% (member of the iTraxx NFI)
While 1Q10 sales figures look encouraging (EUR 24bn vs. consensus of EUR 23.7bn), the announcement of a planned
buyback of up to 6% of shares (ca. EUR 1.5bn) over the next 12 months prompted a one-notch downgrade at S&P.
Like-for-like sales growth of 1.6% for the group was primarily supported by Carrefour's operations in Emerging
Markets, mostly in Latin America (sales +10.1% l-f-l to EUR 3.8bn), followed by a solid development in Asia (+6.9%l-f-l
to EUR 2.3bn). Rating pressure is rising at Moody's and at S&P (which downgraded the rating one notch to A- after the
announcement of the share buyback increase), while Fitch considers the net debt to EBITDA ratio requirement of 2.7x-2.8x as
being fulfilled. After the downgrade to A-, the new requirement for this ratio is 25%-30% "in anticipation of a flat
dividend payout of EUR 900mn" and with stable capex vs. FY09 (EUR 2.1bn). We reiterate our underweight
recommendation for the issuer reflecting rating pressure, which is not yet reflected in spread levels. (1H10 results: 27 July)
---/BBB-s/BBB-s Stable Casino Guichard Perrachon (COFP): Marketweight 17.7% (member of the iTraxx NFI)
Casino's business in FY09 benefited from its international positioning, especially in Brazil and in Vietnam. Cost savings
supported profit generation and divestments were pursued for debt reduction. Hence, the adjusted net debt to EBITDA
ratio for FY09 (vs. FY08) improved to ca. 2.5x (2.7x), while adj. FFO to net debt moved towards 28% (25%). We remain on
marketweight for the name, as we trust Casino's commitment to its investment grade ratings. (1H10 results: 29 July)
Baa3s/BBB-s/--- Stable Delhaize (DELH): Marketweight 2.1%
Delhaize's trading statement with 4Q09 sales of EUR 4.87bn (just 1.5% sales growth at identical exchange rates) was
below consensus of EUR 4.95bn. The good message is the "confirmation of the previous earnings guidance, excluding
a fourth quarter charge of EUR 44mn (pre-tax) for the US restructuring, store closings and store impairments".
Delhaize's credit ratios have significant headroom at the rating level. We calculate 9M09 adj. net debt to EBITDA (LTM)
of 2.1x (9M08 LTM: 2.7x) and 9M09 adj. FFO to net debt of 32.2% (29.6%). We keep our marketweight
recommendation for the DELH06/14, which is quite illiquid. (1H10 results: 13 August)
Baa2n/BBBs/BBBs Stable METRO (METFNL): Marketweight 14.6% (member of the iTraxx NFI)
1Q10 results benefited from the economic recovery in Asia and to some extent in Eastern Europe. Some positive
effects were provided by the fact that Easter occurred in 1Q (last year: 2Q). METRO stated that the SHAPE 2012
program is gaining further momentum and consequently, EBITDA improved 19% to EUR 453mn. Cash-flow generation
was marked by the 1Q-typical working capital build-up (EUR 2.8bn), which usually drives debt to its annual peak. 1Q10
LTM (1Q09 LTM) adj. net debt/EBITDA was 3.4x (3.4x) and adj. FFO/net debt was 18.4% (12.4%), which underlines
management's statement about the success of the SHAPE 2012 program starting to show visibility. The debt reduction
should not be interpreted as general deleveraging guidance for FY10, given the planned higher capex compared with FY09.
METRO confirmed the existing guidance, i.e. that FY10 sales should be above the FY09 level, however, the increase
will not reach the group's medium-term growth target of 6%. FY10 EBIT should be "tangibly" higher than in FY09.
---/BBB-s/--- Improving PPR (PRTP): Overweight 8.1% (member of the iTraxx NFI)
FY09 results delivered on management's commitment to restore the group's credit profile, with stable group margins
and lower leverage, thus cementing the investment grade rating. FY09 sales and EBIT declined 4% yoy to EUR 16.5bn
and EUR 1.4bn, respectively, but sequential improvements were seen during the year (especially at Gucci Group).
Cash flow generation benefited from improved working capital management, lower expansion capex and a EUR 1bn
cash-in from the CFAO IPO. Debt was consequently reduced to EUR 4.4bn (FY08: EUR 5.6bn), which was the main
driver for the credit profile improvement. We calculate FY09 (vs. FY08) adj. FFO to debt of 25.7% (19.3%), which
should be sufficient for S&P to confirm the rating. We remain on overweight for the issuer and continue to be protection
sellers. (1H10 results: 30 July)
A3n/A-s/A-s Stable Tesco (TSCOLN): Marketweight 16.1% (member of the iTraxx NFI)
The reported debt reduction achieved in FY09/10 was prompted by on-to-off-balance sheet transactions (sale-and-
lease back), with the impact on adjusted leverage thus being more than offset. Main benefits for operations came
primarily from Asia (sales +19.7% to GBP 9.1bn/trading profit +24% to GBP 440mn) and the UK home market (sales
+4.2% to GBP 42.3bn/trading profit +6.7% to GBP 2.4bn), while Europe and US lagged behind. The company reported
a GBP 1.7bn reduction in debt (to GBP 7.9bn), mainly on sale-and-lease back transactions (GBP 1.8bn achieved
through proceeds from property divestments). Tesco intends to further reduce debt to GBP 7.5bn in the ongoing
financial year, also driven by sale-and-lease backs. We therefore consider rating pressure to be high, reflecting credit
metrics that have already been weak for the ratings during the last few years. This, however, is already reflected in
spread levels. We are therefore marketweight on the name. (1H 10/11 results: 5 October)

Euro Credit Pilot

(Moody's/S&P/Fitch) Profile Comment Retail sector
Aa2s/Aas/Aas Stable Wal-Mart (WMT): Marketweight 4.3%
With annual sales of over USD 405bn generated in 15 countries and with more than 2 million employees, Wal-Mart is
the largest retailer worldwide. The company generates ca. 60% of its sales in the US. Its international operations are
mainly focused on Central & South America and Asia. Wal-Mart has a best-in-class credit profile (a.o., with adj. debt to
EBITDA of 1.3x at FYE09) and a best-in-class rating in the retailer universe, despite a currently ongoing USD 15bn
share buyback program. We have a neutral stance towards the recently issued EUR 1bn WMT 09/29. (1H10 results:
17 August)

+49 89 378-12252
Banks (Marketweight)
Weight in iBoxx FIN: 81.3% Sector drivers: Midsummer Night was recently celebrated, marking the turn of the seasons. We doubt that the same
occasion in accounting terms, i.e., the end of 1H10, will lead to the same level of festivities once results start being
Current ASW spread: SEN: 149.2bp released. Too obvious are the differences between the old pagan tradition and the dull reality of contemporary
LT2: 336.1bp financials' fundamentals. Midsummer, celebrated on the year's longest day after springtime has brightened the mood,
UT2: 423.0bp welcomes the start of summer that brings warmth and sunshine. Financials' 1H10 accounts, in contrast, are being
T1: 754.9bp assembled during the sector's darkest days after many problems have spoiled the mood, and the outlook is for tough
times full of uncertainty. Uncertainty also means opportunity, but is this the right time to invest? Spreads appear
tempting, but the fundamental outlook is frightening. Moreover, markets are not yet in a panic mode that has led to
Euro STOXX BAK YTD: -28.7% overly bearish spread levels. Hence, we expect spreads to continue their widening trend, with deep subs
underperforming default-triggering debt, and insurance faring better than banks.
Last month's recap: The iTraxx Financials is off the ytd record highs from early June, which saw the 5Y and 10Y
senior at 200bp (all-time high was 210bp in March 2009), and the subs at almost 300bp (405bp). Following a long rally
from the March 2009 peak, cash spreads for bank and insurance paper tightened for more than a year before widening
pronouncedly as of mid-April this year.

(Moody's/S&P/Fitch) Profile Comment Banks sector
Aa3p/As/A+s Stable ABN Amro (ABNANV): Marketweight 0.0%
Fortis Bank (Nederland) N.V. has been absorbed by ABN AMRO Bank N.V.. The merger of the two subsidiaries of
Dutch State owned ABN AMRO Group N.V. was executed as scheduled. ABN Amro Bank assumed all rights and
obligations of Fortis Bank Nederland, which ceased to exist. The joint bond ticker is ABNANV, and the Bloomberg ID is
3531454Z NA. Following the merger, ABN AMRO is #2 in its domestic market by loans, deposits, and revenues, and
#3 by total assets. The enlarged ABN AMRO will preserve the universal bank character of its predecessor institutions,
and it will benefit from their excellent strategic fit. Overall, the bank will be biased to Dutch banking in the mentioned
segments, with market positions of #1 in private and corporate, and #3 in retail and SME. In addition, there is a global
presence to support Dutch clients abroad, as well as international business in selected areas. The Dutch government
will remain the ultimate 100% owner of ABN AMRO in the coming years.
A1s/A-n/A-s Weakening Allied Irish Banks (AIB): Marketweight 0.5%
#2 Irish bank by assets. Its strategic focus is on retail and commercial clients in Ireland, the United Kingdom, Poland,
and the United States, but it will have to sell most international activities in order to comply with EC impositions and to
fulfill new regulatory capital requirements (for which it needs to raise EUR 7.4bn in equity capital). AIB reported a net
attributable loss of EUR 2.4bn for FY09, as loan-loss provisions almost tripled (representing 4% of average customer
loans). Asset quality ratios deteriorated sharply: the impaired loans ratio is 13.5% (FY08: 2.3%), and the criticized
loans ratio, which includes the former, is 29.4% (11.7%). There will be some alleviation when EUR 23bn of loans are
transferred to the domestic bad bank (National Asset Management Agency, or NAMA) at a discount of above 40%: all
else being equal, the criticized loans ratio would fall from 29.4% to 20.5%, and the impaired loans ratio will decline from 13.5%
to 6%. Capitalization ratios were even below the FY08 levels, with only 7.2% in Tier-1 ratio and 10.2% in total capital
ratio, albeit AIB received EUR 3.5bn in non-voting state capital (incl. a warrant for 25% in voting capital) in 2009.
A1s/A-s/As Stable Banca Monte dei Paschi di Siena (MONTE): Marketweight 1.0% (member of the iTraxx FIN)
The Siena-based group is Italy's third-largest bank, providing a full range of banking services, mainly to SMEs and
families. BMPS reported better-than-expected 1Q10 results. Net profits more than halved yoy to EUR 142mn due to a
one-off item of EUR 194mn from the disposal of the bank's asset manager in 1Q09 (adjusted by this impact, net profit
increased by 33% yoy). In addition, the bottom-line figure largely beat market consensus of EUR 96mn and compares
with a net loss of EUR 181mn in 4Q09. The good performance was mainly due to a substantial increase in fees &
commissions (up 6% qoq and even 25% yoy to EUR 494mn) and lower opex (down by 17% qoq and 4% yoy to EUR 860mn).
The former largely absorbed the negative impact of declining net interest income (down 0.4% qoq and 13% yoy to EUR 886mn).
The NPL ratio increased by 41bp qoq and 112bp yoy to 7.4%, while NPL coverage was stable at 56%. Asset quality
weakened in line with expectations and is not of major concern. Solvency ratios were still at relatively low levels with
the Tier-1 ratio flat qoq at 7.5%, primarily due to the EUR 1.9bn in Tremonti bonds, but also benefiting from a relative
large proportion of hybrid securities, reducing the quality of loss-absorbing capacity of the balance sheet.

Euro Credit Pilot

A3n/--/BBB+s Weakening Bancaja (CAVALE): Marketweight 0.2%
Caja de Ahorros de Valencia, Castellon y Alicante (Bancaja) is the 6th largest bank in Spain (3rd largest savings bank).
It has a solid presence across Spain with focus on the Valencian community. The caja follows a retail banking strategy
complemented by the SME business. It reported slightly better-than-expected 1Q10 results (net attributable profits of
EUR 78mn), which compare with a weak 4Q09 break-even. Mainly on the back of much higher other undisclosed
income, total revenues were boosted 36% qoq. Loan-loss provisions picked-up substantially qoq to a more adequate
level. One of its current threats is the loan-deposit ratio, which stood at 172% as of 1Q10. Solvency ratios are only
slightly better: the core Tier-1 ratio stood at 7% and the Tier-1 ratio was stable at 8.1%. The 1Q10 results are credit
neutral and spreads are clearly driven by the increased sovereign risk. We welcome the sound qoq improvement in
top-line results, but doubt their sustainability. Main driver of the caja's overall credit profile is and will be implicit state
support (it is still the third largest caja in Spain) as fundamentals are quite weak.
A1s/An/A+s Stable Banco Espirito Santo (BESPL): Marketweight 0.8% (member of the iTraxx FIN)
BES is the 3rd largest Portuguese bank with a 20% market share. Its business profile is dominated by the corporate
segment followed by SME and retail units. Geographically, international profit contribution has strongly increased.
Banco Espirito Santo (BES, A1s/A-n/A+n) reported better-than-expected 1Q10 results due to larger trading gains. Net
attributable income increased by 1.7% qoq and even nearly 18% yoy to EUR 119mn. However, in 1Q10, net interest
income plummeted by 20% yoy to EUR 254mn, which was offset by higher trading gains of EUR 76mn (vs. a trading
loss of EUR 54mn in 1Q09 and vs. EUR 341mn in 4Q09, which, however, was driven by extraordinary good capital
markets & other results. We point out that international activities gained in strength as their contribution to top-line
revenues increased to EUR 170mn (31%) from EUR 144mn (27%), while the domestic business was nearly flat at EUR 385mn.
In this context, the different efficiencies are remarkable, as the international cost-income ratio was 37%, while the domestic
cost-income ratio was 53%.
Aa2n/AAn/AAs Improving Banco Santander (SANTAN): Marketweight 1.5% (member of the iTraxx FIN)
#1 Spanish bank, internationally active in the UK and Latin America with solid positions in retail, corporate, private
banking and asset management. Banco Santander reported better-than-expected 1Q10 results. Net profits increased
to EUR 2.215mn from EUR 2.1bn in 1Q09, beating once again market consensus of EUR 2.11bn. The NPL ratio only
rose slightly to 3.34% from 3.24% in 4Q09 and the coverage ratio declined slightly to 74% from 75% in 4Q09. Core
capital continued to increase to a strong 8.8% from 8.6%, driven by capital gains and also by ordinary internal capital
generation. Santander is a cash machine and one of the strongest banks, which continuously outperformed during the
current crisis. Santander's 1Q10 results are highly credit supportive, as they fully reflect the fundamental strength of the
bank, which should offset the impact of Wednesday's downgrade of the Spanish sovereign credit by S&P. Spreads
should continue their outperformance vs. domestic peers, particularly BBVA, and negative headline risk from sovereign
credit risk contagion should affect SANTAN spread level only marginally.
A2s/An/A+s Stable Bank of America (BAC): Marketweight 4.1%
BAC, one of three U.S. banks with USD 2 trillion in assets, reported 1Q10 net income of USD 3.2bn, compared with a
net loss of USD 194mn in 4Q09 and net income of USD 4.2bn in 1Q09. After preferred dividends, BAC earned USD 0.28 per
diluted share in 1Q10, up from a loss of USD 0.60 per share in 4Q09 and earnings of USD 0.44 per share in 1Q09.
Results were above market expectations and were driven primarily by: (i) Provision for credit losses fell by USD 3.6b yoy,
reflecting an improvement in credit quality; and (ii) Strong capital markets activity, including record sales and trading
driven by industry-leading corporate and investment banking positions, helped drive results for Global Banking and
Markets. BAC, despite its track record of underlying fundamental strength, was burdened by the acquisition of
Countrywide and ML, but their integration is paying off with its buoyant 1Q09/2Q09 results, only to slip in 3Q09/4Q09,
then rebound strongly in 1Q10. Capital ratios have remained at strong levels, with a Tier 1 capital ratio of 10.23%
(1Q09: 10.09%), while Tier 1 common equity ratio stood at 7.60% (1Q09: 4.49%).
A1s/A-s/A-s Weakening Bank of Ireland (BKIR): Marketweight 0.4%
Largest Irish bank. Its core divisions are Irish retail banking including life assurance activities, and the provision of
financial services in the UK. Bank of Ireland released an interim management statement as well as the details of its
awaited capital increase. In 1Q10, it experienced net interest margin pressure, anticipated cost savings, and loan-loss
provisions in line with previous guidance. The capital management exercise includes various fully underwritten items
that will lead to a net equity increase of at least EUR 2.8bn, above the regulator's EUR 2.66bn post-NAMA
requirement. As a result, BKIR will increase its FY09 pro-forma equity Tier-1 ratio from 5.3% to 8.0%; the bank expects
to maintain this ratio above 7% under Basel II. In mid-April, BKIR said that it expects EU approval and impositions
regarding its restructuring plan by mid-2010, including business disposals, certain loan portfolios wind-downs, and
burden sharing of subs: (i) no discretionary coupons and call option exercises on bank capital from 1 February 2010 to
31 January 2011, (ii) no ordinary dividends as long as the 2009 preference shares are government-owned, until max.
30 September 2012.
Aa3s/AA-n/AA-s Weakening Barclays (BACR): Marketweight 3.0% (member of the iTraxx FIN)
Barclays, with total assets of GBP 1.55tn as of June 2009, is the third largest bank in the world. Barclays has a strong
franchise in UK Retail & Business Banking, engages in international retail and commercial banking activities, and is
also a prominent global player in investment banking (Barclays Capital), credit cards (Barclaycard), and wealth
management, while large part of the asset management activities (Barclays Global Investors) have been sold. It
reported GBP 1.1bn in 1Q10 net attributable profit (+29% yoy). As the main reason, the bank cites in its IMS a 35%
drop in loan-loss provisions; however, annualized 1Q10 loan-loss provisions (GBP 9.2bn) are above the FY09 total
(GBP 8.1bn). Total revenues were 4% higher, and operating expenses rose by 17%. The core Tier-1 ratio stood at
9.8% as of March (December 2009: 10%). Management said that April performance was in line with 1Q10, but there
was no FY10 profit outlook. Barclays continued to benefit from the benign capital market environment. While the level
of loan-loss provisions will remain high, FY10 revenues might decline from the high FY09 levels.

Euro Credit Pilot

A1s/--/A+wn Stable Bayerische LB (BYLAN): Marketweight 0.6%
#2 German Landesbank. BayernLB reported EUR 498mn in 1Q10 pre-tax profits, 50% more than one year earlier, and
even +62% when compared to 1Q09 figures excluding Hypo Alpe-Adria (which was deconsolidated at end-2009). Main
drivers were lower loan-loss provisions as well as only EUR 5mn in restructuring expenses vs. EUR 226mn in 1Q09.
As the strong result cannot be extrapolated, management is optimistic that it can deliver a small FY10 profit at the
group level; going forward, profitability is targeted to be in line with the cost of the state capital injections. Unfortunately,
there is no such statement on the single-entity result according to German GAAP (HGB), which is decisive for the
nominal value recovery of BYLAN deep subs. In addition to general uncertainties regarding HGB accounts, the
changes according to the Accounting Law Modernization Act (BilMoG) will be incorporated this year, leading to positive
and negative P&L effects (e.g. pensions, trading, general provisions).
Aa2n/AAn/AA-p Stable BBVA (BBVASM): Marketweight 1.5% (member of the iTraxx FIN)
#2 Spanish bank; it is a well-diversified group in Spain, Latin America and the US with a good variety of products and
retail banking focus. It enjoys a strong market share in its retail banking, asset management, private banking and
insurance sectors. Net profit was flat yoy and compares to EUR 31mn in 4Q09. In 1Q10, total revenues were flat qoq
to EUR 5.3bn. The net interest income declined qoq by 5.7% to EUR 3.4bn, whereas trading income jumped qoq by
over 50%. Opex declined substantially by 6% qoq, which had a positive impact on pre-provision income to EUR 3.2bn.
Compared to 4Q09, provisions and other impairments declined substantially, due to lower loan-loss provisions (down
to EUR 1,078mn). The core Tier-1 ratio increased by 10bp to 8.1% and the Tier-1 ratio reached 9.5%. The 1Q10
results are credit neutral. During the last quarter, it proved true that BBVA gave up its joint prime position in the
Spanish banking sector with Santander. Main differences are the weaker geographical diversification and the weaker
asset quality of BBVA. Nevertheless BBVA still belongs to the top tier in the Spanish banking sector.
A1n/BBB+n/A+n Weakening BCP (BCPPL): Marketweight 0.5%
#1 private banking group in Portugal. BCP has been expanding into Poland, Greece and Romania, which now weighs
on the bank's performance. BCP reported better-than-expected 1Q10 results. Net profit more than doubled qoq to EUR
96mn. The operating profit improved substantially qoq (driven particularly by fees & commissions, but also by stronger
trading gains). Loan-loss provisions increased by 10% qoq to EUR 165mn. NPLs increased by EUR 119mn and total
customer loans were nearly flat at EUR 77.1bn. A minor outflow in customer deposits of EUR 329mn or 0.71% to EUR 46bn,
resulting in a small pick-up of the loan-deposit ratio to 168%, reflects the dependency on wholesale funding. Solvency
ratios were flat, with core Tier-1 ratio of 6.4% but adequate 9.3% in Tier-1 capital (under Basel II IRB respectively 7.3%
and 9.7%). BCP's 1Q10 results are credit neutral as the current spread development is currently solely driven by the
sovereign credit. Overall, we still prefer Banco Espirito Santo vs. BCP due to the geographical diversification, the better
asset quality and the lower dependency on wholesale funding.
Aa2s/AAn/AAn Improving BNP Paribas (BNP): Marketweight 2.7% (member of the iTraxx FIN)
The largest listed bank in France is a highly diversified group with a strong domestic franchise in retail, corporate,
investment banking and asset management operations. BNP (Aa2s/AAn/AAn) reported strong 1Q10 results, which
were substantially better than expected. Net attributable profit was boosted 67% qoq and 47% yoy to EUR 2,283mn,
exceeding market consensus of EUR 1.63bn by over 40%. This strong bottom-line result was driven by the group's
enlarged dimension following the Fortis integration since May 2009. Moreover, costs of risk declined significantly. Total
revenues of the group increased by 15% qoq and by 22% yoy to over EUR 11.5bn, which was driven by the retail
banking unit. BNP's core Tier-1 ratio increased to 8.3% (up 30bp qoq) and the Tier-1 ratio was up 40bp to 10.5%,
partially driven by reduced RWAs (here the driving force was declining market risk, while credit risk increased). BNP,
which has no Greek banking subsidiary like Crédit Agricole or SocGen, announced that its corporate commitments
amounted to ca. EUR 3bn or 0.2% of the group’s total commitments.
Aa3s/A+s/A+s Stable BPCE (CDEE): Marketweight 0.2%
Groupe BPCE became the second largest banking group in France through the merger, on 31 July 2009, of 20
Banques Populaires and 17 Caisses d’Epargne, two complementary cooperative banking networks with 34mn
customers, 110,000 employees and 8,000 branches. BPCE is the central body of the group, and now holds the assets
transferred from the Caisses Nationale des Caisses d'Epargne (CNCE) and the Banque Fédérale des Banques
Populaires (BFBP). BPCE reported a much better-than-expected 1Q10 result. The quarterly improvement is due to
substantially higher profit contributions from BPCE's core business lines. Net attributable profit of the Commercial
Banking & Insurance unit increased by 59% qoq to EUR 717mn and the CIB's unit profit contribution was boosted by
158% to EUR 214mn. The NPL ratio increased by 19bp qoq to 3.8% and NPL coverage declined by 3pp to 55%, which
is relatively adequate given the type of business model. Hence, BPCE's solvency ratios are also adequate, although
not reflecting the best quality due to the high proportion of hybrid capital. The core Tier-1 ratio increased by 20bp to
7.3% and the Tier-1 ratio stood at 9.5%.
A1n/An/A+n Weakening Caja Madrid (CAJAMM): Marketweight 0.3%
#4 in Spain and the second biggest savings bank; it has a strong domestic retail franchise and its 1,920 branches
remain concentrated in the Madrid region (20%+ market share). In the past ten years, the bank carried out a strong
branch expansion, leaving it exposed to high overcapacity – still a major problem in the Spanish caja segment. Caja
Madrid reported net profit of EUR 73mn in 1Q10 due to large trading gains and lower-than-expected provisioning. The
bottom-line result was still substantially affected by the large loan-loss provisions (LLPs), which, however, declined not
only qoq by 29% but also by 13% yoy to EUR 282mn. This reduction is again an unexpected exercise by Caja Madrid
as we expected a further increase in LLPs due to the calendar effect of the Spanish provisioning policy. Instead, a
larger negative is clearly the substantially deteriorated earnings power. Net interest income declined by 11% qoq and
even 35% yoy to EUR 492mn and fees & commissions also plummeted by 9% qoq and 5% yoy to EUR 177mn. This
negative impact was partly offset qoq by boosted trading gains of EUR 103mn vs. EUR 5mn in 4Q09. The recorded
NPA ratio, which includes the securities portfolio as well as off-balance sheet items, was flat qoq at 5.43% (the next
surprise). And the NPA coverage increased to 45%. The adjusted NPL ratio was 6.41% and the adj. NPL coverage still
a weak 41.3%. Solvency ratios improved slightly, as the core Tier-1 ratio was up 8bp to a just adequate 6.9% and the
Tier-1 ratio was up 6bp to 8.9%, both driven by reduced RWAs, which were stronger than the negative impact on
capital from the net loss of EUR 357mn in 4Q09.

Euro Credit Pilot

A3s/An/A+s Stable Citigroup (C): Marketweight 3.9%
Citigroup, one of three U.S. banks with USD 2 trillion in assets, reported 1Q10 net income of USD 4.4bn or USD 0.15
per diluted share, its highest net income on record since 2Q07. Results were above market expectations and were
driven by strong revenue growth, and lower expenses and net credit losses. Citigroup revenues were USD 25.4bn, up
USD 7.5bn qoq, excluding the impact of the TARP repayment and exit of the loss-sharing agreement in 4Q09.
Securities and Banking revenues more than doubled to USD 8.0bn from USD 3.3bn in 4Q09. Excluding the impact of
CVA from both periods, revenues increased USD 2.5bn, or 48%, qoq sequentially to USD 7.7bn. Expenses decreased
USD 796mn, or 6%, qoq to USD 11.5bn. Net credit losses declined USD 1.6bn, or 16% qoq, to USD 8.4bn. Citigroup
recorded a net release of reserves for loan losses and unfunded lending commitments of USD 53mn in 1Q10, versus a
USD 755mn net build up in 4Q09. Allowance for loan losses was USD 48.7bn or 6.80% of loans, up from USD 36.0bn
or 6.09% of loans in 4Q09, primarily reflecting the adoption of SFAS 166/167. Tier-1 Capital and Tier-1 Common 1
ratios of 11.2% and 9.1%, respectively, increased significantly from the pro-forma ratios as of year end 2009, after
adjusting for the adoption of SFAS 166/167, which had a negative impact of 140 and 138 basis points, respectively.
Aa3n/An/A+s Stable Commerzbank (CMZB): Marketweight 1.6% (member of the iTraxx FIN)
#2 German bank by total assets; universal bank operating in all businesses; took over and absorbed Dresdner Bank in 2009.
Commerzbank reported a net attributable profit of EUR 708mn for 1Q10, above market expectations. The main profit
driver was a sharp turnaround in trading income. Moreover, net interest income and net commission income also
improved. Loan-loss provisions were down 24% yoy and more than 50% qoq, adding to the positive performance that
was above the bank's internal plan. The Tier-1 ratio remained at a high 10.8%. Commerzbank said that all operating
segments were profitable, which will also be the case for FY10 as a whole. Nevertheless, as management stated
earlier, an overall net profit could be achieved in FY10 only under the condition of both economic trends and financial
markets developing positively; profitability at the group level is definitely targeted for FY11, and the FY12 target of
more than EUR 4bn in operating profits was confirmed.
Aa1n/AA-n/AA-s Stable Credit Agricole (CASA) (ACAFP): Marketweight 1.9% (member of the iTraxx FIN)
CASA is one of the four large mutual groups in France. Due to the dominant retail business in the country (2,573 local
credit cooperatives or local banks) it is considered the #1 French bank. Moreover, it is Europe's 2nd largest banking
group by equity. Crédit Agricole reported weaker-than-expected 1Q10 results. Net profit of Crédit Agricole SA, the
listed parent company of the group, more than doubled yoy and still increased by 8.3% qoq to EUR 470mn, but missed
market expectations of EUR 511mn (according to Bloomberg). Net profit of Credit Agricole group also more than
doubled yoy and was nearly stable qoq (down 0.8%) at EUR 949mn. Overall, much improved income from the CIB unit
absorbed the (lower-than-expected) negative impact of the group's Greek subsidiary Emporiki bank (for a detailed
comment on Emporiki's 1Q10 results please refer to our DCB dated 6 May 2010). Hence, the group has regained
substantial operating strength despite the weakening impact of Emporiki. Due to the latter, costs of risk are still
elevated, but declined qoq to EUR 1.5bn, and were better absorbed by a higher pre-provision income of the group.
Besides the regained operating strength, the group successfully managed asset quality deterioration: the NPL ratio
only increased by 22bp qoq to still relatively moderate 3.3%, despite Emporiki, and NPL coverage only declined by ca.
5pp qoq to still comfortable 80%. In addition, the group's Tier-1 ratio stood at a comfortable 10% (up 30bp qoq), which
is underlined by the relatively sound asset quality. At Crédit Agricole SA, solvency ratios are a bit lower: the core Tier-1 ratio
was 9.2% (down 10bp qoq) and the Tier-1 ratio stood at 9.6% (up 10bp qoq).
Aa3s/A+s/AA-s Stable Crédit Mutuel (CM) (BFCM): Marketweight 1.3%
Groupe CM is among the four largest mutual groups in France, however its structure is less cohesive and more
complex than that of peers. The group includes almost 2,000 Caisses Locales (local cooperative banks) as well as 18
regional Fédérations, out of which 10 have decided to pool their interests (five within CM5-CIC group, three within
Crédit Mutuel Arkea and two within Crédit Mutuel Sud Europe Méditerranéen), joining their central bodies (Caisse
Fédérales). Within the CM, the Banque Fédérative du Crédit Mutuel, BFCM, is the holding company and refinancing
center for the so called sub-group "CM5-CIC group" (on 1 January 2009, the "Fédération du Crédit Mutuel Midi-
Atlantique" amended the existing CM4-CIC group). The other ungrouped Fédérations of Groupe CM establish more or
less a particular form of partnership (e.g. IT & insurance). Besides CM5-CIC, the BFCM consolidates 100% of citibank
Deutschland, and 51% of Cofidis. In 1H09, net profit increased by 25% yoy to EUR 340mn (BFCM only reports bi-annually).
Moreover, on a like-for-like basis (excluding profit contribution from citibank Deutschland group, Cofidis group, CIC
Iberbanco, Banca Popolare Milano, and CMCIC Leasing GmbH), net income even increased by 39% yoy to EUR 379mn. We
point out that before the latest rush of banks to tap capital markets (in October), the group had already been successful
in raising EUR 1,126mn from existing "stakeholders" during 1H09 to reinforce its solvency ratios (Tier-1 ratio was
10.44% as of 1H09 vs. 9.7% as of 1Q09 and 8.78% as of FY08). Already on 1 October 2009, it repaid the nominal of
EUR 1,036mn of the super-subordinated hybrid securities (being the first French entity to do so), which had been
issued to the French government in December 2008, and interest amounting to EUR 70.8mn.
Aa2n/As/AA-n Weakening Credit Suisse (CS): Marketweight 3.9% (member of the iTraxx FIN)
#2 Swiss bank by assets and among the largest in Europe and worldwide. Credit Suisse reported CHF 2,055mn in
1Q10 net attributable profit, in line with market forecasts. Compared to 1Q09, revenues were 11% higher despite a
30% drop in trading income. Moreover, costs were 4% lower yoy, leading to almost double pre-tax profits in 1Q10. The
stable net income figure was due to last year's loss of non-controlling interests which was borne by minorities. It reports
a Tier-1 ratio of 16.4% and total capital ratio of 21.6%. The net return on equity was at pre-crisis levels of above 20%.
Segment-wise, Private Banking, which had CHF 18.6bn in net new assets, contributed CHF 0.9bn to pre-tax profits,
Investment Banking CHF 1.8bn, and Asset Management CHF 0.2bn, with net new assets of CHF 11.2bn. Management
said that conditions in 2Q10 were so far similar to those in 1Q10; it remains optimistic about the bank's outlook, but did
not provide a profit forecast. The results are credit positive.
Aa3s/An/A+s Stable Danske Bank (DANBNK): Marketweight 1.1%
#1 Danish banking group, #2 Nordic banking group. Danske Bank (Aa3s/An/A+s) reported DKK 769mn in 1Q10 net
attributable profit, well above consensus forecasts. The result was much better than in 4Q09, as costs and loan-loss
provisions declined; yoy, profits halved, as very strong trading income offset the high loan-loss provisioning figure in 1Q10. The
main positive news is that loan-loss provisions, albeit substantially above pre-crisis levels, continued to decline
following a peak in 4Q08. Capitalization ratios were stable compared to December, and the yoy increase is explained
by the government hybrid capital injection of DKK 26bn. Management did not provide a concrete profit outlook, but said
that the level of loan-loss provisions will remain high (albeit below the FY09 level).

Euro Credit Pilot

A2n/A+s/A+s Stable Deutsche Apotheker- und Ärztebank (DAA): Marketweight 0.4%
Deutsche Apotheker- und Ärztebank eG (DAPO) is the largest primary cooperative bank in Germany. The purpose of
the bank is to cater to the needs of its members, who belong almost exclusively to the medical profession. Unlike other
cooperative banks, DAPO is not bound by the regional principle, and can thus operate throughout Germany, where it
focuses on the attractive niche of medical professionals and the health care sector. DAPO is a member of
FinanzVerbund, the protection scheme of Germany's cooperative banks. FinanzVerbund protects 100% of deposits
and bearer bonds of the non-bank customers of its associated banks, regardless of the amount. Before reliance on the
deposit protection, banks in difficulties will first be supported by restructuring measures under the institutional
protection ("Institutsschutz"). For FY09 it reported a net loss of EUR 283mn due to increased loan-loss provisioning.
The pre-provision income was nearly flat yoy at EUR 318mn and hence was not able to absorb the huge increase in
loan-loss provisions. The Tier-1 ratio declined to 6.2% (from 8.7% in FY08).
Aa3s/A+s/AA-n Stable Deutsche Bank (DB): Marketweight 3.0% (member of the iTraxx FIN)
Deutsche Bank is the largest German bank and among the largest global banks by total assets. DB is a global
investment bank with a top-tier franchise and leadership in fixed income products; it also has a strong and profitable
private client and asset management (PCAM) franchise. It reported a 1Q10 net profit of EUR 1.8bn, well above market
expectations, and also much higher both yoy and qoq. The improvement was achieved due to a strong increase in
trading income (qoq), as well as a base effect due to EUR 1bn in one-off charges (yoy), leading to significantly higher
revenues; this was mitigated by strong cost growth, while loan-loss provisions halved. The Tier-1 ratio decreased from
12.6% (December 2009) to 11.2%. Given economic and regulatory uncertainties, management's outlook is confident
but not too optimistic. DB continued to benefit from the benign market environment, and capitalization ratios developed
as expected. Upcoming acquisitions will be used to reduce the T1 ratio, which is above the new internal 10% target.
--/--/A+s Stable Dexia (DEXGRP): Marketweight 0.3%
Dexia, which received a EUR 6.4bn capital increase from Belgian and French federal and regional governments as
well as its major shareholders, has a solid franchise in public sector lending and project finance in Europe, while it
agreed to sell the insurance business of FSA (Dexia's US monoline subsidiary). Dexia is also strong in retail banking in
Belgium and Luxembourg. Another key subsidiary, DBIL, primarily offers private banking and asset management.
Dexia reported EUR 216mn in 1Q10 net attributable profit, in line with market expectations. On a yoy comparison,
revenues were 13% lower based on reported figures, but 11% higher when adjusted for FSA (was deconsolidated as
of 2Q09). Still, revenues were adversely affected by higher funding costs, lower term transformation gains, and losses
from the bond portfolio deleveraging measures. While costs were overall flat, loan-loss provisions decreased by more
than a third. This figure is still well above pre-crisis levels, as two thirds are due to the Financials Products portfolio.
Capitalization ratios were stable, with the Tier-1 ratio at 12.5%.
Aa3s/A+s/A+s Stable DnB NOR Group (DNBNOR): Marketweight 0.9%
#1 financial group in Norway (34% owned by the Kingdom of Norway). DnB NOR reported NOK 3.1bn in 1Q10 net
attributable profit, flat yoy but significantly higher qoq, and above market expectations. The main driver of the qoq
increase was lower loan-loss provisions. Management expects this declining trend to continue (previously, stable loan-
loss provisions were expected for FY10) and also confirmed the 2010 operating pre-provisions profit target of NOK 20bn.
Capitalization ratios were stable compared to December.
DnB NOR, despite obvious problems in ship finance and the Baltics (where the DnB NORD joint-venture with Nord/LB
is in the restructuring process), remains a sound bank. The figures are credit positive, and DnB NOR remains a safe-
haven in these stormy times.
Aa3n/An/As Stable Erste Bank (ERSTBK): Marketweight 0.6%
Erste Bank is Austria's second largest bank. It is a universal bank operating in all banking businesses with particular
strength in retail banking and SME clients. Two-thirds of group net profit is generated in CEE, where Erste Bank built
up a strong network over recent years. It reported EUR 255mn in net attributable profit for 1Q10, above market
expectations and higher both qoq and yoy. Yoy, total revenues were 10% higher on net interest income and net
commission income growth. Costs were slightly lower. Loan-loss provisions increased by 44%. The NPL ratio was
6.9% (4Q09 6.6%), and the NPL coverage improved to 59% (57.2%). Capitalization ratios were almost unchanged.
Management did not provide a FY10 profit outlook. Despite the good 1Q10 figures, it will face a difficult 2010.
Annualized 1Q10 loan-loss provisions are above the FY09 figure, and it remains to be seen whether pre-provision
income can mitigate this in coming quarters. Nevertheless, the bank is well prepared, and government support would
be forthcoming in case of need, providing comfort to buy & hold investments in default-triggering instruments.
A1n/An/A+s Stable Goldman Sachs (GS): Marketweight 3.3%
Goldman Sachs, the leading US investment firm, reported 1Q10 (ended 31 March) net earnings of USD 3.46bn (vs. net
income of USD 1.81bn in 1Q09). Results were above market expectations, and were driven by record fixed income
trading and underwriting revenues. Diluted earnings per common share (EPS) for 1Q10 were USD 5.59 compared with
USD -3.39 for 1Q09 and USD 8.20 for 4Q09. Annualized return on average common shareholders' equity (ROE) was
20.1% for 1Q10. GS continued its leadership in investment banking, ranking first in worldwide announced and
completed M&A and public common stock offerings YTD. Fixed Income, Currency and Commodities (FICC) generated
quarterly net revenues of USD 7.39bn, reflecting strength in the franchise across products and regions. The accrual for
compensation and benefits expenses was 43.0% of net revenues for 1Q10 (the firm's lowest ever fist quarter ratio),
down from 50.0% in 1Q09. GS continues to maintain strong capital, with Tier-1 capital ratio (under Basel I) of 15.0% as
of 31 March 2010, Tier-1 common ratio reached 12.4%, while tangible common equity was 13.2%.
Aa2n/AA-n/AAs Stable HSBC (HSBC): Marketweight 3.9%
Largest European bank in terms of market value; it is one of the few truly world-class financial services groups, with
long-established businesses in Europe, Asia, Middle East, North and Latin America. Nevertheless, it reported USD 5.8bn in
FY09 net profit (+2%), significantly below market expectations (USD 7.8bn). Despite higher-than-expected loan-loss
provisions (+6% to USD 26.5bn, following excellent 1H09 figures) and the own credit fair value charge, the bank
showed a resilient result, supported by the excellent capital markets environment (trading income up 50%). Without
any direct state support, HSBC continuously reports a superb capitalization (its Tier 1 ratio improved to a very
comfortable 10.8%) despite absorption of many negative items, is able to make and execute clear-cut decisions (e.g.,
run-down of HSBC Finance Corp. except for credit cards), and did not incur overall losses during the crisis. Hence, it
remains a sound overall credit, in our view. Moreover, government support would be forthcoming immediately, if ever needed.

Euro Credit Pilot

A2wn/BBB+n/Awn Stable HSH Nordbank (HSHN): Marketweight 0.1%
#5 German Landesbank. Within its domestic market, Germany's most northern states Hamburg and Schleswig-
Holstein (whose initials are reflected in the acronym HSH), HSHN is the market leader in the sector of business clients;
it is also the world's biggest financial service provider for shipping. HSH Nordbank reported an increased 1Q10 net
loss, in line with expectations. The net loss totaled EUR 279mn (EUR 170mn before costs of government guarantee of
EUR 151mn), which compares with EUR 139mn (EUR 111mn) in 1Q09 and a net profit of EUR 138mn in 4Q09. The
operating performance reflected the decline in loan volume (total assets down to EUR 173bn vs. EUR 207bn in 1Q09).
However, the large trading loss, which was mainly triggered by a negative impact of EUR 160mn in foreign currency
valuation, is surprising. Evidence of the restructuring efforts, operating expenditures and loan-loss provisions is
missing. On the back of the recorded net loss, the Tier-1 ratio declined by 70bp to 9.8%. Looking ahead, management
reiterated its expectation of being profitable in 2011 and being able to pay dividends in 2012.
A1s/As/An Stable ING Groep (INTNED): Marketweight 1.5%
ING reported 1Q10 net profit of EUR 1,326mn, rebounding from the net loss of EUR 793mn in 1Q09. Results were
above market expectations as bad loans declined, writedowns decreased, it booked a gain on sale of Asian and Swiss
private-banking business. 1Q10 underlying net profit increased to EUR 1,018mn vs. EUR 236mn loss in 1Q09.
Divestments & special items totaled EUR 306mn vs. EUR -558mn in 1Q09. Net result per share increased to EUR 0.35
(1Q09: EUR -0.39), while return on equity climbed to 11.3% from 3.3% in FY09. Shareholders’ equity increased by
EUR 4.4bn to EUR 38.2bn, or EUR 10.10 per share. Bank core Tier-1 ratio rose to 8.4% from 7.8% at year-end 2009,
well above the 7.5% target. Insurance Groups Directive Solvency I ratio improved to 261% from 251%. Group
debt/equity ratio improved to 11.8% from 12.4% and Financial Conglomerates Directives capital ratio increased from
157% to 162%. ING has made a strong start in 2010, with earnings recovery in both banking and insurance, while it
has been showing progress in strengthening its financials, and in focusing on fewer but stronger businesses to simplify
the group and reinforce its franchise.
Aa2s/AA-n/AA-s Stable Intesa Sanpaolo (ISPIM): Marketweight 3.6% (member of the iTraxx FIN)
Intesa Sanpaolo is Italy's second largest banking group, which resulted from the merger between Banca Intesa and
Sanpaolo IMI in 2007. It has leading market positions in the Italian banking sector and a strong international presence
focused on CEE countries and the Mediterranean basin. Intesa Sanpaolo significantly beat market consensus with
sound 1Q10 results. Net attributable profit "only" declined by 36% yoy on an unadjusted basis to EUR 688mn.
However, like in 1Q09, the bottom-line result was mainly driven by a positive tax impact totaling EUR 511mn, net profit
in 1Q10 adjusted by non-recurring items increased by 10.2% yoy. The quality of 1Q10 results is already reflected in
total revenues, which increased by 4% qoq and 2% yoy to EUR 4.2bn. Regulatory capital ratios improved slightly with
the core Tier-1 ratio up by 10bp to 7.2% and the Tier-1 also up 10bp to 8.5%, however still not providing an overly
comfortable level. Pro-forma of announced disposals and benefits from the Basel II advanced approach, this ratios
would increase by 50bp. Apparently, other measures to improve these capital ratios have a potential of 150bp, which
proves to be very challenging given the pending problems with the realization of the initial measures.
Aa3n/A+n/AA-s Stable JPMorgan Chase (JPM): Marketweight 2.4%
JPM, one of three U.S. banks with USD 2 trillion in assets, reported 1Q10 net income of USD 3.3bn, or USD 0.74 per
share, compared with 1Q09 net income of USD 2.1bn, or USD 0.40 per share, above market expectations. Results
reflected strong net revenue, particularly in trading, and a benefit from the provision for credit losses. Investment Bank
generated strong net income and Fixed Income Markets revenue: Ranked #1 in global investment banking fees; Credit
costs were a benefit of USD 462mn, driven by repayments and loan sales. Solid results contributed by other JPM
businesses, including Asset Management, Commercial Banking and Retail Banking. Consumer credit trends for Chase
portfolios showed improvement in delinquencies: Card Services credit costs included USD 1.0bn reserve reduction;
Home Lending credit costs included USD 1.2bn reserve increase for Washington Mutual credit-impaired portfolios.
Corporate results included USD 1.0bn in trading and securities gains and USD 2.3bn in additional litigation reserves,
including those for mortgage-related matters. JPM reports that its balance sheet remained very strong, with Tier-1
Capital of USD 131.4bn, or 11.5%, and Tier-1 Common of USD 104.0bn, or 9.1%. Total firm-wide credit reserves were
more than USD 39bn, or 5.6% of total loans.
A1n/A-s/As Stable KBC (KBC): Marketweight 0.5%
KBC Group is the third largest bancassurer in Belgium (market share banking business 22%) and has extensive
operations in Eastern Europe. KBC reported 1Q10 net profit of EUR 442mn, compared to the net loss of EUR -3,600mn
posted in 1Q09. Results were above market expectations, and were driven by stable business development combined
with lower loan loss provisioning. Highlights for 1Q10 are: continued sound deposit and credit spreads; gradual
recovery of fee & commission income confirmed; strong dealing room activities; insurance premium inflows continued
their steady pace; operational expenses remained very well under control; substantially lower loan loss impairments
quarter-on-quarter; and EUR 1.5bn in excess regulatory capital accumulated beyond the 10% Tier-1 solvency target.
A1s/As/AA-s Weakening Lloyds Banking Group (LLOYDS): Marketweight 2.0%
Lloyds Banking Group is the UK's domestic retail market leader. Given its importance to the country's financial system,
substantial government support was given to Lloyds Banking Group. It was granted guarantees for around GBP 40bn
in funding, and it received GBP 19bn in T1 capital. HM Treasury owns 43% of the group. In FY09, the bank reported a
net loss of GBP 6.3bn (in line with expectations), based on "combined" figures which are adjusted for the HBOS
acquisition. On a statutory basis, there was a GBP 2.8bn profit due to the GBP 11.2bn acquisition gain. Loan-loss
provisions increased by 61%, leading to a doubling of operating losses. Management's cautious outlook, which
includes a strong improvement in core business, was confirmed. While default-triggering instruments benefit from
strong governmental support, deep subs received EC impositions.
A2n/An/As Stable Morgan Stanley (MS): Marketweight 1.9%
Morgan Stanley, one of the leading investment banks in the world, reported 1Q10 net income of USD 1.78bn, or USD 0.99 per
diluted share, compared with a loss of USD 177mn, or USD 0.57 per diluted share in 1Q09. Results were above
market expectations, and were driven by higher fixed income trading revenue. Net revenues were USD 9.1bn in 1Q10,
compared with USD 2.9bn in 1Q09. Net revenues in 1Q09 included negative revenue of USD 1.7bn due to the
significant improvement in MS’ credit spreads on certain long-term debt. The effect of changes in MS’ debt-related
credit spreads in the quarter was minimal. Comparisons of quarter results with the prior year were affected by the
results of the MS Smith Barney joint venture (51% MS, 49% Citigroup), which closed on 31 May 2009. The results for 1Q10
also included a tax benefit of USD 382mn associated with prior year undistributed earnings of certain non-U.S.
subsidiaries. The annualized return on average common equity from continuing operations was 17.1% in the current
quarter. Tier-1 capital ratio (Basel I) was approximately 15.0% and Tier-1 common ratio was approximately 8.2%.

Euro Credit Pilot

Aa3s/A+s/A+s Stable Natixis (KNFP): Marketweight 0.3%
Natixis is the corporate, investment and financial services arm of the recently established Groupe BPCE, the second
largest banking group in France unifying the Group Caisse d'Epargne and the Group Banque Populaire. Natixis
reported much better-than-expected 1Q10 results. Net attributable profit reached EUR 464mn (vs. EUR 326mn market
consensus), a decline of 38% qoq, as the bottom-line result substantially benefited from a large tax one-off in 4Q09.
The 1Q10 pre-tax income increased by 23% qoq to EUR 555mn, which reflects the substantial improvement in income
quality. Nevertheless, main driver of the improved performance was a positive impact from associates totaling EUR 143mn.
Natixis' pre-provision income declined qoq by 7% mainly due to a 3.6% decline in total revenues – which, however,
were up 28% qoq to EUR 1.6bn. Regarding asset quality, we are a bit surprised about the significant decline in Natixis'
NPL ratio, which was down 1pp to 2.8%, while NPL coverage was pretty stable at 70%, with major write-offs apparently
not being the driver of the declining NPL ratio. Natixis' core Tier-1 ratio continued to increase by 20bp to a
quantitatively higher level vs. BPCE of 8.5% and the Tier-1 ratio stood at 9.5%.
Aa2s/AA-s/AA-s Stable Nordea (NBHSS): Marketweight 1.7%
Largest Swedish bank and a leading financial services group in the Nordic region, with operations in the Baltics.
Nordea reported net attributable profit of EUR 642mn for 1Q10 (+43% qoq, +2.6% yoy), above market expectations.
Loan-loss provisions were significantly lower than in the 4Q08-4Q09 period. Nevertheless, loan-loss provisions are still
at a multiple of the 1Q08-3Q08 average. The impaired loans ratio increased to 1.4% (47% of which are NPLs),
compared to 1.4% in 4Q09 and 1% in 1Q09, driven by the Baltic exposure and also Denmark. Total revenues and
costs were overall stable, with single-digit differences qoq and yoy. Capitalization ratios were pretty much unchanged
compared to December (10.1% Tier-1, 12.3% total capital ratio). Regarding the FY10 outlook, management confirmed
that risk-adjusted profits are forecasted to be lower than in FY09, as treasury and market income is expected to be
lower; loan-loss provisions will likely decline yoy, but remain at a high level despite stabilizing credit quality. The figures
confirm our positive view on the name. Nordea remains a safe-haven among European banks.
Aaan/AAAn/AA+s Stable Rabobank (RABOBK): Marketweight 8.4%
#3 Dutch bank; it is a cooperative financial institution consisting of local independent Rabobanks in the Netherlands;
low risk & strong business franchise, leading to defendable market shares and predictable earnings; cross-support
mechanism among member banks of the group. Rabobank reported EUR 2.6bn (-9%) in FY09 operating profit.
Revenues increased 2% and costs declined by 4%. However, loan-loss provisions were 65% higher, reflecting 66bp of
average loans, compared to 41bp in the prior year and the 21bp long-term average. The capital position was
strengthened by earnings retention, T1 instrument issuance and declining risk-weighted assets, leading to a Tier-1 ratio of
13.8%, well above the 12.5% internal target. Rabobank does not participate in any of the government's programs
(funding guarantees, capital injection). Based on the 2010 economic recovery and lower unemployment forecasts
(6.75% for the Netherlands), loan-loss provisions are expected to decrease yoy, but to remain at a high, above-
average level.
A1s/An/As Stable Raiffeisen Zentralbank Österreich (RZB): Marketweight 0.4%
Raiffeisen Zentralbank Österreich AG (RZB) is primarily a wholesale commercial bank. It is also the central bank of the
Austrian Raiffeisen cooperative banking sector, providing services like liquidity management for the member banks.
RZB runs a banking network via subsidiaries in 17 CEE banking markets, providing services for 14mn mainly retail and
SME customers as a universal bank, in contrast to RZB's Austrian customer profile. RZB recorded a 1Q10 net
attributable profit of EUR 292mn and RI's net profit increased by 78% yoy to EUR 100mn. The operating performance
of RZB declined, while loan-loss provisions (LLPs) decreased substantially. This reflects the fact that RZB's asset
quality deterioration slowed down, with the NPL ratio only up by 40bp to 7.69% (3.77% including banks and off-balance
sheet operations). RZB's Tier-1 ratio improved slightly by 20bp qoq to a sound 9.6% and the Tier-1 ratio reached
13.3%. RI's LLPs declined by 34% yoy to EUR 295mn, which, in combination with fair value gains on marketable
securities, was the main driver of its bottom-line result.
A1s/As/AA-s Weakening RBS (RBS): Marketweight 3.9% (member of the iTraxx FIN)
RBS is a universal bank engaging in private, retail, corporate, and investment banking, primarily in the UK and the US,
but also in Ireland, Continental Europe, and Asia-Pacific. RBS (Bank: Aa3s/A+s/AA-s) published an interim
management statement covering 1Q10. In this period, RBS incurred a net attributable loss of GBP 248mn. In operating
terms, i.e., when deducting items such as taxes, Asset Protection Scheme (APS) costs, and restructuring expenses,
among others, there was a profit of GBP 713mn; the core bank even achieved an operating profit of GBP 2,272mn.
Compared both yoy and qoq, these figures are an improvement, with higher revenues (particularly in Global Banking &
Markets, GBM), slightly lower costs, and lower loan-loss provisions being the drivers. RBS also said that it achieved
GBP 11bn in customer deposit growth as well as an increase in the number of UK retail clients being served.
Capitalization ratios (pro-forma basis) were slightly lower than in December, with the Tier-1 ratio at 13.7%, and the
core Tier-1 ratio at 10.6% (includes a 1.4pp benefit from APS).
A1n/As/A+s Stable Skandinaviska Enskilda Banken AB (SEB): Marketweight 0.7%
#2 Swedish bank, active in retail, corporate, investment banking and asset management. The Group is active in the
Nordic as well as in the Baltic area. SEB reported a net attributable profit of SEK 674mn in 1Q10, well above
expectations. Total revenues were down by 5% qoq and by 18% yoy, as net interest income and trading income
declined substantially yoy. Costs were flat qoq and 12% lower yoy. Loan-loss provisions were significantly lower than
last year, as impaired loans decreased by 8%, and loan-loss provisions in the Baltics almost halved qoq. Asset quality
remained largely stable outside CEE, and improved in the Baltics, which, however, still account for 74% of the group's
loan-loss provisions. Capitalization ratios slightly declined compared to December, with the Tier-1 ratio being 12.4%
and the total capital ratio 13.1% now; the fading out of the Basel II transitional floor will lift these by ca. 1.5pp.
Management did not provide any profit targets for FY10.
Baa1wn/BBB+s/BBB+n Stable SNS REAAL (SNSSNS): Marketweight 0.4%
SNS REAAL is a bancassurance entity offering its services to retail and small corporate clients. There are two major
operating companies within the group: SNS Bank (#5 Dutch bank), including separate entities such as SNS Securities
and SNS Asset Management, and REAAL Verzekeringen (#2 Dutch life insurer). SNS REAAL released its 1Q10
trading update: Net profit of EUR 42mn (compared to EUR 10mn generated in FY09 overall), with retail banking being
break-even, profit growth in insurance, and a net loss in property finance. Banking capitalization was flattish compared
to December, with the core Tier-1 ratio at 8.4%, and Tier-1 ratio at 10.9%. Insurance solvency under IFRS improved to
334% (December: 314%), and regulatory solvency slightly declined to 225% (230%). Group double leverage was
slightly down to 112.3%, below SNS' internal 115% target. In 1Q10, SNS REAAL issued one EUR 500mn senior bond,
EUR 1.4bn securitization notes, and EUR 1bn in covered bonds.

Euro Credit Pilot

Aa2n/A+s/A+s Stable Société Générale (SOCGEN): Marketweight 2.7% (member of the iTraxx FIN)
Société Générale (SocGen) is one of the top 3 and also one of the oldest banks in France. Furthermore,
characteristically it is the 3rd largest Corporate and Investment bank (SG CIB) in the eurozone. Société Générale
reported better-than-expected 1Q10 results. Net attributable profits were boosted to EUR 1,063mn, which was yoy and
also qoq driven by the combination of a substantial increase in net banking income (up 34% yoy and 28% qoq to EUR 6.6bn)
and sharply reduced loan-loss provisions (LLPs) and other provisions (down 16% yoy and even 41% qoq to EUR 1.1bn).
This bottom line result largely exceeded market consensus of EUR 654mn. Net banking income qoq was mainly driven
by the improved CIB performance due to both increased operating income and a substantially smaller negative impact
from the legacy asset portfolio (net loss reduced to EUR 0.2bn vs. a net loss of EUR 1.6bn in 4Q09). SocGen slightly
increased its core Tier-1 ratio by 10bp to 8.5%, mainly due to internal capital generation despite a 4% qoq increase in
RWAs (Tier-1 ratio also up 10bp to 10.6%).
A2s/A+s/A+s Stable Standard Chartered (STANLN): Marketweight 0.7%
UK based bank, active in Asia Pacific, Middle East & Southern Asia, Africa, and to some extent in the US and the UK.
Standard Chartered plc released an IMS covering 1H10, with total revenues and profits expected to be in line with
1H09 on a reported basis but higher yoy on an adjusted basis. While operating segments performed well, own account
income was weaker. Net interest margins were a bit lower yoy, supported by low liability margins. Cost growth
outpaced income growth due to low investments made last year in Wholesale Banking. Loan-loss provisions remained
stable in both segments. There is low exposure to troubled asset classes, and no direct exposure to Southern
European sovereign debt. Capitalization and liquidity remain strong, wholesale funding requirements are low over the
next few years, and the bank is a net interbank lender. Management did not provide a FY10 profit outlook. The
announcement is credit positive and confirms that SC is one of the banks less adversely affected by the global
economic crisis. The weaker 2Q10 performance compared to 1Q10 is in line with sector trends.
Aa2s/AA-s/AA-s Stable Svenska Handelsbanken (SHBASS): Marketweight 1.5%
#3 Swedish banking group and one of the leading Nordic banks, well-positioned in mortgage lending, as well as in the
Swedish mutual funds and insurance arena. Compared to its Nordic peers, SHB has a relatively small exposure in the
Baltic states. It reported a 1Q10 net attributable profit of SEK 2.85bn (+13.4% qoq, +3.2% yoy), above market
expectations. Loan-loss provisions continued to decline, but are still above pre-crisis levels; also the absolute level of
NPLs was lower at SEK 2.1bn, compared to SEK 3.2bn in December. Total revenues were flattish qoq and slightly
down yoy due to lower trading income, while costs are back at the 1Q09 level. The Tier-1 ratio was unchanged from
December at 9.1%, and the total capital ratio was lower at 12.2%. Profitability (net ROE of 13.4%) and efficiency
(cost/income 45.8%) ratios speak for themselves. Management did not provide an outlook for 2010. Moreover, the
liquidity position is strong, as the bank theoretically does not have to tap funding markets for more than two years; it
continues to be a net lender. The figures confirm our positive view on the name.
Aa3n/A+s/A+s Stable UBS (UBS): Marketweight 2.8% (member of the iTraxx FIN)
One of the largest banks in Europe and globally, with a diversified range of activities comprising investment banking,
private banking, asset management and Swiss retail banking. UBS reported CHF 2.2bn in 1Q10 net attributable profit,
and CHF 2.8bn in pre-tax profit, in line with the announcement from mid-April ("above CHF 2.5bn"). That is a multiple
of 4Q09 profits and compares to a loss in 1Q09, with a strong turnaround in trading income being the main driver. In
addition, there was an overall recovery in loan-loss provisions. Costs were higher qoq, which is attributable to the
strong trading income figure and related variable compensation. Capitalization ratios even improved from the strong
December levels, reaching 16% and 20%; the FINMA leverage increased to 4.1%, well above the national regulator's
future requirement. On the negative side, 1Q10 net new money outflows were still CHF 18bn, albeit considerably less
than the CHF 56bn in 4Q09, broken down into CHF 8bn for Wealth Management & Swiss Bank, CHF 7bn for Wealth
Management Americas, and CHF 3bn for Global Asset Management.
Luis A. Maglanoc, CFA (UniCredit Bank)

+49 89 378-12708
luis.maglanoc@unicreditgroup.de
Alexander Plenk, CFA (UniCredit Bank)

+49 89 378-12429
alexander.plenk@unicreditgroup.de
Dr. Dietmar Tzschentke (UniCredit Bank)

+49 89 378-12960
dietmar.tzschentke@unicreditgroup.de

Euro Credit Pilot
Financial Services (Marketweight)

Weight in iBoxx FIN: 8.2% Sector drivers: Following many drop-outs in 2008, the iBoxx FSV is now an even smaller sector, including a weird mix
of single names which do not have much in common, except for being in some way related to financials and not fitting
Current ASW spread: SEN: 155.7bp into other sectors (according to the iBoxx committee members; we have a different view in some cases). Given this
T1: 490.2bp composition, we discontinue to provide a sector view, as this simply does not make any sense. Moreover, we focus our
comment on the by far most important issuer in this sector.
Euro STOXX FSV YTD: -11.2% Last month's recap: n.a.

(Moody's/S&P/Fitch) Profile Comment Financial Services sector
Aa2s/AA+s/-- Stable GE Capital Corp (GE): Marketweight 61.3%
GE Capital Corp (GEEC) is wholly owned by General Electric Co (GE) through General Electric Capital Services Inc
(GECS). GECC and GE reported 1Q10 results that S&P says will not affect their ratings and outlooks. GE reported
consolidated net income of USD 2.3bn in 1Q10, down 18% yoy or USD 0.21 per share (down 19%), broadly in line with
market expectations. Revenues were USD 36.6bn for the quarter, down 5% yoy, reflecting acceleration of GE Capital
downsizing, while industrial sales declined 2%. Losses, delinquencies and non-earning assets (ex. FAS 167) declined
versus 4Q09. Industrial cash flow from operations were on track at USD 2.6bn; USD 70bn consolidated cash and
equivalents. Industrial operating profit was solid at 13.4%; ex. Olympics 14.7%, up 30bp from 1Q09. Total company
orders were USD 17.1bn, down 8%; total backlog steady at USD 174bn. GE says 2010 framework remains achievable
with upside potential, and expects to grow earnings for the balance of 2010. GE Capital's total consolidated pretax
income of USD 185mn, though still muted, is in stark contrast to the USD 799mn loss for 4Q09. GECS's debt-to-equity
ratio rose to 5.8:1 from 5.5:1 (adjusting for excess liquidity and taking account of hybrid capital) as a result of SFAS 167. Its
Tier-1 common ratio rose to 6.8% from 6.6%, sequentially. GECS has arranged all 2010 planned term funding (USD 38bn),
and USD 8bn of the planned USD 20-25bn of 2011 term funding is complete. GE's plan to reduce the relative size of
GECC is helping to reduce GECC's funding requirements as it continues to contract its balance sheet.

+49 89 378-12708

Euro Credit Pilot
Insurance (Marketweight)
Weight in iBoxx FIN: 10.5% Sector drivers: We maintain our position on the insurance sector: underweight on sub-debt and overweight on senior
debt. The outlook for the life sector is more bearish, hence we continue to underweight life. The European insurance
Current ASW spread: SEN: 165.7bp sector has fared well relative to banks over the past two years. While insurers were not the cause of the financial
T1: 560.5bp turmoil, they still suffer some of its consequences. The highest degree of negative rating actions occurred in the life
and health sector, followed by property & casualty, with reinsurance showing a greater level of rating stability. 3Q09, 4Q09
and 1Q10 results of the major insurers that we cover have overall been positive, showing recovery and/or continuing
Euro STOXX INN YTD: -11.9% improvements in their operating performance and financial condition. Going forward, we expect the overall stabilization
in capital market conditions to continue to ease valuation pressures on insurers' balance sheets, even put values back,
while improving access to debt capital markets, despite elevated uncertainties in the course of this year. Stabilizing
macroeconomic conditions should also support operating performance. For the insurers that we cover, we expect a
stabilizing credit rating environment, and continued improvement in spreads, although we do not expect a marked
increase in debt issuance. For the 2010 outlook, Moody's says the market focus has moved away from capital. For the
Insurance earnings outlook, the fundamentals are challenging with increasing combined ratios for P&C, depressed top
and bottom lines for Life, and investment returns being at historical lows. Consolidation could be a solution to premium
decline in emerging markets as well as in providing funding alternatives. With respect to the regulatory environment,
Solvency II could either be a threat or opportunity.
Last month's recap: The tightening spree for Insurance senior and sub-debt reversed in February, with spreads
widening in line with general market nervousness on sovereign risk, and the perception of fragility of the worldwide
economic recovery. A sharp recovery followed in the course of March for both senior and sub-debt spreads, which
continued in April, then another spike in May before recovering once more, then inching up in June.

(Moody's/S&P/Fitch) Profile Comment Insurance sector
A3n/A-n/An Stable Aegon (AEGON): Marketweight 2.7% (member of the iTraxx FIN)
Aegon is a leading player in its three key markets: the Netherlands (first in group pensions), the UK (5th in life &
pension), and the US (6th in individual life). Aegon reported its third quarterly profit, with 1Q10 net income of EUR 371mn,
compared with a net loss of EUR 173mn in 1Q09. Results were above market expectations, and were driven by
improved earnings and lower impairments. Underlying earnings before tax increased to EUR 488mn (1Q09: EUR -98mn),
supported by improved financial markets, while impairments declined to EUR 150mn, their lowest level in seven
quarters. New life sales of EUR 538mn, with an increase in Americas and Central & Eastern Europe offset by Spain
and the UK. Gross deposits, excluding run-off businesses, of EUR 7.8bn, driven mainly by strong pension sales in the
Americas. The value of new business declined mainly due to decrease in fixed annuity sales in the US and immediate
annuities in the UK as a result of repricing. Aegon has a continuously strong capital position, with excess capital
amounting to EUR 3.7bn (earnings contribution was offset by higher capital requirements), together with IGD capital
surplus of EUR 7.0bn, equivalent to a solvency ratio of 205%.
A3n/A-n/BBBwd Stable AIG (AIG): Marketweight 4.6%
AIG reported net income attributable to AIG of USD 1.5bn for 1Q10, or USD 2.16 per diluted common share, compared
to a net loss of USD 4.4bn or USD -39.67 per diluted common share in 1Q09. 1Q10 adjusted net income was USD 809mn,
compared to an adjusted net loss of USD 2.1bn in 1Q09. AIG’s continuing insurance operations earned USD 2.2bn
before tax in 1Q10, compared to USD 908mn in 1Q09. Despite USD 481mn of catastrophe losses in 2010, General
Insurance earned USD 879mn in 1Q10, compared to USD 710mn in 1Q09, benefiting from improved investment
performance. Domestic Life & Retirement Services’ earnings improved, principally due to increased net investment
income and the absence of unfavorable deferred acquisition cost (DAC) unlockings in 2010. Premiums, deposits, and
other considerations declined by 6.5%, compared to 1Q09, as a result of a decline in individual fixed annuities and
lower life insurance sales. Surrender activity has stabilized. In Financial Services, AIG Financial Products Corp.’s
(AIGFP) loss narrowed due to increased fair values of its asset and derivatives portfolios, offset somewhat by the effect
of AIG’s tightened credit spreads. International Lease Finance Corporation (ILFC) reported a loss, solely as a result of
asset impairments in connection with recently announced aircraft sales. At 31 March 2010, total equity was USD 101.7bn, a
USD 3.6bn increase from USD 98.1bn at 31 December 2009.
Aa3s/AAs/AA-n Stable Allianz Group (ALVGR): Marketweight 19.4% (member of the iTraxx FIN)
Allianz is one of the world's largest financial services firms. Allianz reported 1Q10 net income net income from
continuing operations of EUR 1,588mn, vs. the EUR 424mn posted in 1Q09. Results were above market expectations,
and driven by growth at the life and health insurance and asset management units, and a gain of ca. EUR 500mn from
the sale of about one-third of its remaining stake in Chinese bank ICBC. Total quarterly revenues grew 10.3% yoy to
EUR 30.6bn (1Q09: EUR 27.7bn). Operating profit also increased significantly by 20.4% to EUR 1.7bn (1Q09: EUR 1.4bn).
Operating profit growth in both Life/Health and Asset Management overcompensated for a decline in the Property-
Casualty result. This segment was especially impacted by claims from natural catastrophes amounting to EUR 555mn.
All three business segments contributed to the quarterly net income, which translates to a year-on-year increase of 274.5%.
Allianz's capital position remains strong with a solvency ratio of 168% at 31 March 2010, or 4pp higher than at year-
end 2009. Shareholders' equity amounted to EUR 43.5bn, 8.2% higher than the year-end 2009 figure of EUR 40.2bn.
A1s/AA-s/A+n Stable Assicurazioni Generali (ASSGEN): Marketweight 12.9% (member of the iTraxx FIN)
Generali is the leading insurance franchise in Italy both in life and P&C, and the third largest insurer in Europe, with
significant operations in Western Europe, and a growing position in CEE. Generali reported 1Q10 net profit of EUR 527mn,
compared to the EUR 104mn posted in 1Q09. 1Q10 results were above market expectations, and were driven by the
excellent performance of the Life business, which benefited from high premium income, the improvement on the
financial markets and containment of costs. The Life operating result rose to EUR 866mnn (+60.8% yoy), assisting the
growth of the total operating result to EUR 1,201mn (+22%). Total gross written premiums increased by 16.2% yoy to
EUR 20.9bn (1Q09: EUR 18.5bn). In particular, the improvement was supported by outstanding performance in the
Life business, where premiums totaled EUR 14.2bn (+25.7%), reflecting significant growth on the Group’s key markets.
Generali's capital position improved further, as shareholders' equity rose to EUR 18.0bn as of 31 March 2010 (Dec 2009:
EUR 16.7bn), while its Solvency I ratio was 129%, up 1pp from year-end 2009.

Euro Credit Pilot

A1n/An/An Stable Aviva (AVLN): Marketweight 4.7% (member of the iTraxx FIN)
Aviva is the world's fifth-largest insurance group and the biggest in the UK. Its main sources of premium income are
long-term savings (roughly 70%) and general insurance (about 30%). Around half of its business is in the UK, with
major subsidiaries also in France, the Netherlands, Spain, Italy, Ireland, Poland, Canada and Australia. Aviva Plc
reported preliminary FY09 results, posting IFRS net profit of GBP 1,315mn, rebounding from a net loss of GBP 885mn
in FY08, beating market expectations. Results were positively impacted by higher investment returns. Operating profit
was down 12% yoy to GBP 2,022mn, IGD solvency surplus more than doubled to GBP 4.5bn, Group return on equity
reached 16.2%, with total dividend per share of 24 pence. Aviva said that the decline in financial markets at the end of 2008
put predictable downward pressure on its operating earnings, but it has been able to counteract this by making its
business more resilient by reducing costs and operating more efficiently. As a result, its earnings per share increased
to 37.8 pence, from a loss of 36.8 pence in 2008.
A2s/A+n/A-n Stable AXA (AXASA): Marketweight 7.9% (member of the iTraxx FIN)
AXA is an international insurer with a very strong market position. AXA reported FY09 net income of EUR 3,606mn (vs.
EUR 923mn in FY08), ahead of market expectations. Results were boosted by revaluations in financial assets and
derivatives, mainly due to the favorable market trends. Total Revenues remained resilient, down only -1.2% (on
reported basis) to EUR 90,124mn. Life & Savings revenues were down -0.6% to EUR 57,620mn. France, Italy and
Germany experienced positive growth, whereas the US and the UK declined. In the US, product redesign actions led to
a drop in market share. Net inflows remained comparable to the prior-year level at EUR +8.6bn, mainly driven by
higher client retention. New Business Value (NBV) was up 13.0% to EUR 1,113mn, primarily due to improved product
mix and financial market conditions partly offset by lower volumes (APE down 8.8% to EUR 6,188mn). New Business
margin was up from 14.5% to 18.0%. Its shareholders equity was EUR 46.2bn, up EUR 8.8bn, benefiting from a EUR 2.4bn
capital increase, a EUR 5.0bn increase in net unrealized capital gains and EUR 3.6bn in net income for the period,
partially offset by a EUR 1.0bn increase in pension deficits and a EUR 0.8bn 2008 dividend payment. Solvency I ratio
was 171% post-dividend, up 44 points yoy.
Baa1n/--/BB+s Weakening Clerical Medical Finance (CLMD): Underweight 0.0%
(sub rating only) Clerical Medical Finance Plc (CMF) is part of Clerical Medical Investment Group (CMIG) which, in turn, is a subsidiary
of HBOS plc. CMIG is part of the Insurance and Investment Division of HBOS, and sells life, pensions and mutual
funds through its branch networks – Halifax and Bank of Scotland – as well as securing sales through IFA's and other direct
channels. While CMIG was considered a core part of HBOS, upon completion of the acquisition of HBOS by Lloyds
TSB Group in January 2009, there are concerns that the insurer's strategic importance with the enlarged bank is less clear.
--/AAn/-- Stable CNP Assurances (CNPFP): Marketweight 1.3%
CNP Assurances is France's leading life insurer group, benefiting from unparalleled size in the French market and
access to an extremely large retail client base, ensuring strong and resilient business operations. CNP benefits from
very strong support and operational links with its shareholders CDC, Groupe Caisse d'Epargne (GCE) and La Banque
Postale (LBP). This support takes the form of a shareholders' pact and a 10-year exclusive distribution agreement with
the retail banks GCE and LBP. CNP maintains close links with, and is supported by French state-owned CDC, which
has a 40% stake in CNP. A French decree requires that the public sector controls at least 61% of CNP (vs. 77%
actual). CNP provided for the first time quarterly profit indicators, saying that 1Q10 attributable net profit reached EUR 280mn.
Results were in line with market expectations, and were boosted by higher premiums and more favorable capital
market valuations. 1Q10 highlights: EUR 9.4bn in premium income, of which EUR 1.9bn from operations outside
France; upturn in unit-linked sales, which accounted for 10% of business in France and 16% for the Group as a whole;
solid 7.1% growth in average technical reserves over the quarter; solvency capital requirement under Solvency I covered
2.16x including unrealized gains, and around 1.10x by equity and quasi-equity alone.
--/A-n/-- Improving Eureko (EUREKO): Marketweight 2.8%
Eureko B.V. is a privately-owned Dutch financial services group, whose core business is insurance. Its operations span
ten European countries, especially the Netherlands, Greece and Ireland, offering a full range of insurance. Eureko BV
reported FY09 net profit of EUR 1,381mn (vs. a net loss of EUR 2,620mn in FY08), helped by the stabilization of
financial markets and by the financial compensation following the PZU settlement (contributing EUR 1.1bn of the net
profit). The impact of financial markets was down to EUR -337mn (FY08: EUR -2,697mn). Structural cost reductions
amounted to EUR 183mn, with targets more than achieved. Eureko says that the capital support from shareholders,
Vereniging Achmea (EUR 600mn) and Rabobank (EUR 400mn), took effect in April 2009 and laid the foundation for
the subsequent firm rise in solvency. As a result, the Group solvency position rose steadily through FY09 and ended
the year at 216% (FY08: 150%), and for the insurance entities at 251% (FY08: 197%), also supported by its decisive
de-risking strategy.
--/An/-- Stable Groupama (CCAMA): Marketweight 2.8%
Groupama is one of the largest composite insurance groups in France. It is a registered insurance company, and
consolidates all the insurance subsidiaries of the group, and also acts as a quota-share reinsurer for approximately
40% of the business written by the group's caisses régionales (regional mutual insurers), of which there are 11 with
7,000 local offices (caisses locales). The caisses régionales write the majority of the business in France and, through
their 99.9% stake in Groupama, are the ultimate owners of it. Groupama reported FY09 net income of EUR 660mn, an
increase of 142% over FY08. This substantial increase was primarily generated by positive developments of the
underwriting results, cost control and by the recovery in financial markets, which allowed realized capital gains in FY09
comparable to those realized in FY07, after FY08 was marked by the financial crisis. FY09 net profit was also impacted
by following non-recurring items: the cost of the storms Klaus and Quinten of EUR 131mn after taxes; goodwill
impairment for the emerging countries in the Central and Eastern Europe zone of EUR 113mn and EUR 49mn for Turkey.

Euro Credit Pilot

--/AA-n/A+n Stable Hannover Re (HANRUE): Marketweight 2.0% (member of the iTraxx FIN)
A leading reinsurer in Europe and worldwide, with operations spanning all business lines. Hannover Re reported 1Q10
group net income of EUR 157.2mn, down 31.2% from EUR 228.6mn in 1Q09, but above market expectations. 1Q09
figures included a positive non-recurring effect of EUR 86.4mn in connection with the acquisition of the ING life
reinsurance portfolio, while 1Q10 figures were impacted by higher claims from natural disasters including the
earthquake in Chile and the winter storm Xynthia in Western Europe. HNR reiterated its FY10 outlook for a return on
equity (ROE) of at least 15%. Gross written premium for 1Q10 increased by 7.1% to EUR 2.9bn (1Q09: EUR 2.7bn),
the level of retained premiums decreased to 90.8% (91.7%), while net premium earned climbed by 9.5% to EUR 2.3bn
(EUR 2.1bn). The operating profit (EBIT) for 1Q10 stood at EUR 245.0mn, after EUR 307.0mn in 1Q09, and adjusted
for the above-mentioned positive non-recurring effect, EBIT would have grown by 11.1% yoy. Driven by the profit trend
and increased unrealized gains, group shareholders' equity improved on the level of 31 December 2009 (EUR 3.7bn)
by 10.0% to reach EUR 4.1bn.
A1wn/As/As Stable ING Groep (INTNED): Marketweight 8.9%
See Banks
A2n/A+n/An Weakening Legal & General (LGEN): Underweight 0.9%
L&G is a leading provider of insurance, investment and savings products in the UK, which is its primary focus, but it
also has operations in the Netherlands, France, Germany and the US. It reported FY09 net profit of GBP 844mn,
rebounding from the net loss of GBP -1,130mn in FY08, way ahead of market expectations. Results were boosted by
demand for savings products and buoyant capital markets. IFRS operating profit was up 87% yoy to GBP 1,109mn, net
cash rose 118% at GBP 699mn, while the final dividend was also up by 33% to 2.73 pence per share. International
segment IFRS operating profit increased 115% to GBP 127mn, while annual cost reduction hit GBP 69mn, exceeding
the target of GBP 50mn. EEV operating profit went up 51% yoy to GBP 1,319mn, while world EEV New Business
contribution increased 10% to GBP 328mn. IGD surplus increased by as much as GBP 1.3bn to GBP 3.1bn. IGD
coverage ratio at end FY09 was 224% (FY08: 169%).
--/A+s/A-n Stable Mapfre (MAPFRE): Marketweight 0.0%
Mapfre is Spain's leading insurance group ranked 1st in property & casualty (ca 17.7% share), and 2nd in life (9.1% share). It
is also the largest in property & casualty in Latin America (6.2% share). It reported 1Q10 net income of EUR 273.1mn,
down 4.8% yoy, but above market expectations. It booked a charge of EUR 80.8mn for claims related to the Chilean
earthquake in February. Business growth was enhanced by the pick-up of sales in Spain, offset by the impact of
severe weather and catastrophes. Revenues were up 8.9% yoy to EUR 5,892.4mn, premiums were up 9.6% yoy to
EUR 4,935.3mn, while managed savings rose 9.8% yoy to EUR 24,889.2mn. Property & casualty combined ratio
increased 3.3 p.p. to 97.5% as loss experienced was affected by costs arising from Chilean earthquake and the severe
weather conditions in Spain and the US. Excluding this, combined ratio would have improved by -1.3 p.p. to 92.9%, due to the
strong performance of the non-catastrophic reinsurance business and a better technical result at MAPFRE AMÉRICA.
Aa3s/AA-s/AA-s Stable Munich Re (MUNRE): Marketweight 7.2% (member of the iTraxx FIN)
Munich Re is the world's second largest reinsurer. Munich Re reported 1Q10 consolidated profit of EUR 485mn, up
11% yoy (1Q09: EUR 437mn). Results were ahead of market expectations, and were driven by large gains from the
disposal of investments, while the natural catastrophe burden was unusually high. The reinsurer says its FY10 profit
target of more than EUR 2bn is increasingly ambitious following a number of claims from natural disasters. Munich Re
also announced a further share buyback program: before the next AGM on 20 April 2011, shares with a volume of up
to EUR 1bn are to be repurchased, currently equivalent to around nine million shares or approx 5% of the share capital.
The Group recorded an operating result of EUR 770mn in 1Q10 (1Q09: EUR 736m). Compared with year-end 2009, equity
rose by 4.1% to EUR 23.2bn as of 31 March 2010. Annualized return on risk-adjusted capital (RORAC) amounted to
10.7%, while return on equity (ROE) was 8.5%. Gross premiums written rose by 12.4% to EUR 11.7bn (EUR 10.4bn).
Baa1n/--/BBB+n Weakening Old Mutual (OLDMUT): Underweight 1.1%
Old Mutual plc is the UK listed holding company of Old Mutual group, an international financial services group focused
on life insurance, asset management and banking with core operations based in South Africa, the US, the UK and the
Nordic region. Old Mutual Plc reported a FY09 IFRS net loss of GBP -118mn, compared to a net profit of GBP 683mn
in FY08, missing market expectations. Results were impacted mainly by marking-to-market of Group debt, as the
valuation improvement in 2009 negatively impacted profit after tax by GBP 263mn, reversing the positive impact of
GBP 503mn of marking-to-market its own debt instruments in FY08, together with a charge relating to acquisition
accounting of GBP 443mn and negative short-term fluctuations in investment return of GBP 316mn. Old Mutual says it
has achieved substantial progress in delivering against the five strategic priorities set last year. Old Mutual's strategy is
focused on building a long-term savings, protection and investment group.
A2n/A+n/A+n Stable Prudential (PRUFIN): Marketweight 0.8%
Prudential reported FY09 net income of GBP 676mn, compared to a net loss of GBP -396mn in FY08, in line with
market expectations. FY09 highlights are: (i) Embedded Value: New business profit of GBP 1,607mn up 34% yoy;
Operating profit based on longer-term investment returns of GBP 3,090mn up 8%; Shareholders’ funds of GBP 15.3bn,
equivalent to 603 pence per share; (ii) IFRS: Operating profit based on longer-term investment returns of GBP 1,405mn up
10%; Operating profit after tax covers FY09 dividend 2.2 times; Shareholders’ funds of GBP 6.3bn (2008: GBP 5.1bn);
(iii) New Business: Total APE sales of GBP 2,896mn up 1%; Retail APE sales of GBP 2,890mn up 11%; EEV new
business profit margin (% APE) of 56% (2008: 42%); Free surplus – investment in new business – of GBP 675mn
down 16%; (iv) Capital & Dividend: Management action strengthened Insurance Groups Directive (“IGD”) capital
surplus, estimated at GBP 3.4bn, GBP 1.9bn higher than at the end of 2008 (GBP 1.5bn); FY09 dividend increased by
5% to 19.85 pence per share.
A3s/--/BBB+s Stable Standard Life (STALIF): Marketweight 1.2%
Standard Life Assurance operates four major businesses: life & pensions, banking, healthcare, and investments. The
key business area is UK life and pension, where it is number 2 with respect to market share; through subsidiaries and
branches it also operates in Canada, Ireland, Germany, India and China. Standard Life reported FY09 attributable net
profit of GBP 213mn (FY08: GBP 100mn), above market expectations, as pension assets under management climbed.
EEV core capital and cash generation after tax was up 16% to GBP 350mn (FY08: GBP 303m), while profits were
resilient in difficult markets with an EEV operating profit before tax of GBP 919mn (FY08: GBP 933mn). Standard Life
says it made a significant step up in investment to develop its leading corporate and retail propositions to accelerate
profitable growth, together with a further GBP 100mn of efficiency savings targeted by 2012. The sale of Standard Life
Bank to Barclays was concluded on 1 January 2010.

Euro Credit Pilot

--/BBB-s/BB+n Weakening Swiss Life (SLHNVX): Underweight 0.0%
Swiss Life, Switzerland's largest life insurer, reported FY09 attributable net profit of CHF 278mn, down 20.6% from the
CHF 350mn posted in FY08. Results were below market expectations, and were impacted by reorganization charges
in AWD (loss contribution of CHF 92mn to Swiss Life's annual result). Dividend payment is to be reduced by half to
CHF 2.40 per share (FY08: CHF 5). The Group increased its premium volume for FY09 on a currency-adjusted basis
by 12% to CHF 20.2bn. Positive developments on financial markets and the strong performance of the Investment
Management segment contributed significantly to the overall result: a strong investment result of CHF 4.3bn on the
insurance portfolio, an investment performance of 7.5% (FY08: -0.7%) and a net investment return of 3.9% (FY08: 0.3%).
The Group achieved a net result from continuing operations of CHF 324mn, up CHF 1.5bn on the previous year.
A1n/A+s/-- Stable Swiss Re (SCHREI): Marketweight 4.3% (member of the iTraxx FIN)
Swiss Re is one of the largest reinsurers in the world and operates in more than 30 countries. Swiss Re reported 1Q10
attributable net income of USD 158mn, up 21.5% vs. the USD 130mn posted in 1Q09. Results were above market
expectations, and were driven by higher investment income offsetting claims from natural catastrophes. Earnings per
share were CHF 0.49 (USD 0.46), compared to CHF 0.45 (USD 0.39) in 1Q09. The estimated excess capital position
at the AA level increased to more than USD 12bn. Swiss Re reports that based on current information, it provisionally
estimates its loss from the explosion of the Deepwater Horizon oil rig to be USD 200mn before tax. The company
expects the total insured market loss from this event to be in the range of USD 1.5bn to USD 3.5bn. Shareholders’
equity increased by USD 0.8bn to USD 26.2bn in 1Q10, driven mainly by mark-to-market gains on fixed income
securities amounting to USD 1.1bn. Return on equity for 1Q10 was 2.7% (1Q09: 2.9%).
A2s/AA-n/An (Zurich Stable Zurich Financial Services (ZFS) (ZURNVX): Marketweight 6.1% (member of the iTraxx FIN)
Insurance Co) Zurich Financial Services Group (ZFS) is Switzerland's largest insurer and ranks among the leading property &
casualty insurers in the world. Zurich Financial Services reported a 75.8% increase in 1Q10 attributable net income to
USD 935mn from USD 532mn in 1Q09, beating market expectations. ZFS achieved sustained profitability in its core
business segments and strong growth at Global Life and Farmers, offsetting higher claims from weather and
catastrophe-driven events. 1Q10 highlights include business operating profit (BOP) of USD 1.3bn, up 19% yoy,
equivalent to an annualized BOP ROE after tax of 13.5%; 1Q10 net income equivalent to an annualized return on
equity (ROE) of 13.2%; total Group business volumes, comprising gross written premiums, policy fees, insurance
deposits and management fees, of USD 19.0bn, up 11% yoy (6% on a local currency basis); shareholders’ equity of
USD 28.2bn, a 4% decrease over year-end after deduction of the USD 2.2bn dividend; Solvency I ratio up 17pp to 212%.

+49 89 378-12708

Euro Credit Pilot
UniCredit Research Model Portfolio

Portfolio changes
Portfolio construction As usual, portfolio adjustments comprise several relative value-driven bond switches as well
principles
as insertions in and removals from the CDS and bond portfolios. These reflect the
corresponding single-name recommendation changes of our primary sector analysts. We are
including a greater number of bonds from sectors we prefer. The portfolio construction is
primarily driven by the bottom-up view of our analysts and the sector allocation. As the
portfolio is essentially a selection of bonds that are favorable in our view the invested notional
is the same for each bond. In contrast to our bond portfolio, the single-bond weight is given by
its respective outstanding volume in the iBoxx index. CDS portfolios are also equally weighted
in terms of notional volume per reference entity.
Overview of this month's The main bond portfolio changes are summarized in the table below.
cash changes
JULY BOND PORTFOLIO UPDATE
Sector Remove Add Comment

Automobiles & Parts BMW 5% 28/05/15 BMW 5% 06/08/18 Relative value switch
RENAUL 4.375% 27/01/15 RENAUL 8.125% 15/05/12 Relative value switch
VW 7% 09/02/16 VW 5.625% 09/02/12 Relative value switch
Food & Beverage EEEKGA 4.375% 15/07/11 EEEKGA 7.875% 15/01/14 Relative value switch
Industrial Transportation ABESM 4.875% 27/10/21 Changed recommendation to underweight
Oil & Gas BPLN 4.5% 08/11/12 Changed recommendation to overweight
Personal & Household Goods (Core) MOET 4.625% 01/07/11 MOET 4.375% 12/05/14 Relative value switch
Long Positions BPLN 5Y SEN CDS Changed recommendation to overweight
IMTLN 5Y SEN CDS Still attractive levels for a non-cyclical company; intact de-
leveraging story
WKLNA 5Y SEN CDS Trades tight but defensive play
SINGLE-NAME RECOMMENDATION CHANGES
Ticker Issuer Date From To Action

CARGIL Cargill Inc 07/07/10 Underweight event driven upgrade
HNDA Honda 07/07/10 Marketweight Underweight downgrade
RBOSCH Robert Bosch GmbH 07/07/10 Marketweight Underweight downgrade
TOYOTA Toyota Motor Corp 07/07/10 Underweight Marketweight upgrade
ABESM Abertis Infrastructuras S.A. 06/07/10 Overweight Underweight downgrade
PORTEL Portugal Telecom 01/07/10 Marketweight Underweight downgrade
ARRFP SAPRR 29/06/10 Underweight Marketweight upgrade
BPLN BP P.L.C 17/06/10 Marketweight Overweight upgrade

Euro Credit Pilot
Our portfolio construction principle

We split our portfolio into two parts: a cash portfolio and a recommended list including long and
short positions in 5Y CDS. We differentiate between investors who adopt a buy & hold approach in
the cash universe, and those who have implemented a more active credit portfolio management
using single name CDS. For the latter, we highlight not only long (short protection) but also short
positions (long protection). The recommended lists in the cash and the CDS market might differ due
to the fact that some names/bonds are cheap/dear in a specific market segment.
The format of our UniCredit Model Portfolio for buy & hold cash investors does not differentiate
between "buys" and "core holds". The portfolio represents our "top picks" within the iBoxx universe,
which includes all bonds in which we see value. There are no portfolio weights on the bonds, making
them equally weighted in particular to calculate the ex-post performance.
The long and short CDS portfolios comprise 5Y single-name CDS only, implementing a trading-
oriented portfolio which aims at outperforming the iTraxx Main in terms of carry and m-t-m
performance. The CDS reference names are part of the same universe as the cash bond portfolio, i.e.,
members of the iBoxx Corporates index (including financials and non-financials) and the iTraxx
Europe universe. We recommend selling protection on our favorites, while we recommend buying
protection on those names we do not like. We track the list versus the iTraxx and implement our
macro view by buying or selling protection on the overall.
Market segmentation: The credit market is still a segmented market place. Insurance companies and
asset managers are still dominating the cash market, while other investors are using the derivatives
universe (CDS, CLN) on an equal footing with bonds to express their views and take credit risk. The
management style of credit portfolios differs among these two market segments.
Cash bonds – iBoxx – top picks

NON-FINANCIALS (PRICES AS OF 05/07/2010)
ISIN Ticker Coupon Maturity Price Mid mDur ASW Rating (Moody's/S&P/Fitch)
Aerospace & Defense (MW)
XS0402476963 FNCIM 8.125 3/12/2013 115.42 2.93 172 A3/BBB/BBB+
Automobiles & Parts (MW)
XS0173501379 BMW 5 6/8/2018 107.69 6.37 131 A3/A-/--
XS0403611204 DAIGR 9 30/1/2012 110.31 1.46 118 A3/BBB+/BBB+
XS0427926752 RENAUL 8.125 15/5/2012 107.79 1.72 263 Baa2/BBB-/--
XS0412447632 VW 5.625 9/2/2012 105.45 1.52 102 A3/A-/BBB+
Basic Resources (OW)
XS0202202957 GLEINT 5.375 30/9/2011 101.66 1.14 291 Baa2/BBB-/--
XS0431928760 MTNA 8.25 3/6/2013 112.11 2.60 235 Baa3/BBB/BBB
XS0305188533 XTALN 5.25 13/6/2017 103.37 5.73 224 Baa2/BBB/--
Chemicals (UW)
XS0259604329 LINGR 7.375 14/7/2016 107.11 4.52 376 Baa2/BBB/--
XS0423036663 LXSGR 7.75 9/4/2014 116.20 3.28 148 Baa2/BBB/BBB
Construction & Materials (UW)
XS0430786581 CRHID 7.375 28/5/2014 114.05 3.41 179 Baa1/BBB+/BBB+
XS0207037507 HOLZSW 4.375 9/12/2014 105.09 3.92 123 Baa2/BBB/BBB
Food & Beverage (OW)
BE0934984015 ABIBB 7.375 30/1/2013 112.53 2.33 85 Baa2/BBB+/--
FR0010612713 BNFP 5.5 6/5/2015 113.62 4.27 51 A3/A-/--
XS0196608003 EEEKGA 4.375 15/7/2011 101.92 0.96 144 A3/A*-/--
XS0353181190 KFT 6.25 20/3/2015 114.27 4.07 106 Baa2/BBB-/BBB-
DE0008461021 SUEDZU 5.75 27/2/2012 105.69 1.56 108 Baa2/--/--
Health Care (UW)
XS0497185511 MRKGR 3.375 24/3/2015 102.81 4.29 75 A3*-/BBB+/--
XS0415624393 ROSW 4.625 4/3/2013 106.97 2.49 40 A2/AA-/AA-

Euro Credit Pilot
Industrial Goods & Services (Core) (UW)
XS0252915813 ABB 4.625 6/6/2013 106.75 2.73 65 A3/A/BBB+
XS0302740328 ATCOA 4.75 5/6/2014 108.02 3.57 80 A3/A-/--
XS0306488627 JMVOIT 5.375 21/6/2017 105.11 5.75 209 Baa2/--/--
XS0429612566 MANAG 7.25 20/5/2016 118.23 4.85 167 A3/BBB+/--
Industrial Transportation (OW)
XS0271758301 ABESM 4.875 27/10/2021 88.28 7.96 303 --/BBB/--
XS0427290357 ATLIM 5.625 6/5/2016 110.63 4.96 142 A3/A-/A-
Media (MW)
XS0408678133 BERTEL 7.875 16/1/2014 115.98 3.06 144 Baa2/BBB/BBB+
XS0357251726 WKLNA 6.375 10/4/2018 116.37 6.16 146 Baa1/BBB+/BBB+
Oil & Gas (OW)
XS0411044653 ENIIM 5 28/1/2016 109.92 4.79 91 Aa2/A+/AA-
XS0220790934 GAZPRU 5.875 1/6/2015 104.60 4.19 280 Baa1/BBB/BBB
XS0422624980 OMV 6.25 7/4/2014 112.23 3.35 108 A3/--/A-
XS0306900795 TNEFT 5.381 27/6/2012 103.44 1.86 229 Baa1/BBB/--
XS0402228471 TOTAL 4.75 10/12/2013 108.75 3.12 41 Aa1/AA/AA
Personal & Household Goods (Core) (MW)
FR0010206284 MOET 3.375 22/6/2012 102.79 1.90 70 --/A-/BBB+
FR0010094714 MOET 4.625 1/7/2011 102.94 0.97 59 --/A-/BBB+
XS0237323943 PG 4.125 7/12/2020 106.59 8.28 50 Aa3/AA-/--
Retail (UW)
FR0000488413 COFP 6 27/2/2012 106.27 1.56 98 --/BBB-/BBB-
FR0010208660 PRTP 4 29/1/2013 102.88 2.39 131 --/BBB-/--
XS0295018070 TSCOLN 5.125 4/10/2047 106.89 16.85 166 A3/A-/A-
Technology (MW)
XS0274906469 IBM 4 11/11/2011 103.27 1.30 46 A1/A+/A+
XS0435008726 LMETEL 5 24/6/2013 106.92 2.76 99 Baa1/BBB+/BBB+
Telecommunications (MW)
DE000A0T5X07 DT 6 20/1/2017 114.52 5.36 122 Baa1/BBB+/BBB+
XS0148956559 DT 8.125 29/5/2012 110.98 1.79 102 Baa1/BBB+/BBB+
FR0000471948 FRTEL 7.25 28/1/2013 112.49 2.33 73 A3/A-/A-
XS0275164084 KPN 4.75 17/1/2017 107.25 5.50 116 Baa2/BBB+/BBB+
XS0173549659 OTE 5 5/8/2013 95.19 2.62 490 Baa2/BBB-/BBB
XS0356044643 T 6.125 2/4/2015 115.28 4.13 73 A2/A/A
XS0162867880 TELEFO 5.125 14/2/2013 106.28 2.41 112 Baa1/A-*-/A-
XS0368055959 TELEFO 5.58 12/6/2013 107.07 2.71 149 Baa1/A-*-/A-
XS0269252077 TELNO 4.5 28/3/2014 107.86 3.41 54 A3/A-/BBB+
XS0418508924 TITIM 8.25 21/3/2016 118.50 4.57 254 Baa2/BBB/BBB
XS0465576030 TLIASS 4.75 16/11/2021 106.52 8.54 108 A3/A-/A-
XS0429817538 TPSA 6 22/5/2014 110.62 3.46 133 A3/BBB+/BBB+
XS0408285913 VOD 6.25 15/1/2016 114.53 4.63 127 Baa1/A-/A-
Tobacco (OW)
XS0352065584 BATSLN 5.875 12/3/2015 113.31 4.08 89 Baa1/BBB+/BBB+
XS0275431111 IMTLN 4.375 22/11/2013 104.92 3.06 116 Baa3/BBB/BBB-
Travel & Leisure (UW)
FR0010720045 ACCOR 7.5 4/2/2014 111.17 3.09 249 --/BBB-/BBB-
XS0292924775 EXHO 4.5 28/3/2014 106.54 3.40 90 --/BBB+/BBB+
XS0471074822 LTOIM 5.375 5/12/2016 101.84 5.18 267 Baa3/BBB-/--

Euro Credit Pilot
Utilities (MW)
XS0171463788 AWLN 4.625 7/10/2013 106.63 2.94 85 A3/A-/A
XS0271020850 CEZCO 4.125 17/10/2013 105.04 2.99 86 A2/A-/A
XS0223249003 DANGAS 5.5 29/6/2015 97.32 4.22 394 Baa3/BBB/BBB-
XS0409744744 EDF 5.125 23/1/2015 111.13 4.02 60 Aa3/A+/AA-
XS0441402681 EDNIM 4.25 22/7/2014 104.45 3.56 125 Baa2/BBB+/BBB+
XS0399861086 ENBW 6.875 20/11/2018 124.89 6.41 91 A2/A-/--
XS0306644344 ENEL 5.25 20/6/2017 109.84 5.83 125 A2/A-/A
XS0408095387 EOANGR 5.5 19/1/2016 113.93 4.74 65 A2/A/A+
DE000A0DLU69 EWE 4.875 14/10/2019 109.45 7.26 95 A2/A-/--
XS0180181447 FRTUM 5 19/11/2013 109.07 3.05 53 A2/A/A
FR0000475741 GSZFP 5.125 24/6/2015 110.25 4.40 89 Aa3/A/--
XS0222372178 IBESM 3.5 22/6/2015 100.44 4.49 134 A3/A-/A
XS0170798325 NGGLN 5 2/7/2018 108.11 6.58 125 Baa1/BBB+/BBB+
FR0010612622 RTE 4.875 6/5/2015 110.34 4.31 60 --/A+/--
XS0292873683 STATK 4.625 22/9/2017 108.47 5.94 84 Baa1/A-/BBB+
XS0223129445 VATFAL 5.25 29/6/2015 97.73 4.26 361 Baa1/BBB/A-
XS0424019437 VERBND 4.75 17/4/2015 108.03 4.25 96 A2/A/--
FINANCIALS (PRICES AS OF 05/07/2010)
Banks (MW)
XS0432092137 ACAFP 5.875 11/6/2019 111.27 6.98 171 Aa2/A+/A+
XS0455308923 AIB 4.5 1/10/2012 94.18 1.96 561 A1/A-/A-
XS0459200035 BPIM 4.125 22/10/2014 102.34 3.79 163 A2/A-/A-
XS0287195233 DANBNK 4.878 15/5/2017 80.75 5.37 537 Baa3/BB+/A-
XS0365303675 ISPIM 5.75 28/5/2013 102.62 2.61 318 Aa3/A/A+
XS0201065496 RBS 4.625 22/9/2021 75.97 4.72 633 Ba2/BBB*-/A
XS0337453202 SEB 7.0922 21/12/2017 94.00 5.52 533 Ba2/BBB-/A-
XS0149298860 SNSSNS 5.625 14/6/2012 105.20 1.84 167 A3/A-/A-
XS0365303329 SOCGEN 7.756 22/5/2013 89.89 2.37 961 Baa2/BBB+/--
Insurance (MW)
XS0425811865 AEGON 7 29/4/2012 106.41 1.70 219 A3/A-/A
XS0159527505 ALVGR 6.5 13/1/2025 105.87 3.78 313 A2/A+/A
XS0416215910 ASSGEN 4.875 11/11/2014 106.97 3.81 127 A1/A+/A+
XS0434882014 AXASA 4.5 23/1/2015 106.23 4.03 109 A2/A/A-
FR0010409789 CNPFP 4.75 22/12/2049 63.67 4.67 827 --/A/--
XS0433923108 EUREKO 7.375 16/6/2014 112.09 3.44 233 --/A-/--
XS0187043079 HANRUE 5.75 26/2/2024 99.00 3.14 421 --/A/A-
XS0267516598 INTNED 4 18/9/2013 101.86 2.89 172 Baa1/A-/BBB+*-
XS0304987042 MUNRE 5.767 12/6/2017 86.42 5.35 534 A3/A/A
XS0429265159 SCHREI 7 19/5/2014 113.58 3.41 153 A1/A+/--
XS0201168894 ZURNVX 4.5 17/9/2014 105.89 3.70 114 A2/A+/A

Euro Credit Pilot
Long/short recommendations in the CDS universe

LONG LIST – SELL PROTECTION (PRICES AS OF 05/07/2010)
Issuer Debt Currency iTraxx Sector Rating (Moody's/S&P/Fitch) 5Y CDS (Mid)

BMW SEN EUR Autos A3/A-/-- 121
DAIGR SEN EUR Autos A3/BBB+/BBB+ 121
VW SEN EUR Autos A3/A-/BBB+ 145
BATSLN SEN EUR Consumers Baa1/BBB+/BBB+ 65.5
BNFP SEN EUR Consumers A3/A-/-- 76.5
EXHO SEN EUR Consumers --/BBB+/BBB+ 77.5
MOET SEN EUR Consumers --/NR/BBB+ 63.5
NESTLE SEN EUR Consumers Aa1/AA/AA+ 45
PRTP SEN EUR Consumers --/BBB-/-- 189
SUEDZU SEN EUR Consumers Baa2/A-/WD 137
EDF SEN EUR Energy Aa3/A+/AA- 89.5
EDNIM SEN EUR Energy Baa2/BBB+/BBB+ 117
ENBW SEN EUR Energy A2/A-/A 65.5
EOANGR SEN EUR Energy A2/A/A+ 64.5
IBESM SEN EUR Energy A3/A-/A 203
NGGLN SEN EUR Energy Baa1/BBB+/A-*- 89.5
TOTAL SEN EUR Energy Aa1/AA/AA 90.5
CMZB SUB EUR Financials Aa3/A/A+ 257
RBS SEN EUR Financials Aa3/A+/AA+ 205
SANTAN SUB EUR Financials Aa1/AA/AA 261
BASGR SEN EUR Industrials A1*-/A/A+ 67.5
FNCIM SEN EUR Industrials A3/BBB/BBB+ 185
GLEINT SEN EUR Industrials Baa2/BBB-/-- 445
HOLZSW SEN EUR Industrials Baa2/BBB/BBB 167
LINGR SEN EUR Industrials A3/A-/-- 62.5
LXSGR SEN EUR Industrials Baa2/BBB/BBB 123
MTNA SEN EUR Industrials Baa3/BBB/BBB 363
SIEGR SEN EUR Industrials A1/A+/A+ 94.5
XTALN SEN EUR Industrials Baa2/BBB/-- 219
BERTEL SEN EUR TMT Baa2/BBB/BBB+ 121
FRTEL SEN EUR TMT A3/A-/A- 74.5
OTE SEN EUR TMT Baa2/BBB-/BBB 441
TELEFO SEN EUR TMT Baa1/A-*-/A- 175
TELNO SEN EUR TMT A3/A-/BBB+ 75.5
TITIM SEN EUR TMT Baa2/BBB/BBB 279
TLIASS SEN EUR TMT A3/A-/A- 60.5
VOD SEN EUR TMT Baa1/A-/A- 123
WPPLN SEN EUR TMT Baa3/BBB/BBB 127
ACCOR SEN EUR non-iTraxx --/BBB-/BBB- 175

Euro Credit Pilot
SHORT LIST – BUY PROTECTION (PRICES AS OF 05/07/2010)
Issuer Debt Currency iTraxx Sector Rating (Moody's/S&P/Fitch) 5Y CDS (Mid)

AUCHAN SEN EUR Consumers --/A/-- 74.5
CAFP SEN EUR Consumers A2e/A-/A- 87.5
CBRYLN SEN EUR Consumers Baa2*-/BBB*-/BBB- 24.75
COFP SEN EUR Consumers --/BBB-/BBB- 151
DIAG SEN EUR Consumers A3/A-/A- 73.5
HENKEL SEN EUR Consumers A3/A-/A- 56.5
JAPTOB SEN EUR Consumers Aa3/A+/A+ 46.5
PHG SEN EUR Consumers A3/A-/A- 72.5
SCACAP SEN EUR Consumers Baa1/BBB+/-- 92.5
LUFTHA SEN EUR Crossover Ba1/BBB-/-- 253
RWE SEN EUR Energy A2/A/AA- 60.5
VATFAL SEN EUR Energy A2/A/A+ 70.5
VIEFP SEN EUR Energy A3/BBB+/A- 113
CMZB SEN EUR Financials Aa3/A/A+ 115
ISPIM SEN EUR Financials Aa2/A+/AA- 131
MONTE SEN EUR Financials A1/A-/A 161
ADENVX SEN EUR Industrials Baa3/BBB-/-- 155
AIFP SEN EUR Industrials --/A/WD 55.5
AKZANA SEN EUR Industrials Baa1/BBB+/BBB+ 68.5
BAYNGR SEN EUR Industrials A3/A-/A- 55.5
BOUY SEN EUR Industrials --/A-/BBB+ 84.5
DPW SEN EUR Industrials Baa1/BBB+/WD 66.5
DSM SEN EUR Industrials A3/A-/A- 62.5
EADFP SEN EUR Industrials A1/BBB+/BBB+ 173
SANFP SEN EUR Industrials A1/AA-/AA- 73.5
SOLBBB SEN EUR Industrials A3/A/A- 84.5
TNTNA SEN EUR Industrials A3/BBB+/-- 85.5
PORTEL SEN EUR TMT Baa2/BBB*-/BBB 195
STM SEN EUR TMT Baa1/BBB+/A- 73.5
TKA SEN EUR TMT A3/BBB/-- 103
VIVFP SEN EUR TMT Baa2/BBB/BBB 123

Euro Credit Pilot
Performance of our portfolio in June

PERFORMANCE FROM 01/06/2010 UNTIL 06/07/2010
Portfolio vs. Portfolio Benchmark Excess

Financials iBoxx € Financials -82 -18 -64
Non-Financials iBoxx € Non-Financials 10 -1 11
Cash Portfolio -72 -19 -54
Long Positions iTraxx Main long -9 -26 16
Short Positions iTraxx Main short -15 26 -41
CDS -25 0 -25
PERFORMANCE OF NON-FINANCIALS FROM 01/06/2010 UNTIL 06/07/2010
ASW as of ASW as of
01/06/2010 06/07/2010 carry MtM P&L
Benchmark: iBoxx € Non-Financials 113 116 10.86 -11.89 -1.03
Non-Financials 137 140 13.18 -3.38 9.80
Aerospace & Defense
FNCIM 8.125% 03/12/13 149 171 14.25 -79.95 -65.70
Automobiles & Parts
BMW 5% 28/05/15 126 98 12.06 134.54 146.60
DAIGR 9% 30/01/12 128 115 12.23 22.48 34.72
RENAUL 4.375% 27/01/15 263 264 25.26 -1.49 23.77
VW 7% 09/02/16 147 125 14.06 122.69 136.75
Basic Resources
GLEINT 5.375% 30/09/11 343 291 32.90 66.73 99.63
MTNA 8.25% 03/06/13 296 231 28.40 195.49 223.89
XTALN 5.25% 13/06/17 237 222 22.77 93.51 116.28
Chemicals
LINGR 7.375% 14/07/16 387 368 37.08 97.48 134.57
LXSGR 7.75% 09/04/14 161 148 15.41 50.77 66.17
Construction & Materials
CRHID 7.375% 28/05/14 238 176 22.79 244.11 266.91
HOLZSW 4.375% 09/12/14 136 120 13.04 69.60 82.64
Food & Beverage
ABIBB 7.375% 30/01/13 82 85 7.83 -9.20 -1.37
BNFP 5.5% 06/05/15 52 52 5.00 -0.37 4.64
EEEKGA 4.375% 15/07/11 143 139 13.67 3.89 17.56
KFT 6.25% 20/03/15 105 105 10.03 -0.99 9.04
SUEDZU 5.75% 27/02/12 100 107 9.57 -12.16 -2.60
Health Care
MRKGR 3.375% 24/03/15 82 76 7.87 28.18 36.05
ROSW 4.625% 04/03/13 41 40 3.95 3.33 7.29
Industrial Goods & Services (Core)
ABB 4.625% 06/06/13 63 64 6.06 -1.84 4.22
ATCOA 4.75% 05/06/14 72 79 6.88 -29.02 -22.14
JMVOIT 5.375% 21/06/17 203 207 19.49 -25.35 -5.86
MANAG 7.25% 20/05/16 164 168 15.77 -18.22 -2.45
Industrial Transportation
ABESM 4.875% 27/10/21 222 304 21.25 -669.77 -648.53
ATLIM 5.625% 06/05/16 139 151 13.35 -65.02 -51.67
Media
BERTEL 7.875% 16/01/14 158 143 15.13 56.60 71.72
WKLNA 6.375% 10/04/18 159 145 15.22 97.37 112.59

Euro Credit Pilot
ASW as of ASW as of
01/06/2010 06/07/2010 carry MtM P&L
Oil & Gas
ENIIM 5% 28/01/16 82 92 7.90 -50.94 -43.04
GAZPRU 5.875% 01/06/15 311 277 29.86 151.51 181.37
OMV 6.25% 07/04/14 96 110 9.21 -52.55 -43.34
TNEFT 5.381% 27/06/12 261 227 25.02 68.75 93.77
TOTAL 4.75% 10/12/13 25 41 2.39 -58.81 -56.42
Personal & Household Goods (Core)
MOET 3.375% 22/06/12 42 69 4.00 -55.88 -51.88
MOET 4.625% 01/07/11 57 60 5.42 -3.87 1.55
PG 4.125% 07/12/20 49 49 4.75 3.60 8.35
Retail
COFP 6% 27/02/12 81 98 7.76 -30.91 -23.14
PRTP 4% 29/01/13 128 128 12.24 -0.97 11.28
TSCOLN 5.125% 04/10/47 188 162 18.04 459.38 477.42
Technology
IBM 4% 11/11/11 33 45 3.18 -17.92 -14.74
LMETEL 5% 24/06/13 79 99 7.58 -62.70 -55.12
Telecommunications
DT 6% 20/01/17 131 121 12.52 58.00 70.52
DT 8.125% 29/05/12 78 100 7.50 -46.45 -38.95
FRTEL 7.25% 28/01/13 50 71 4.84 -58.12 -53.28
KPN 4.75% 17/01/17 121 116 11.65 32.75 44.39
OTE 5% 05/08/13 293 487 28.12 -544.51 -516.39
T 6.125% 02/04/15 73 74 6.99 -4.62 2.37
TELEFO 5.125% 14/02/13 106 110 10.18 -11.25 -1.06
TELEFO 5.58% 12/06/13 130 150 12.47 -59.57 -47.10
TELNO 4.5% 28/03/14 51 54 4.91 -11.22 -6.31
TITIM 8.25% 21/03/16 247 252 23.67 -29.54 -5.87
TLIASS 4.75% 16/11/21 110 106 10.55 42.61 53.17
TPSA 6% 22/05/14 116 133 11.15 -64.75 -53.60
VOD 6.25% 15/01/16 127 126 12.19 3.72 15.91
Tobacco
BATSLN 5.875% 12/03/15 86 91 8.27 -22.17 -13.90
IMTLN 4.375% 22/11/13 115 115 11.05 0.83 11.88
Travel & Leisure
ACCOR 7.5% 04/02/14 264 251 25.34 49.31 74.65
EXHO 4.5% 28/03/14 77 91 7.36 -54.11 -46.74
LTOIM 5.375% 05/12/16 267 266 25.62 7.68 33.29
Utilities
AWLN 4.625% 07/10/13 71 84 6.85 -40.46 -33.61
CEZCO 4.125% 17/10/13 65 87 6.27 -70.63 -64.36
DANGAS 5.5% 29/06/15 409 382 39.22 112.68 151.90
EDF 5.125% 23/01/15 59 61 5.63 -13.02 -7.39
EDNIM 4.25% 22/07/14 119 123 11.44 -15.45 -4.01
ENBW 6.875% 20/11/18 99 90 9.53 77.81 87.35
ENEL 5.25% 20/06/17 133 125 12.73 50.70 63.43
EOANGR 5.5% 19/01/16 68 64 6.55 22.55 29.11
EWE 4.875% 14/10/19 87 93 8.37 -49.40 -41.03
FRTUM 5% 19/11/13 35 53 3.39 -60.68 -57.29
GSZFP 5.125% 24/06/15 60 86 5.78 -130.52 -124.75
IBESM 3.5% 22/06/15 122 136 11.66 -66.98 -55.32
NGGLN 5% 02/07/18 109 123 10.46 -99.10 -88.64
RTE 4.875% 06/05/15 57 61 5.43 -19.91 -14.48
STATK 4.625% 22/09/17 89 84 8.57 35.09 43.66
VATFAL 5.25% 29/06/15 363 354 34.82 38.27 73.09
VERBND 4.75% 17/04/15 89 97 8.55 -35.08 -26.53

Euro Credit Pilot
PERFORMANCE OF FINANCIALS FROM 01/06/2010 UNTIL 06/07/2010
ASW as of ASW as of
01/06/2010 06/07/2010 carry MtM P&L
Benchmark: iBoxx € Financials 225 235 21.61 -39.26 -17.65
Financials 323 361 30.98 -113.04 -82.06
Banks
ACAFP 5.875% 11/06/19 165 170 15.83 -34.70 -18.87
AIB 4.5% 01/10/12 439 561 42.05 -250.00 -207.94
BPIM 4.125% 22/10/14 194 164 18.60 122.06 140.66
DANBNK 4.878% 15/05/17 536 529 51.41 31.18 82.59
ISPIM 5.75% 28/05/13 256 320 24.50 -180.21 -155.71
RBS 4.625% 22/09/21 546 632 52.35 -341.67 -289.32
SEB 7.0922% 21/12/17 569 527 54.58 217.54 272.12
SNSSNS 5.625% 14/06/12 146 166 14.00 -39.78 -25.77
SOCGEN 7.756% 22/05/13 868 958 83.26 -202.92 -119.66
Insurance
AEGON 7% 29/04/12 163 217 15.59 -105.43 -89.84
ALVGR 6.5% 13/01/25 303 306 29.09 -9.34 19.75
ASSGEN 4.875% 11/11/14 126 127 12.08 -5.27 6.81
AXASA 4.5% 23/01/15 101 109 9.67 -36.99 -27.32
CNPFP 4.75% 22/12/49 620 818 59.44 -711.02 -651.58
EUREKO 7.375% 16/06/14 202 233 19.33 -123.79 -104.45
HANRUE 5.75% 26/02/24 388 407 37.25 -60.17 -22.92
INTNED 4% 18/09/13 144 173 13.81 -89.94 -76.13
MUNRE 5.767% 12/06/17 479 528 45.92 -233.39 -187.47
SCHREI 7% 19/05/14 120 154 11.47 -136.19 -124.72
ZURNVX 4.5% 17/09/14 98 115 9.41 -70.82 -61.41
PERFORMANCE OF LONG LIST (SELL PROTECTION) FROM 01/06/2010 UNTIL 06/07/2010
5Y CDS as of 5Y CDS as of clean price roll roll total

01/06/2010 06/07/2010 performance adj. accrued costs coupon P&L
Benchmark: iTraxx Main long 122 124 -7.7 -2.2 -15.6 -- -- -25.5
Long Positions 145 148 -18.2 4.6 -15.6 -5.2 25.3 -9.1
ACCOR 175 175 -9.0 9.0 -15.6 -11.1 25.3 -1.4
BASGR 62 68 -24.7 -5.3 -15.6 9.4 25.3 -10.9
BATSLN 68 64 24.2 -4.1 -15.6 7.8 25.3 37.7
BERTEL 135 119 71.2 4.9 -15.6 -3.1 25.3 82.7
BMW 123 121 6.6 3.0 -15.6 0.7 25.3 19.9
BNFP 79 77 12.7 -2.7 -15.6 5.9 25.3 25.6
CMZB (SUB) 263 251 32.5 18.3 -15.6 -23.7 25.3 36.8
DAIGR 127 121 25.0 3.6 -15.6 0.7 25.3 39.0
EDF 69 88 -89.4 -4.8 -15.6 5.1 25.3 -79.4
EDNIM 105 113 -39.0 0.4 -15.6 0.3 25.3 -28.6
ENBW 68 64 24.2 -4.1 -15.6 7.2 25.3 37.0
EOANGR 67 64 19.4 -4.2 -15.6 8.3 25.3 33.1
EXHO 79 76 17.6 -2.7 -15.6 5.3 25.3 29.9
FNCIM 191 181 34.1 11.0 -15.6 -13.6 25.3 41.2
FRTEL 60 74 -64.2 -5.8 -15.6 8.5 25.3 -51.8
GLEINT 453 439 17.1 33.3 -15.6 -45.0 25.3 15.1
HOLZSW 201 163 159.3 12.9 -15.6 -10.7 25.3 171.3
IBESM 173 203 -143.3 7.8 -15.6 -10.7 25.3 -136.5
LINGR 55 62 -29.0 -6.3 -15.6 10.0 25.3 -15.5
LXSGR 137 123 61.3 5.1 -15.6 -2.3 25.3 73.8
MOET 61 64 -9.7 -5.3 -15.6 8.5 25.3 3.2
MTNA 361 357 -11.2 26.6 -15.6 -34.8 25.3 -9.7
NESTLE 49 45 27.2 -6.7 -15.6 12.4 25.3 42.6

Euro Credit Pilot

NGGLN 91 90 6.1 -1.2 -15.6 3.2 25.3 17.8
OTE 289 421 -534.7 17.8 -15.6 -45.2 25.3 -552.4
PRTP 171 193 -107.7 7.8 -15.6 -13.2 25.3 -103.4
RBS 219 201 65.4 14.2 -15.6 -17.4 25.3 71.9
SANTAN (SUB) 295 255 145.4 21.9 -15.6 -24.7 25.3 152.4
SIEGR 81 94 -61.0 -3.0 -15.6 2.3 25.3 -51.9
SUEDZU 133 135 -13.5 4.0 -15.6 -6.2 25.3 -5.9
TELEFO 155 171 -80.0 6.2 -15.6 -8.5 25.3 -72.6
TELNO 67 75 -35.2 -4.7 -15.6 6.3 25.3 -23.8
TITIM 239 269 -143.0 14.9 -15.6 -23.1 25.3 -141.5
TLIASS 58 61 -9.3 -5.7 -15.6 9.6 25.3 4.3
TOTAL 72 89 -79.8 -4.3 -15.6 3.8 25.3 -70.6
VOD 115 121 -30.5 1.7 -15.6 -0.2 25.3 -19.3
VW 135 141 -32.4 4.1 -15.6 -3.1 25.3 -21.6
WPPLN 135 129 23.8 4.5 -15.6 -3.1 25.3 35.0
XTALN 237 219 62.4 16.0 -15.6 -18.5 25.3 69.6
PERFORMANCE OF SHORT LIST (BUY PROTECTION) FROM 01/06/2010 UNTIL 06/07/2010

Benchmark: iTraxx Main short 122 124 7.7 2.2 15.6 -- -- 25.5
Short Positions 98 97 -3.7 0.6 15.6 -2.6 -25.3 -15.4
ADENVX 155 155 6.8 -6.7 15.6 8.5 -25.3 -1.2
AIFP 51 55 13.5 6.7 15.6 -10.7 -25.3 -0.3
AKZANA 73 69 -23.4 3.4 15.6 -7.8 -25.3 -37.6
AUCHAN 66 74 35.1 4.8 15.6 -7.0 -25.3 23.2
BAYNGR 55 55 -6.1 6.0 15.6 -10.5 -25.3 -20.3
BOUY 77 85 36.2 3.3 15.6 -5.1 -25.3 24.8
CAFP 71 86 69.9 4.4 15.6 -5.3 -25.3 59.3
CBRYLN 29 25 -32.9 9.4 15.6 -16.1 -25.3 -49.3
CMZB 135 113 -99.8 -5.1 15.6 1.5 -25.3 -113.1
COFP 143 149 33.2 -5.1 15.6 7.7 -25.3 26.1
DIAG 81 74 -37.0 2.2 15.6 -6.1 -25.3 -50.6
DPW 65 67 5.2 4.7 15.6 -7.8 -25.3 -7.6
DSM 65 63 -14.7 4.6 15.6 -8.9 -25.3 -28.8
EADFP 185 171 -53.1 -10.5 15.6 10.0 -25.3 -63.4
HENKEL 54 57 8.8 6.3 15.6 -10.3 -25.3 -4.9
ISPIM 147 125 -97.3 -6.5 15.6 4.6 -25.3 -108.9
JAPTOB 45 46 -2.4 7.4 15.6 -11.7 -25.3 -16.4
LUFTHA 279 247 -114.9 -20.3 15.6 25.0 -25.3 -119.9
MONTE 181 157 -99.6 -10.4 15.6 8.8 -25.3 -110.9
PHG 70 73 10.8 4.1 15.6 -7.0 -25.3 -1.8
PORTEL 197 189 -24.2 -11.6 15.6 9.6 -25.3 -36.0
RWE 60 62 4.6 5.4 15.6 -8.5 -25.3 -8.2
SANFP 57 75 83.7 6.4 15.6 -7.2 -25.3 73.2
SCACAP 90 92 8.4 1.4 15.6 -3.4 -25.3 -3.3
SOLBBB 81 85 17.1 2.6 15.6 -5.3 -25.3 4.7
STM 66 73 30.1 4.8 15.6 -6.3 -25.3 18.9
TKA 109 103 -27.7 -1.4 15.6 -0.3 -25.3 -39.0
TNTNA 81 85 17.1 2.6 15.6 -4.6 -25.3 5.4
VATFAL 66 70 15.3 4.7 15.6 -7.8 -25.3 2.4
VIEFP 94 111 83.5 1.4 15.6 -0.3 -25.3 75.0
VIVFP 115 123 39.9 -1.6 15.6 3.1 -25.3 31.6

Euro Credit Pilot
Notes

Euro Credit Pilot
Notes

Euro Credit Pilot
Notes

Euro Credit Pilot
Disclaimer
Our recommendations are based on information obtained from, or are based upon public information sources that we consider to be reliable but for the completeness and
accuracy of which we assume no liability. All estimates and opinions included in the report represent the independent judgment of the analysts as of the date of the issue. We reserve the
right to modify the views expressed herein at any time without notice. Moreover, we reserve the right not to update this information or to discontinue it altogether without notice.
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suitable for certain investors depending on their specific investment objectives and time horizon or in the context of their overall financial situation. The investments discussed
may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange may have an adverse effect on the value of investments.
Furthermore, past performance is not necessarily indicative of future results. In particular, the risks associated with an investment in the financial, money market or investment
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Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany.
b) UniCredit Bank AG London Branch, Moor House, 120 London Wall, London EC2Y 5ET, United Kingdom.
Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany and subject to limited regulation by the Financial
Services Authority (FSA), 25 The North Colonnade, Canary Wharf, London E14 5HS, United Kingdom. Details about the extent of our regulation by the Financial Services
Authority are available from us on request.
c) UniCredit Bank AG Milan Branch, Via Tommaso Grossi, 10, 20121 Milan, Italy, duly authorized by the Bank of Italy to provide investment services.
Regulatory authority: “Bank of Italy”, Via Nazionale 91, 00184 Roma, Italy and Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany.
d) UniCredit CAIB AG, Julius-Tandler-Platz 3, 1090 Vienna, Austria
Regulatory authority: Finanzmarktaufsichtsbehörde (FMA), Praterstrasse 23, 1020 Vienna, Austria
e) UniCredit Securities, Boulevard Ring Office Building, 17/1 Chistoprudni Boulevard, Moscow 101000, Russia
Regulatory authority: Federal Service on Financial Markets, 9 Leninsky prospekt, Moscow 119991, Russia
f) UniCredit Menkul Değerler A.Ş., Büyükdere Cad. No. 195, Büyükdere Plaza Kat. 5, 34394 Levent, Istanbul, Turkey
Regulatory authority: Sermaye Piyasası Kurulu – Capital Markets Board of Turkey, Eskişehir Yolu 8.Km No:156, 06530 Ankara, Turkey
g) Zagrebačka banka, Paromlinska 2, HR-10000 Zagreb, Croatia
Regulatory authority: Croatian Agency for Supervision of Financial Services, Miramarska 24B, 10000 Zagreb, Croatia
h) UniCredit Bulbank, Sveta Nedelya Sq. 7, BG-1000 Sofia, Bulgaria
Regulatory authority: Financial Supervision Commission (FSC), 33 Shar Planina str.,1303 Sofia, Bulgaria
This report may contain excerpts sourced from UniCredit Bank Russia, UniCredit Tiriac Bank, Bank Pekao or Yapi Kredi all members of the UniCredit group. If so, the pieces and
the contents have not been materially altered.
POTENTIAL CONFLICTS OF INTERESTS

Accor 3; A2A 3; Air Liquide 3; Allianz 1a, 1b, 6a; Allied Irish Banks 3; Alstom 2; Arcelor Mittal 3; Assicurazioni Generali 3; Aviva 6a; AXA 3; Banca Monte dei Paschi di Siena 3;
Banco Espirito Santo 3; Banco Santander 3; Bank of America 2, 3; Barclays 2, 3; Bayer AG 1a; BayernLB 3; BCP 2, 3; BMW AG 2, 3; BNP Paribas 2, 3; Bouygues 3; Caja
Madrid 2, 3; Carrefour 3; CEZ 3, 4; Citigroup 2; Commerzbank 2, 3; Crédit Agricole 3; Credit Suisse 2; Daimler AG 3; Danone 3; Danske Bank 2, 3; Deutsche Bank 1a, 2, 3;
Deutsche Telekom 3; Dexia 2, 3; DnB NOR 2, 3; E.ON 1a, 3; EADS NV 3; EDF 3; Edison 2, 3, 7; EDP 3; EnBW 2; Endesa 3; Enel 2, 3, 6a, 7; ENI 2, 3, 7; Erste Bank 3;
Finmeccanica SpA 3, 7; France Telecom 3; Gas Natural 3; GDF Suez 3; GE Capital 2; Goldman Sachs 2, 3; Hera 7; Holcim 2; HSH Nordbank 3; Iberdrola 3; Imperial Tobacco 2;
ING 2, 3; Intesa Sanpaolo 3; Italcementi S.p.A. 2, 3, 6a; K+S 2; KPN NV 2; Linde AG 1a; Lloyds Banking Group 2, 3; Lottomatica 2, 3, 7; LVMH 3; Michelin 3; Nederlandse Gas 3;
Nokia Oyi 3; Nordea 2, 3; OMV 3; Peugeot 3; Philip Morris International 3; PPR 3; Renault 3; Shell 3; RWE 2; Sanofi-Aventis 3; SEB 2, 3; SFR 3; Société Générale 2, 3;
STMicroelectronics N.V. 3; Südzucker 2; Svenska Handelsbanken 3; Telecom Italia 3; Telefonica 3; Telekom Austria 3; TP Group 3; Terna 3; Total 3; UBS 2, 3; Verbund 3; Vinci 3;
Vivendi 3; Voith 2; Volkswagen 2, 3, 4; Caisses d'Epargne et de Prevoyance 3; Raiffeisen Zentralbank Österreich AG 3;
Key 1a: UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch, UniCredit Securities, UniCredit Menkul Değerler A.Ş.,
Zagrebačka banka and UniCredit Bulbank and/or a company affiliated with it (pursuant to relevant domestic law) owns at least 2 % of the capital stock of the company.
Key 1b: The analyzed company owns at least 2% of the capital stock of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch,
UniCredit Securities, UniCredit Menkul Değerler A.Ş., Zagrebačka banka and UniCredit Bulbank and/or a company affiliated with it (pursuant to relevant domestic law).
Key 2: UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch and UniCredit Securities, UniCredit Menkul Değerler A.Ş.,
Zagrebačka banka and UniCredit Bulbank and/or a company affiliated with it (pursuant to relevant domestic law) belonged to a syndicate that has acquired securities or any
related derivatives of the analyzed company within the twelve months preceding publication, in connection with any publicly disclosed offer of securities of the analyzed company,
or in any related derivatives.
Key 3: UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch and UniCredit Securities, UniCredit Menkul Değerler A.Ş.,
Zagrebačka banka and UniCredit Bulbank and/or a company affiliated (pursuant to relevant domestic law) administers the securities issued by the analyzed company on the
stock exchange or on the market by quoting bid and ask prices (i.e. acts as a market maker or liquidity provider in the securities of the analyzed company or in any related
derivatives)
Key 4: The analyzed company and UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch and UniCredit Securities, UniCredit
Menkul Değerler A.Ş., Zagrebačka banka and UniCredit Bulbank and/or a company affiliated (pursuant to relevant domestic law) concluded an agreement on services in
connection with investment banking transactions in the last 12 months, in return for which the Bank received a consideration or promise of consideration.
Key 5: The analyzed company and UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch and UniCredit Securities, UniCredit Menkul
Değerler A.Ş., Zagrebačka banka and UniCredit Bulbank and/or a company affiliated (pursuant to relevant domestic law) have concluded an agreement on the preparation of
analyses.
Key 6a: Employees of UniCredit Bank AG Milan Branch and/or members of the Board of Directors of UniCredit (pursuant to relevant domestic law) are members of the Board of
Directors of the Issuer. Members of the Board of Directors of the Issuer hold office in the Board of Directors of UniCredit (pursuant to relevant domestic law).
Key 6b: The analyst is on the supervisory/management board of the company they cover.
Key 7: UniCredit Bank AG Milan Branch and/or other Italian banks belonging to the UniCredit Group (pursuant to relevant domestic law) extended significant amounts of credit
facilities to the Issuer.
UniCredit Research page 88

Euro Credit Pilot
RECOMMENDATIONS, RATINGS AND EVALUATION METHODOLOGY

Company Date Rec. Company Date Rec. Company Date Rec.
AALLN 01/02/2010 Marketweight EXPNLN 03/03/2010 Marketweight SABIC 01/06/2010 no rec.
ABESM 06/07/2010 Underweight FNCIM 04/08/2009 Overweight SANDVK 05/05/2010 Marketweight
ABESM 06/07/2010 Underweight FNCIM 30/07/2009 Overweight SANDVK 05/05/2010 Marketweight
ABIBB 02/02/2010 Overweight FRTEL 04/11/2009 Marketweight SDFGR 26/11/2009 Underweight
ABNANV 06/07/2010 Marketweight FRTEL 29/10/2009 Marketweight SDFGR 13/11/2009 Marketweight
ACCOR 25/02/2010 Overweight GASSM 28/04/2010 Marketweight SDFGR 07/10/2009 Overweight
ACCOR 27/08/2009 Underweight GASSM 05/11/2009 Overweight SECURI 11/11/2009 Marketweight
ACCOR 17/07/2009 Marketweight GASSM 04/11/2009 Overweight SESGLX 01/06/2010 Marketweight
ADENVX 01/06/2010 Marketweight GAZPRU 04/08/2009 Overweight SESGLX 05/05/2010 Underweight
AEMSPA 03/03/2010 Marketweight GSK 05/02/2010 Marketweight SESGLX 07/10/2009 Marketweight
AEMSPA 02/10/2009 Underweight HNDA 06/07/2010 Underweight SIEGR 04/11/2009 Marketweight
AIFP 01/02/2010 Underweight HNDA 05/05/2010 Marketweight SLB 23/02/2010 Marketweight
AIG 06/07/2010 Marketweight HNDA 30/09/2009 Overweight SLB 19/02/2010 Underweight
AIG 30/03/2010 no rec. HOLZSW 01/06/2010 Overweight SOLBBB 07/10/2009 Underweight
AKZANA 26/04/2010 Underweight HOLZSW 05/05/2010 Overweight SOLBBB 29/09/2009 Marketweight
AKZANA 03/03/2010 Marketweight HOLZSW 04/11/2009 Marketweight SOLBBB 08/09/2009 Underweight
AMXLMM 06/07/2010 event driven HUWHY 05/05/2010 event driven SSELN 30/03/2010 Underweight
ARRFP 29/06/2010 Marketweight INTNED 02/02/2010 Marketweight STATK 19/02/2010 Marketweight
ASML 05/05/2010 Marketweight INTNED 04/11/2009 no rec. SUEDZU 19/10/2009 Marketweight
ATCOA 04/11/2009 Overweight ITCIT 30/03/2010 Marketweight SYNNVX 02/02/2010 Marketweight
ATCOA 04/08/2009 Marketweight JMVOIT 04/11/2009 Overweight TELNO 06/05/2010 Overweight
AZN 29/01/2010 Underweight JNJ 04/11/2009 Underweight TELNO 05/05/2010 Underweight
AZN 23/10/2009 Marketweight JNJ 02/09/2009 Marketweight TELNO 05/05/2010 Underweight
BASGR 04/11/2009 Marketweight KFT 07/09/2009 Underweight TELNO 10/02/2010 Marketweight
BASGR 29/10/2009 Marketweight LINGR 02/02/2010 Marketweight TELNO 05/10/2009 Overweight
BASGR 30/09/2009 Overweight LMETEL 09/12/2009 Marketweight TELNO 05/10/2009 Overweight
BAYNGR 03/09/2009 Underweight LXSGR 11/05/2010 Marketweight TELNO 09/07/2009 Marketweight
BAYNGR 29/07/2009 Marketweight LXSGR 13/08/2009 Overweight TENN 03/03/2010 Marketweight
BERTEL 07/10/2009 Overweight MANAG 30/03/2010 Overweight TITIM 30/04/2010 Marketweight
BERTEL 04/08/2009 Marketweight MANAG 02/02/2010 Marketweight TITIM 13/04/2010 Overweight
BGGRP 04/08/2009 Marketweight MANAG 30/11/2009 Overweight TITIM 02/02/2010 Marketweight
BHP 01/02/2010 Underweight MICH 31/07/2009 Marketweight TITIM 02/02/2010 Marketweight
BMW 01/06/2010 Overweight MOET 30/07/2009 Marketweight TKA 11/12/2009 Underweight
BMW 05/05/2010 Marketweight MRK 09/12/2009 Marketweight TKAGR 14/05/2010 Marketweight
BMW 05/05/2010 Marketweight MRKGR 18/03/2010 Overweight TKAGR 03/03/2010 Overweight
BMW 30/09/2009 Overweight MRKGR 01/03/2010 Underweight TKAGR 12/02/2010 Overweight
BMY 09/12/2009 Underweight MTNA 01/02/2010 Overweight TLIASS 06/05/2010 Overweight
BOGAEI 05/05/2010 Marketweight MTNA 03/08/2009 Marketweight TOTAL 31/07/2009 Overweight
BOUY 04/11/2009 Underweight MTNA 29/07/2009 Marketweight TOYOTA 06/07/2010 Marketweight
BPLN 17/06/2010 Overweight NK 04/11/2009 Underweight TOYOTA 03/03/2010 Underweight
CAFP 17/07/2009 Underweight NOKIA 09/12/2009 Marketweight TOYOTA 30/09/2009 Marketweight
CARGIL 06/07/2010 event driven NOVART 22/10/2009 Underweight UNANA 03/03/2010 Underweight
CEIFP 07/10/2009 Marketweight OMV 09/12/2009 Marketweight UNANA 04/02/2010 Underweight
CEZCO 02/02/2010 Marketweight OTE 02/02/2010 Overweight UNANA 06/08/2009 Marketweight
CEZCO 21/12/2009 Overweight PEUGOT 24/11/2009 Marketweight VALEBZ 30/03/2010 Marketweight
CEZCO 26/10/2009 Marketweight PEUGOT 30/09/2009 Underweight VERBND 30/03/2010 Marketweight
DAIGR 27/04/2010 Overweight PEUGOT 04/08/2009 Marketweight VERBND 03/03/2010 Overweight
DAIGR 30/03/2010 Marketweight PEUGOT 29/07/2009 Marketweight VERBND 02/03/2010 Marketweight
DAIGR 07/10/2009 Overweight PFE 23/10/2009 Marketweight VERBND 04/08/2009 Overweight
DAIGR 01/10/2009 Marketweight PORTEL 01/07/2010 Underweight VERBND 28/07/2009 Overweight
DAIGR 30/09/2009 Overweight PORTEL 02/06/2010 Marketweight VIEFP 10/05/2010 Marketweight
DANGAS 02/11/2009 Marketweight PRUFIN 06/07/2010 Marketweight VIVFP 15/04/2010 Underweight
DANGAS 07/10/2009 Marketweight PRUFIN 30/03/2010 no rec. VIVFP 07/10/2009 Marketweight
DSM 03/11/2009 Underweight RBOSCH 06/07/2010 Underweight VIVFP 09/09/2009 Underweight
EADFP 01/06/2010 Marketweight RBOSCH 29/01/2010 Marketweight VLVY 23/04/2010 Marketweight
EADFP 14/05/2010 Marketweight RBOSCH 07/10/2009 Underweight VLVY 23/04/2010 Marketweight
EADFP 20/11/2009 Underweight RBOSCH 06/10/2009 Marketweight VLVY 30/03/2010 Underweight
EDF 25/01/2010 Marketweight RBOSCH 01/10/2009 Overweight VLVY 23/10/2009 Marketweight
EDF 09/07/2009 Overweight RBOSCH 30/09/2009 Marketweight VLVY 23/10/2009 Marketweight
EDNIM 30/03/2010 Overweight REDELE 30/03/2010 Underweight VLVY 30/09/2009 Overweight
ELEPOR 05/05/2010 Underweight RENAUL 01/06/2010 Marketweight VW 30/03/2010 Overweight
ELIASO 13/01/2010 Underweight RENAUL 05/05/2010 Overweight VW 30/09/2009 Marketweight
ENBW 07/01/2010 Overweight RENAUL 06/04/2010 Underweight VW 27/07/2009 Overweight
ENBW 03/08/2009 Marketweight RENEPL 05/05/2010 Marketweight WKLNA 01/06/2010 Overweight
ENEL 05/05/2010 Marketweight RENEPL 30/03/2010 Overweight WMT 07/10/2009 Marketweight
ENEL 14/09/2009 Overweight RENEPL 29/07/2009 Marketweight WPPLN 01/06/2010 Marketweight
ENEL 04/08/2009 Marketweight RENTKL 07/10/2009 Marketweight WPPLN 09/12/2009 Overweight
ENGSM 02/09/2009 Underweight RWE 04/11/2009 Marketweight WPPLN 10/09/2009 Marketweight
EUTELS 05/05/2010 Underweight RWE 02/11/2009 Marketweight XTALN 03/03/2010 Overweight
EUTELS 30/03/2010 event driven RWE 17/08/2009 Underweight XTALN 08/02/2010 Overweight
Overview of our ratings

You will find the history of rating regarding recommendation changes as well as an overview of the breakdown in absolute and relative terms of our investment ratings on our
websites www.research.unicreditgroup.eu and http://www.cib-unicredit.com/research-disclaimer under the heading “Disclaimer.”
Note on the bases of evaluation for interest-bearing securities:
Our investment ratings are in principle judgments relative to an index as a benchmark.

Euro Credit Pilot
Issuer level:
Marketweight: We recommend having the same portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML
EUR HY index for sub-investment grade names).
Overweight: We recommend having a higher portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR
HY index for sub-investment grade names).
Underweight: We recommend having a lower portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR
HY index for sub-investment grade names).
Instrument level:
Core hold: We recommend holding the respective instrument for investors who already have exposure.
Sell: We recommend selling the respective instrument for investors who already have exposure.
Buy: We recommend buying the respective instrument for investors who already have exposure.
Trading recommendations for fixed-interest securities mostly focus on the credit spread (yield difference between the fixed-interest security and the relevant government bond or
swap rate) and on the rating views and methodologies of recognized agencies (S&P, Moody’s, Fitch). Depending on the type of investor, investment ratings may refer to a short
period or to a 6 to 9-month horizon.
The prices used in the analysis are the closing prices of the appropriate local trading system or the closing prices on the relevant local stock exchanges. In the case of unlisted
stocks, the average market prices based on various major broker sources (OTC market) are used.
Coverage Policy
A list of the companies covered by UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch, UniCredit Securities, UniCredit
Menkul Değerler A.Ş., Zagrebačka banka and UniCredit Bulbank is available upon request.
Frequency of reports and updates
It is intended that each of these companies be covered at least once a year, in the event of key operations and/or changes in the recommendation. Companies for which UniCredit Bank AG
Milan Branch acts as Sponsor or Specialist must be covered in accordance with the regulations of the competent market authority.
SIGNIFICANT FINANCIAL INTEREST:
UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch, UniCredit Securities, UniCredit Menkul Değerler A.Ş., Zagrebačka banka and
UniCredit Bulbank and/or a company affiliated (pursuant to relevant national German, Italian, Austrian, UK and Russian law) with them regularly trade shares of the analyzed
company. UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch, UniCredit Securities, UniCredit Menkul Değerler A.Ş.,
Zagrebačka banka and UniCredit Bulbank may hold significant open derivative positions on the stocks of the company which are not delta-neutral.
Analyses may refer to one or several companies and to the securities issued by them. In some cases, the analyzed issuers have actively supplied information for this analysis.
ANALYST DECLARATION
The author’s remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly.
ORGANIZATIONAL AND ADMINISTRATIVE ARRANGEMENTS TO AVOID AND PREVENT CONFLICTS OF INTEREST
To prevent or remedy conflicts of interest, UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch, UniCredit Securities,
UniCredit Menkul Değerler A.Ş., Zagrebačka banka and UniCredit Bulbank have established the organizational arrangements required from a legal and supervisory aspect,
adherence to which is monitored by its compliance department. Conflicts of interest arising are managed by legal and physical and non-physical barriers (collectively referred to
as “Chinese Walls”) designed to restrict the flow of information between one area/department of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG,
UniCredit Bank AG Milan Branch, UniCredit Securities, UniCredit Menkul Değerler A.Ş., Zagrebačka banka and UniCredit Bulbank and another. In particular, Investment Banking
units, including corporate finance, capital market activities, financial advisory and other capital raising activities, are segregated by physical and non-physical boundaries from
Markets Units, as well as the research department. In the case of equities execution by UniCredit Bank AG Milan Branch, other than as a matter of client facilitation or delta
hedging of OTC and listed derivative positions, there is no proprietary trading. Disclosure of publicly available conflicts of interest and other material interests is made in the
research. Analysts are supervised and managed on a day-to-day basis by line managers who do not have responsibility for Investment Banking activities, including corporate
finance activities, or other activities other than the sale of securities to clients.
ADDITIONAL REQUIRED DISCLOSURES UNDER THE LAWS AND REGULATIONS OF JURISDICTIONS INDICATED
Notice to Austrian investors
This document does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any securities and neither this document
nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever.
This document is confidential and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on to any other person or published, in
whole or part, for any purpose.
Notice to Czech investors
This report is intended for clients of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch, UniCredit Securities,
UniCredit Menkul Değerler A.Ş., Zagrebačka banka or UniCredit Bulbank in the Czech Republic and may not be used or relied upon by any other person for any purpose.
Notice to Italian investors
This document is not for distribution to retail clients as defined in article 26, paragraph 1(e) of Regulation n. 16190 approved by CONSOB on October 29, 2007.
In the case of a short note, we invite the investors to read the related company report that can be found on UniCredit Research website www.research.unicreditgroup.eu.
Notice to Russian investors
As far as we are aware, not all of the financial instruments referred to in this analysis have been registered under the federal law of the Russian Federation “On the Securities
Market” dated April 22, 1996, as amended, and are not being offered, sold, delivered or advertised in the Russian Federation.
Notice to Turkish investors
Investment information, comments and recommendations stated herein are not within the scope of investment advisory activities. Investment advisory services are provided in
accordance with a contract of engagement on investment advisory services concluded with brokerage houses, portfolio management companies, non-deposit banks and the
clients. Comments and recommendations stated herein rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not suit
your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely on the information stated here may not result in consequences
that meet your expectations.
Notice to Investors in Japan
This document does not constitute or form part of any offer for sale or subscription for or solicitation of any offer to buy or subscribe for any securities and neither this document
nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever.
Notice to UK investors
This communication is directed only at clients of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch, UniCredit
Securities, UniCredit Menkul Değerler A.Ş., Zagrebačka banka and UniCredit Bulbank who (i) have professional experience in matters relating to investments or (ii) are persons
falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 or (iii) to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This communication must
not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant
persons and will be engaged in only with relevant persons.

Euro Credit Pilot
Notice to U.S. investors

This report is being furnished to U.S. recipients in reliance on Rule 15a-6 ("Rule 15a-6") under the U.S. Securities Exchange Act of 1934, as amended. Each U.S. recipient of this
report represents and agrees, by virtue of its acceptance thereof, that it is such a "major U.S. institutional investor" (as such term is defined in Rule 15a-6) and that it understands
the risks involved in executing transactions in such securities. Any U.S. recipient of this report that wishes to discuss or receive additional information regarding any security or
issuer mentioned herein, or engage in any transaction to purchase or sell or solicit or offer the purchase or sale of such securities, should contact a registered representative of
UniCredit Capital Markets, Inc. (“UCI Capital Markets”).
Any transaction by U.S. persons (other than a registered U.S. broker-dealer or bank acting in a broker-dealer capacity) must be effected with or through UCI Capital Markets.
The securities referred to in this report may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S.
reporting and/or other requirements. Available information regarding the issuers of such securities may be limited, and such issuers may not be subject to the same auditing and
reporting standards as U.S. issuers.
The information contained in this report is intended solely for certain "major U.S. institutional investors" and may not be used or relied upon by any other person for any purpose.
Such information is provided for informational purposes only and does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as
amended, or under any other U.S. federal or state securities laws, rules or regulations. The investment opportunities discussed in this report may be unsuitable for certain
investors depending on their specific investment objectives, risk tolerance and financial position. In jurisdictions where UCI Capital Markets is not registered or licensed to trade in
securities, commodities or other financial products, transactions may be executed only in accordance with applicable law and legislation, which may vary from jurisdiction to
jurisdiction and which may require that a transaction be made in accordance with applicable exemptions from registration or licensing requirements.
The information in this publication is based on carefully selected sources believed to be reliable, but UCI Capital Markets does not make any representation with respect to its
completeness or accuracy. All opinions expressed herein reflect the author’s judgment at the original time of publication, without regard to the date on which you may receive
such information, and are subject to change without notice.
UCI Capital Markets may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. These publications
reflect the different assumptions, views and analytical methods of the analysts who prepared them. Past performance should not be taken as an indication or guarantee of future
performance, and no representation or warranty, express or implied, is provided in relation to future performance.
UCI Capital Markets and any company affiliated with it may, with respect to any securities discussed herein: (a) take a long or short position and buy or sell such securities; (b)
act as investment and/or commercial bankers for issuers of such securities; (c) act as market makers for such securities; (d) serve on the board of any issuer of such securities;
and (e) act as paid consultant or advisor to any issuer.
The information contained herein may include forward-looking statements within the meaning of U.S. federal securities laws that are subject to risks and uncertainties. Factors
that could cause a company’s actual results and financial condition to differ from expectations include, without limitation: political uncertainty, changes in general economic
conditions that adversely affect the level of demand for the company’s products or services, changes in foreign exchange markets, changes in international and domestic
financial markets and in the competitive environment, and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their
entirety by this cautionary statement
This document may not be distributed in Canada or Australia.

Euro Credit Pilot
UniCredit Research*
Dr. Ingo Heimig
Thorsten Weinelt, CFA Head of Research Operations
Global Head of Research & Chief Strategist +49 89 378-13952
+49 89 378-15110 ingo.heimig@unicreditgroup.de
thorsten.weinelt@unicreditgroup.de
Credit Research
Luis Maglanoc, CFA, Head

+49 89 378-12708
Credit Strategy & Structured Credit Research Financials Credit Research

Dr. Philip Gisdakis, Head Franz Rudolf, CEFA, Head
Credit Strategy Covered Bonds
+49 89 378-13228 +49 89 378-12449
philip.gisdakis@unicreditgroup.de franz.rudolf@unicreditgroup.de
Dr. Tim Brunne, Quantitative Credit Strategy Alexander Plenk, CFA, Deputy Head
+49 89 378-13521 Banks
tim.brunne@unicreditgroup.de +49 89 378-12429
alexander.plenk@unicreditgroup.de
Markus Ernst, Credit Strategy & Structured Credit
+49 89 378-14213 Amey Dyckmans
markus.ernst1@unicreditgroup.de Sub-Sovereigns & Agencies
+49 89 378-12004
Dr. Stefan Kolek, EEMEA Corporate Credits & Strategy anna-maria.dyckmans@unicreditgroup.de
+49 89 378-12495
stefan.kolek@unicreditgroup.de Florian Hillenbrand, CFA
Covered Bonds
Dr. Christian Weber, CFA, Credit Strategy +49 89 378-12961
+49 89 378-12250 florian.hillenbrand@unicreditgroup.de
christian.weber@unicreditgroup.de
Luis Maglanoc, CFA
Insurance, Banks, RAS
+49 89 378-12708
Corporate Credit Research luis.maglanoc@unicreditgroup.de
Stephan Haber, CFA, Co-Head
Telecoms, Cable, Technology Natalie Tehrani Monfared
+49 89 378-15192 Regulatory & Accounting Service
stephan.haber@unicreditgroup.de +49 89 378-12242
natalie.tehrani@unicreditgroup.de
Dr. Sven Kreitmair, CFA, Co-Head
Automotive, Media Dr. Dietmar Tzschentke
+49 89 378-13246 Banks
sven.kreitmair@unicreditgroup.de +49 89 378-12960
dietmar.tzschentke@unicreditgroup.de
Jana Arndt, CFA
Basic Resources, Industrial G&S
+49 89 378-13211
Carmen Hummel
Consumers, Retail
+49 89 378-12252
Christian Kleindienst
Utilities, Oil & Gas
+49 89 378-12650
Rocco Schilling
Healthcare, Tobacco, Tollroads, Utilities
+49 89 378-15449
Jochen Schlachter
Chemicals, Construction & Materials
+49 89 378-13212
Publication Address
UniCredit Research
Corporate & Investment Banking Bloomberg
UniCredit Bank AG UCCR
Arabellastrasse 12
D-81925 Munich Internet
Tel. +49 89 378-18927 www.research.unicreditgroup.eu
Fax +49 89 378-18352
*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit CAIB AG (UniCredit CAIB), UniCredit Securities (UniCredit Securities),
UniCredit Menkul Değerler A.Ş. (UniCredit Menkul), Zagrebačka banka and UniCredit Bulbank.

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Euro Credit

Economics & FI/FX Research

“ Beware of the 'Great Correlation'

UniCredit Research page 2 See last pages for disclaimer.

■ Debt-Equity-Linkage: Given a significant rise in risk aversion, the level of correlation

Markus Ernst (UniCredit Bank) Dr. Stefan Kolek (UniCredit Bank)

Dr. Christian Weber, CFA (UniCredit Bank) Corporate Credit Research

UniCredit Research page 3 See last pages for disclaimer.

Story of the month

Correlation Average Portfolio Spread Correlation Volatility

0.6 200 0.6 6

0.3 100 0.3 3

UniCredit Research page 4 See last pages for disclaimer.

EARLY INDICATORS SUGGEST SLOWER ECONOMIC GROWTH

Selected PMI indices New orders to inventories ratio vs. US GDP

GDP (% qoq, LS) New Orders-to-Inventories (RS)

Source: Bloomberg, UniCredit Research

UniCredit Research page 5 See last pages for disclaimer.

Micro Fundamentals: Earnings Dispersion

1.0 200% 10%

Source: Bloomberg, UniCredit Research

UniCredit Research page 6 See last pages for disclaimer.

Debt-Equity Linkage: The correlation game

Correlation Euro STOXX Correlation Implied Volatility

0.6 3,000 0.6

0.1 500 0.1 10

Source: Bloomberg, UniCredit Research

UniCredit Research page 7 See last pages for disclaimer.

Credit Quality Trend: Default cycle uncertainty

US recession Europe SG hist DR

12M trailing default rate

UniCredit Research page 8 See last pages for disclaimer.

Market Technicals: Bond supply vs. market spreads

EUROPEAN PRIMARY BOND MARKET ACTIVITY AND MARKET SPREAD LEVELS

Market Technicals are

Source: iBoxx, Bondradar, UniCredit Research

UniCredit Research page 9 See last pages for disclaimer.

Valuation & Timing

Strategic View: …while longer-term prospects deteriorate

UniCredit Research page 10 See last pages for disclaimer.

Spread Forecast Table

actual forecast actual forecast

250 250 200 200

1200 1200 A iBoxx universe o o

1100 1100 BBB iBoxx universe – –

1000 1000 Telecoms iBoxx universe o o

900 900 Automobiles iBoxx universe – –

700 700 Utilities iBoxx universe o o

Source: UniCredit Research

UniCredit Research page 11 See last pages for disclaimer.

Other Credit Markets

SovX WE (USD) EUR/USD Greece 5Y CDS quanto adj. (EOD)

160 1.15 Greece 5Y CDS (in USD) (RS)

100 1.30 -20 600

Source: Markit, Bloomberg, UniCredit Research

UniCredit Research page 12 See last pages for disclaimer.

Securitization: Issuance in the doldrums for longer?

UniCredit Research page 13 See last pages for disclaimer.

EEMEA Corporates: Risk of more recoupling

CORRELATION IN EEMEA CREDITS INCREASED… BUT TO DIFFERENT DEGREES

Jun-10 Jan-10 High Yield-EEMEA Corporates High Yield-Kazakh Corporates

Source: Markit, Bloomberg, JPM, UniCredit Research

UniCredit Research page 14 See last pages for disclaimer.

CREDIT ALLOCATION TABLE