October 2013 Scandi High-Yield Handbook. - the credit handbook of selected high-yield corporate issuers and issues in the Scandinavian region.

Transcription

1 Markets Investment Research October 213 Scandi High-Yield Handbook - the credit handbook of selected high-yield corporate issuers and issues in the Scandinavian region.

2 Fixed Income Credit Research Thomas Hovard Head of Credit Research (+45) hova@danskebank.com Louis Landeman TMT (+46) llan@danskebank.com Åse Haagensen High Yield (+47) ha@danskebank.com Henrik Arnt Financials, EUR Strategy (+45) heand@danskebank.com Jakob Magnussen Utilities, Energy (+45) jakja@danskebank.com Brian Børsting Industrials (+45) brbr@danskebank.com Asbjørn Purup Andersen Portfolio Strategy (+45) apu@danskebank.com Gabriel Bergin Industrials, SEK Strategy (+46) gabe@danskebank.com Kasper From Larsen High Yield, Industrials (+45) kasla@danskebank.com Bjørn Kristian Røed Shipping (Equity & Credit) (+47) bred@danskebank.com Mads Rosendal Industrials, Pulp & Paper (+45) madro@danskebank.com Nils Henrik Aspeli Real Estate (+47) nas@danskebank.com Wiveca Swarting Real Estate, Construction (+46) wsw@danskebank.com Find the latest Credit Research Danske Bank Markets: Bloomberg: DRCR<GO>

3 Investment Research 21 October 213 Scandi High-Yield Handbook Volume 1 The intention of this publication is to provide a quick and simple reference guide to selected Scandinavian high-yield bond issuers, including a company-specific overview with credit characteristics and indication of valuation relative to the fair market rate curves. The handbook covers a broad range of the regional issuers with a credit rating from either Danske Bank Markets or one of the three major rating agencies. We are pleased to introduce the first volume of the Scandi High-Yield Handbook for corporate bond issuers from the Fixed Income Credit Research team at Danske Bank Markets. Table 1. Issuers included in this Scandi High-Yield Handbook Company DBM* Moody's S&P Fitch Company DBM Moody's S&P Fitch Akelius Fastigheter BB Prosafe BB Color Group BB- SAS Caa1 B- DFDS BB+ Seadrill BB+ DLG Finance BB- Stena Ba3 BB Finnair BB Stolt-Nielsen BB+ Fred Olsen Energy BB+ Stora Enso Ba2 BB BB- ISS B1 BB- Tallink Group BB J Lauritzen B Talvivaara Mining Co CC Meda BB Teekay Offshore Partners BB- Nokia B1 B+ BB- UPM-Kymmene Ba1 BB BB North Atlantic Drilling BB Vestas Wind Systems BB Odfjell B+ * DBM = Danske Bank Markets rating Source: Moodys, Standard & Poors, Fitch, Danske Bank Markets The high-yield bond market has consistently outperformed the more risky equity market throughout the financial crisis. Thus, high-yield bonds provide an attractive asset class for investors. High-Yield returns outperform equity returns 18 iboxx High Yield (EUR) total return Euro Stoxx 5 (EUR) total return Source: Bloomberg, Danske Bank Markets Important disclosures and certifications are contained from page 98 of this report.

4 Such greater investor attractiveness, combined with regulators demanding stricter capital requirements for the banking sector, has resulted in Nordic companies increasingly raising funding through debt capital markets as an alternative to traditional bank financing. This is a structural trend that we believe is very likely to continue in the longer term. The aggregate Scandinavian markets for new non-financial corporate bond issues were worth EUR27bn in 212 and approaching EUR2bn this year. The split of new issues has been roughly 4/6 between high-yield and investment grade over the past couple years with both Norway and Finland seeing roughly half of new issues being in the high-yield segment in contrast to the Swedish and Danish markets, which have been dominated by new issues in the investment grade segment. New issue split 213 YTD Regional new issue split 213 YTD High-Yield Investment Grade High-Yield 38% 1% 8% 6% Investment Grade 62% 4% 2% % Norway Sweden Finland Denmark Source: Danske Bank Markets Source: Danske Bank Markets While the Norwegian high-yield debt market has developed steadily over the past decade, both the Swedish and Finnish high-yield markets have gained in size in recent years, with the Danish market having started to become available (first HY-issue in 213). Consequently, Norway currently constitutes the vast majority of the Scandi high-yield market, comprising about half the c.eur11bn issued in 212 and 75% of the c.eur7bn issued to date this year. New High-Yield issue volume split 212 New High-Yield issue volume split 213 YTD Finland 33% Denmark % Norway 51% Sweden 9% Finland 14% Denmark 2% Sweden 16% Norway 75% Source: Danske Bank Markets Source: Danske Bank Markets Before turning to the company-specific credit profiles included in this handbook, let us briefly highlight that the latest fixed income credit research from Danske Bank Markets can be located on the Danske Bank Markets website (requires log-in) and on Bloomberg at DRCR<GO> October 213

5 Contents Akelius Fastigheter... 4 Color Group... 8 DFDS DLG a.m.b.a Finnair... 2 Fred. Olsen Energy ISS J. Lauritzen Meda Nokia... 4 North Atlantic Drilling Odfjell SE Prosafe SE SAS AB Seadrill Limited... 6 Stena AB Stolt-Nielsen Stora Enso Tallink Grupp Talvivaara Mining... 8 Teekay Offshore Partners LP UPM-Kymmene Vestas Wind Systems October 213

6 Akelius Fastigheter Company overview Akelius Fastigheter AB (Akelius Fastigheter) is one of Sweden s largest private real estate companies with a total property portfolio of 2.9m square metres, valued at SEK4.6bn as of June 213. Residential properties accounted for some 95% of total market value and residential holding amounted to 39,455 apartments. Sweden accounts for two-thirds of total market value and Germany the remaining one-third. Akelius Fastigheter is part of the Akelius Group, which is controlled by the Bahamas-based Akelius Foundation. Key credit considerations Increased focused on growth areas The company s goal is that residential properties should account for at least 9% of the total property portfolio s value. Akelius Fastigheter has a strategy to focus on growth through investing in low-risk residential properties in Sweden and Germany, which generate stable cash flows over time. Most of the free cash flow that the company generates is either to be invested in renovating and refurbishing existing properties or to be reinvested in new properties. The company has a strategy of focusing on areas that show good potential for economic and population and rental growth. Over the past few years, the company has divested properties outside such areas, while it has expanded in regions with more attractive growth features. Regulated market for residential properties in Sweden Akelius Fastigheter focuses on residential properties. As residential rents are regulated by law, prices for residential properties have generally risen less than for commercial properties. According to Swedish law, rents need to be negotiated between tenant organisations and landlord organisations, while private rents should compare to social housing rents in comparable areas. This has tended to result in below market level rents and relatively low rental yields in attractive city centre locations. Due to the lack of new housing, there is an ongoing debate in Sweden about how the rental market could be reformed and whether the current rental ceiling should be removed. If this were to happen, we believe it would be clearly positive for private landlords. Financial policy Akelius Fastigheter s financial policy includes a target of maintaining a loan to value ratio of below 6% if only secured debt is included and below 7% if all debt is included. The EBITDA net interest coverage ratio should be around 1.3x, with a conservative capital fixing policy. At the end of June 213, the loan to value ratio was 62% with an interest coverage ratio of 1.3x.The average capital fixing period was five years, with an average interest rate of 4.7%. Table 2. Key credit metrics and ratios Adjusted ratios 7/8 8/ Rental income growth 8% -42% 6% 7% EBITDA (SEKm) 1,69 1,97 1,145 1,327 1,361 EBITDA margin 46% 47% 47% 51% 49% FFO/interest coverage (x) FFO/net debt 1% 3% 2% 1% -4% Net debt/ebitda (x) Total debt/total capital 83% 83% 68% 7% 69%. Financial year 7/8 from July 27 to December 28, and financial year 8/9 from July 28 to 29. Facts Sector: Real Estate Corporate ticker: AFKAST Equity ticker: Private Market cap: Private Equity book value: SEK9.97bn Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: BB+ Senior Unsecured: BB Analysts: Louis Landeman louis.landeman@danskebank.com Wiveca Swarting wiveca.swarting@danskebank.com Key credit issues Strengths: Akelius Fastigheter owns a property portfolio that is well diversified both geographically and between customers. The focus on residential properties implies stable cash flow generation, with a low degree of cyclicality. Vacancy rates are currently low. The company has a conservative interest fixing policy. Challenges: Akelius Fastigheter has rather high leverage, with a relatively high amount of short-term funding. Interest coverage is somewhat low; due partly to the companys conservative interest fixing policy. Most cash flows are reinvested, both in new properties and in upgrading of the existing properties, implying limited free cash flow generation. Source: Danske Bank Markets 4 21 October 213

7 Liquidity Cash and secured and unutilised credit facilities at end-june amounted to SEK1.4bn. In total, the company had access to cash and unutilised but committed credit facilities of SEK2bn. This compares with total secured short-term debt of SEK4.7bn. While this implies a certain refinancing risk, this is balanced by the company s good asset quality and moderate level of secured debt. Some SEK2.1bn of the company s secured debt had an interest fixing period of less than one year and SEK1.9bn of the debt had an interest fixing period of more than five years. For conservative reasons, Akelius Fastigheter prefers to have a relatively long interest and capital fixing period on its debt even if this means that the interest coverage ratio is somewhat lower than would otherwise have been the case. Current performance drivers Q2 13: good operating performance The Q2 earnings released by Akelius Fastigheter in the summer showed a good operating performance compared with a year earlier. In Q2, the company s reported rental income for comparable properties rose by 5.1%, with a rise in operating surplus of 6.4%. The rental level for residential in comparable properties rose by 4.% in Sweden and 2.9% in Germany. The total property value increased by SEK949m or 2.7% in the quarter due to increased rental income. In Sweden, the real vacancy rate (excluding vacant apartments due to upgrades) was a low.6% at end-june 213 (2.2% if including all vacancies). Higher debt following property acquisitions Funds from operations improved to SEK71m (Q2 12 SEK2m). In Q2, Akelius Fastigheter divested properties for SEK651m and acquired properties for SEK4bn. The company also made property investments of SEK357m. Consequently, total debt rose to SEK25.3bn (end-march: SEK22.5bn), of which SEK4.7bn was secured short-term debt. Cash and secured and unutilised credit facilities at end-june amounted to SEK1.4bn. At the end of Q2, the loan to value ratio was 62% (Q1 62%), with interest coverage of 1.3x ( x) and a solidity ratio of 3% (following an equity injection of SEK68m). The average capital fixing period of the secured loans was 5. years with an average interest rate of 4.7%. Outlook and recommendation Akelius Fastigheter s primary focus on stable residential properties with low vacancy rates supports the company s credit profile. In addition, the property portfolio is geographically well diversified and located mainly in cities with good long-term growth characteristics. Compared with sector peers and considering the high share of residential properties, leverage is moderate and debt maturities are well spread over time but with a fairly high proportion of short-term funding. Also, interest coverage is relatively low due to the company s conservative capital fixing policy. We score the company s current liquidity position as aggressive, with cash and unutilised credit facilities not fully covering short-term debt maturities as at end-june. As most of the company s operating cash flows are reinvested, both in new properties and in upgrading of existing properties, this implies limited free cash flow generation but with some flexibility to reduce the investment level in case there is a need to preserve cash. Overall, we maintain our view of Akelius Fastigheter as a BB+ credit, with senior unsecured debt issued by the company one notch lower at BB. Debt coverage SEKbn Market value by category* Source: As at end-june 213 Loan to value, total debt 1% 8% 6% 4% 2% % Profitability SEKm /8 8/ x 16x 12x 8x 4x x Net debt Equity Net debt/ebitda (rhs) Commercial 5% Residential, 95% Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 6% 5% 4% 3% 2% 1% % Rental income EBITDA EBITDA margin 5 21 October 213

8 Relative valuation 6 ASW or DM KVALIT 4/5/16 CLILN 4/27/16 KLOVSS SAGAX 6.5 1/19/17 17 SAGAX 6/25/18 CORESS 5/6/15 AKFAST 6/25/15 PEABSS KLOVSS 3/31/15 1/24/16 BALDER 5/16/17 PEABSS BALDER 6/1/15 FABGSS 2/15/16 1/1/15 WIHLSS 1/12/15 PEABSS 4/24/ Akelius Years to maturity Source: Bloomberg, Danske Bank Markets Floating rate cash price development Price AKFAST 6/25/ jun-12 jul-12 aug-12 sep-12 okt-12 nov-12 dec-12 jan-13 feb-13 mar-13 apr-13 maj-13 jun-13 jul-13 aug-13 sep-13 Source: Bloomberg, Danske Bank Markets Capital structure* Secured debt maturity profile* Equity, 29% Other, 6% <1 year 1% Deferred tax, 5% Loans without security; 1% Loans with security, 5% 1-5 years 39% >5 years 51% As at end-june 213 As at end-june 213 Table 3. Key credit ratios Adjusted ratios 7/8 8/ Rental income growth - 8% -42% 6% 7% EBITDA margin 46% 47% 47% 51% 49% EBIT margin 71% 59% 61% 88% 139% Equity-ratio 16% 16% 28% 25% 27% EBITDA interest coverage (x) EBIT interest coverage (x) FFO interest coverage (x) Operating interest coverage (x) Net debt/ebitda (x) Secured net debt/ebitda (x) Loan to value, total debt 67% 69% 63% 63% 62% Loan to value, secured debt 58% 58% 42% 53% 55% FFO/net debt 1% 3% 2% 1% -4% Total debt/total capital 83% 83% 68% 7% 69% Net debt/total capital 83% 83% 68% 7% 69%. Financial year 7/8 from July 27 to December 28, and financial year 8/9 from July 28 to October 213

9 Table 4. Financial statements Income statement (SEKm) Rental income 2, Operating expenses -1, Operating income Other income Administration expenses EBITDA 1,69 1,97 1,145 1,327 1,361 Realised value changes in property portfolio Unrealised value changes in property portfolio 357 1, EBIT 1,653 2,486 1,493 2,274 3,872 Net interest expenses & derivatives -91-1, , Pre-tax profit ,528 Tax Net profit 868 1, ,44 Balance sheet (SEKm) Fixed assets 25,659 24,474 28,411 32,49 35,47 Goodwill Associates Financial assets ,152 Cash and cash equivalents Other current assets 365 1, Total current assets 42 1, Total assets 26,689 26,321 29,55 33,785 37,63 Long-term interest bearing debt 18,714 15,157 16,447 14,622 17,4 Short-term interest bearing debt 1,91 5,8 1,274 5,743 4,938 Secured interest bearing debt 18,14 16,831 11,955 17,47 19,659 Unsecured interest bearing debt 2,61 3,46 3,838 3,317 2,319 Total interest bearing debt 2,624 2,237 17,721 2,365 21,978 Net interest bearing debt 2,569 2,213 17,71 2,335 21,95 Total equity 4,139 4,219 8,21 8,567 9,97 Total liabilities 21,12 2,951 21,295 25,218 27,93 Total equity and liabilities 25,259 25,17 29,55 33,785 37,63 Cash flow statement (SEKm) FFO Changes in working capital Operating cash flow Capex n.a. -1, ,138-1,493 Acquisitions & disposals ,191 1,136-1, Cash flow after investments -6,32 1,856 1,74-2,68-83 Dividends paid -1, -9 Cash flow from financing activities 6,57-1,885-1,745 2, Financial year 7/8 from July 27 to December 28, and financial year 8/9 from July 28 to October 213

10 Color Group Company overview Color Group is the parent company of Norway s largest short-haul shipping company, which operates six ships on four short-haul cruise, passenger and transportation lanes. The company has demonstrated sound, yet fluctuating cash flow generation throughout the financial crisis, benefiting from its strong business model enjoying more stable fundamentals relative to traditional commodity-based shipping. It reported sales of NOK4.5bn with underlying EBIT of NOK384m in 212. We assign a BB- corporate credit rating to Color Group, assessing the company s business risk as satisfactory, with a highly leveraged financial profile and an adequate-to-strong liquidity profile. Due to subordination, we lower the current outstanding bond issues by one notch. Key credit considerations Market leader in Norwegian short haul sea-based passenger traffic Color Group enjoys a strong market position, holding about a 55% share of all seabased passenger traffic into Norway. Competition exists but barriers to entry are high and the company furthermore benefits from its proprietary port access. The company s business model has proven durable during the financial crisis with highly stable passenger and freight volumes. Extraordinary events have taken their toll on margins within transportation in 211 (an unusually high cancellation rate) and cruise in 212 (a painful implementation of a digital booking system). It is thus comforting that the EBITDA margin in transportation recovered last year and we understand that the margin within Cruise has also reverted towards a normalised level, which bodes well for the 213 group earnings performance. Moreover, the company is likely to implement further ongoing cost enhancing measures, among others addressing its high staff salary base relative to neighbouring countries. Short-term contract structure results in reduced earnings visibility The company s contract structure ranges from longer-term agreements to spot contracts, with the vast majority of revenues stemming from spot sales. Such contract structure is simply a consequence of passenger cruises comprising almost half the revenues. Furthermore, most freight forwards prefer either spot or shorter-term contracts, both falling within the short-term contracts definition. Although a shorterterm contract structure heightens potential short-term gains from fluctuations in freight rates, it also increases the company s vulnerability against a potential adverse earnings impact, providing less earnings and cash flow visibility. Table 5. Key credit metrics and ratios Adjusted ratios E Sales growth 2% 1% -2% 2% -2% 2% EBITDA (NOKm) 989 1, EBITDA margin 22% 23% 21% 2% 19% 2% FFO / Interest coverage 1.x 3.4x 4.x 2.x 2.1x 2.9x FFO / Net debt 5% 15% 16% 1% 1% 12% Net debt / EBITDA 6.7x 5.6x 5.6x 5.8x 6.4x 6.x Total debt / Total capital 8% 73% 73% 75% 77% 76% estimates Facts Sector: Industrials; Transport Corporate ticker: COLLIN Equity ticker: COL NO Market cap: Private Equity book value: NOK1.8bn Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: BB- Senior Unsecured: B+ Analysts: Kasper From Larsen kasla@danskebank.dk Åse Haagesen ha@danskebank.com Key credit issues Strengths: Stable business model and sound cash flow generation, proven also during an economic downturn. Strong market position in Norwegian sea-based cruise and transport. High barriers to entry. Relatively young fleet minimises investment needs. Challenges: Shipping is cyclical by nature, although cruise and liner shipping is less volatile than commodity based shipping. High operational leverage. EU environmental regulation. Minimum disclosure policy limits transparency/information access. Source: Danske Bank Markets 8 21 October 213

11 Liquidity Liquidity needs for Color Group fluctuate markedly from year to year depending on working capital requirements, but also to some extent whether the company undertakes any fleet refurbishment or upgrades, although such upgrades are largely covered by maintenance capex. Moreover, management might consider participating in M&A activities in accordance with the ongoing industry consolidation. We assess the liquidity profile of the company as Adequate to Strong in rating agency terms. Generally, the company generated funds from operations around NOK45m on a LTM basis during , providing sufficient liquidity to fund ongoing operations, but currently short of fully serving its debt obligations and yearly maintenance capex of around NOK15m. Moreover, the company has a very solid cash balance (also in an historical perspective) which combined with credit facilities of approximately NOK55m provides sufficient funding also in the medium term. Current performance drivers Diversification mitigates divisional margin volatility As mentioned Color Group experienced a material adverse margin impact in the transportation and cruise segments during 211 and 212, respectively. Although this had an overall negative impact on earnings margins, the diversification effects between the segments significantly reduced the impact on a group level illustrated by the high but cyclical cash flow generation. Relatively young fleet suggests a normalised investment run-rate Despite operating in a capital intensive and cyclical industry, Color Group has said that the need for new tonnage is very low, indicating that non-m&a related capex is likely to remain at normalised levels supporting a relative stable development in credit metrics. We estimate around NOK15m per year in maintenance capex including refurbishment and/or upgrades of ships. In addition, we estimate that the company will have to invest around NOK1m per year in scrubber technology during to meet upcoming EU environmental regulation. Historical highly leveraged financial profile The company has historically applied a high financial gearing when including operational leasing although metrics have improved moderately over the past five years. This primarily reflect the company having reversed to normalised investment levels not taking delivery of any newbuilds. We expect Color Group to continue to operate with high but stable gearing resulting in an adjusted net debt/ebitda run-rate of around 6.x, contingent on no significant new capital committeemen such as newbuild tonnage or the construction of new port terminals. Aggressive cash distribution policy Dividend payouts have been relatively aggressive in recent years with a payout ratio several times above net income. This reflects Color Group being fully owned (and thus part of) the O.N. Sunde Group and that the owners unsurprisingly seek to optimise the overall owner group structure inclusive of taxes etc. Consequently, no specific dividend policy exists and dividend payments are likely to fluctuate over time. Nonetheless, this represents a cash availability uncertainty thus being negative from a credit perspective. Outlook In accordance with the H1 13 results, management retained its expectations for operational earnings similar to that of 212. The company s main target is to maintain profitable operations on a full-year basis and taking seasonality into consideration, management said that the H1 13 operational result was satisfactory despite realising small negative EBIT of NOK-52m. Sound short-term liquidity NOKm 1,6 1,4 1,2 1, Cash outflow Cash inflow Short term debt Cash & Equivalents Dividend LTM CFO CAPEX Committed facilities High but cyclical cash flows NOKm CFO (adj.) FOCF (adj.) 1, E 214E Stable EBITDA margin performance NOKbn Highly leveraged credit metrics 25% 2% 15% 1% 5%. % E Net sales EBITDA (adj.) EBITDA margin (adj.) NOKbn E X Net debt Equity Net debt/ebitda (rhs) 9 21 October 213

12 Relative value chart DM (bps) COLLIN 8/28/14 COLLIN 8/25/16 COLLIN 11/16/15 COLLIN 9/18/19 Source: Bloomberg, Moodys Danske Bank Markets Moody's MIR B+ category Moody's MIR BBcategory 1 Years to maturity Floating rate cash price development Cash Price COLLIN 8/28/14 COLLIN 11/16/ Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Source: Bloomberg, Danske Bank Markets COLLIN 8/25/16 COLLIN 9/18/19 Debt composition Debt maturity profile Other debt 22% Bond issues 41% Term-loan / Mortgages 37% NOKm 1,6 1,4 1,2 1, Ship mortgage Bond loans >216 Table 6. Key credit ratios Adjusted ratios E 214E 215E Sales growth 2% 1% -2% 2% -2% 2% 2% 2% EBITDA margin 22% 23% 21% 2% 19% 21% 23% 23% EBIT margin 14% 15% 13% 11% 1% 11% 13% 14% ROCE 9% 9% 8% 6% 6% 8% 1% 1% EBITDA interest coverage 2.6x 4.x 4.5x 3.5x 3.1x 4.4x 5.x 5.1x EBIT interest coverage 1.7x 2.6x 2.8x 2.x 1.7x 2.4x 2.9x 3.1x FFO interest coverage 1.x 3.4x 4.x 2.x 2.1x 3.1x 3.6x 3.7x Net debt / EBITDA (reported) 6.1x 5.5x 5.4x 5.6x 5.7x 5.x 4.2x 3.8x Net debt / EBITDA 6.7x 5.6x 5.6x 5.8x 6.4x 5.5x 4.8x 4.5x Gross debt / EBITDA 6.9x 5.7x 6.7x 6.9x 7.3x 6.1x 5.5x 5.4x FFO / net debt 5% 15% 16% 1% 1% 13% 15% 16% FFO / gross debt 5% 15% 13% 8% 9% 12% 13% 13% Total debt / total capital 8% 73% 73% 75% 77% 75% 74% 73% Net debt / total capital 77% 72% 6% 63% 68% 68% 64% 6% Net gearing 376% 268% 224% 256% 292% 277% 249% 22% Dividends / FFO 34% 18% 17% 76% 44% 25% 22% 21% estimates 1 21 October 213

13 Table 7. Financial statements Income statement (NOKm) E 214E 215E Total sales 4,568 4,6 4,59 4,586 4,512 4,62 4,694 4,788 Operating expenses -3,58-3,535-3,54-3,671-3,644-3,619-3,68-3,675 Non-recurring items -15 EBITDA EBITDA adjusted 989 1, ,86 1,113 Depreciation and amortisation EBIT EBIT adjusted Net financials Pre-tax profit Tax Net income Balance sheet (NOKm) E 214E 215E Fixed assets 6,94 6,765 6,67 6,8 4,795 4,755 4,715 4,675 Goodwill Associates Other non-current assets Working capital assets Cash and cash equivalents ,139 1, ,26 Other current assets Total Assets 9,27 8,86 9,649 9,287 8,33 8,94 8,243 8,42 Total Assets (adj.) 1,184 9,74 1,487 1,77 9,852 9,616 9,764 9,942 Total interest bearing debt 5,895 5,195 5,678 5,527 4,776 4,471 4,471 4,471 Total interest bearing debt (adjusted) 6,866 6,82 6,517 6,332 6,32 5,997 5,997 5,997 Net interest bearing debt 5,656 5,94 4,539 4,475 4,19 3,89 3,682 3,445 Net interest bearing debt (adjusted) 6,627 5,981 5,378 5,28 5,544 5,415 5,27 4,97 Working capital liabilities Other current liabilities Other non-current liabilities ,4 1,4 1,4 1,4 Total Equity 1,762 2,234 2,398 2,6 1,9 1,958 2,95 2,26 Total Equity and Liabilities 9,27 8,86 9,649 9,34 8,33 8,94 8,243 8,42 Total Equity and Liabilities (adj.) 1,184 9,74 1,487 1,94 9,852 9,616 9,764 9,942 Cash flow statement (NOKm) E 214E 215E Pre-tax profit Reversal of non-cash items Other cash flow from operations FFO FFO (adjusted) Change in working capital Operating cash flow (CFO) CFO (adjusted) 724 1, Capex -1, Net acquisitions/disposals Free operating cash flow (FOCF) FOCF (adjusted) Dividends paid Share buyback Debt repayment , Funding shortfall New debt , New equity Other cash flow from financing activities Change in cash , estimates October 213

14 DFDS Company overview Denmark-based DFDS operates the largest integrated shipping and logistics network in Europe with particular focus on the Northern European region. It operates 51 ships and has 5,24 employees operating a wide-span route network stretching from Ireland to Russia. In 212 the company reported total sales of DKK11.7bn and underlying EBIT of DKK422m. DFDS demonstrated solid cash flow generation during the financial crisis, cyclical exposure and ongoing oversupply benefiting from strong customer relations and long-term contracts with solid industrial customers, but also synergies offering integrated transport services. Key credit considerations Margin preservation despite fierce competition DFDS enjoys a strong market position in the North Sea and the Baltic Sea but is adversely affected by fierce competition on parts of the trade lanes across the English Channel. Gross margin pressure has been evident in the shipping division yet management has succeeded in preserving the divisional EBIT margin through cost efficiency programmes. Moreover, competitive pressure has recently eased in the North Sea, further supporting an improvement in future group profitability. Contract structure and solid counterparts heightens transparency The company s contract structure ranges from longer-term agreements to spot contracts. However, the integrated transport services offered by DFDS make the company an integrated part of the supply chain, which has encouraged solid industrial customers to sign longer-term contracts, locking in transportation capacity. Although a longer-term contract structure obviously reduces potential short-term gains from fluctuations in freight rates, it also protects against a potential adverse earnings impact, providing greater transparency and lowering overall risk associated with rate fluctuations. Currently, DFDS is operating around 3-4% of freight volumes on longer-term contracts. In the shorter-term contracts (typically 12-month revolving basis), DFDS has solid customers including freight forwarders such as DSV and DHL. Support from current macro trends Generally, shipping and transportation is highly exposed to the economic cycle and a continuation or perhaps even increased uncertainty regarding the European sovereign debt crisis would be likely to result in an adverse earnings impact. Conducting the majority of its business activities in the Northern European region, thus being exposed to stronger economies such as the Scandinavian markets, might mitigate the extent of the cyclical exposure for DFDS to some degree. Moreover, Danske Bank Markets proprietary European Freight Forwarding Index indicates a continuing increase in freight volumes in the near term, supporting companies such as DFDS. Table 8. Key financial ratios Adjusted ratios E Sales growth -1% -2% 51% 18% 1% 5% EBITDA (DKKm) 1,685 1,422 1,919 2,115 1,646 1,687 EBITDA margin 21% 22% 19% 18% 14% 14% FFO / Interest coverage 2.5x 2.5x 3.2x 3.8x 3.6x 3.5x FFO / Net debt 18% 13% 16% 27% 25% 24% Net debt / EBITDA 4.1x 5.1x 4.1x 2.7x 3.x 3.2x Total debt / Total capital 67% 67% 57% 49% 47% 48% estimates Facts Sector: Industrials; Transport Corporate ticker: DFDSDC Equity ticker: DFDS DC Market cap: DKK5.97bn Equity book value: DKK6.6bn Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: BB+ Senior Unsecured: BB+ Analysts: Kasper From Larsen kasla@danskebank.dk Åse Haagesen ha@danskebank.com Key credit issues Strengths: Sound capital structure with no immediate refinancing needs Solid recurring cash flow. generation and no new tonnage investments beyond 213. Strong market position in the Nordic integrated transportation network industry. Solid counterparties and proven operational track record in times of financial crisis. Challenges: Shipping and logistics are cyclical by nature although liner shipping is less volatile than commoditybased shipping. High operational leverage. EU environmental regulation. Price pressure on Ro-Ro freight rates and highly exposed to volatile bunker fuel costs. Source: Danske Bank Markets October 213

15 Liquidity Liquidity needs for DFDS fluctuate materially from year to year depending on whether the company takes delivery of newbuilds but also depending on M&A activities. We assess the liquidity profile of the company as Adequate to Strong in rating agency terms. Generally, the company generated funds from operations around DKK.9-1.bn on LTM basis during , providing sufficient liquidity to fund ongoing operations and leaving ample headroom to serve its debt obligations and yearly maintenance capex of around DKK2-25m. However, with the majority of payments for two newbuilds contained in the 213 capex budget, short-term liquidity as of end December 212 seemed a bit stretched relative to funding needs this year. However, DFDS issued its second corporate bond in March this year a five-year floating rate issue for the amount of NOK7m securing sufficient liquidity. Current performance drivers Balance sheet deleverage despite active M&A strategy Despite being relatively conservative in terms of organic investments during recent years, management has been quite active in M&A. Despite such strategy and continued intense competition, management has succeeded in deleveraging the company s balance sheet from above 5.x adjusted net debt/ebitda in 29 to 3.x by end-212 and improving FFO/net debt from 13% to 25%. However, with DFDS purchasing 12% of its own shares in connection with A.P. Møller-Mærsk recently existing its non-core holding in the company financial leverage is set to increase. This follow management stating that all treasury shares not needed for coverage of incentive schemes will be cancelled in accordance with the next General Meeting. Investment budget set to revert towards lower longer-term run rate Aside from its passenger ships, the company s fleet is fairly young, resulting in relatively modest capex needs despite DFDS operating in a capital-intensive industry. However, the 213 capex budget of DKK1,5m reflects the bulk of payments for two new ships to be delivered next year. Aside from such new builds, no new tonnage commitments exist beyond 213, so we expect ongoing capex levels to return to historical levels of around 5% of sales. Prudent dividend policy The dividend policy targets a 3% pay-out ratio, which management has honoured fairly consistently, with the exception of 29-1 when no dividends were paid. This was mainly due to high capex needs in 29 and funding requirements for the Norfolkline acquisition in 21. It is positive that DFDS has demonstrated dividend restraint in periods with exceptionally high investment needs, indicating a conservative payout policy in such periods. Outlook The latest outlook provided by DFDS reflects the current competitive environment. This is illustrated by the company s retained EBITDA guidance of DKK bn, where the low end of the range is similar to EBITDA realised in 212 despite management expectations of moderate sales growth of 5% in 213. In our view, the guidance clearly reflects that trade lanes across the Channel are currently unprofitable. We believe the higher end of the guided earnings range includes the assumption that successful implementation of efficiency initiatives would more than counterbalance the current competitive pressure. Sound short-term liquidity DKKm 3,5 3, 2,5 2, 1,5 1, 5 Cash outflow Short term debt Dividend CAPEX Solid yet cyclical cash flows UK/Ireland 9% Nordic 12% The Continent 15% The English Channel 12% Solid yet cyclical cash flows DKKm EBITDA Operational cashflow 1,6 1,4 1,2 1, E Leverage on the rise DKKbn Cash inflow Cash & Equivalents LTM FFO Committed facilities Baltic Sea 12% North Sea 4% E X Net debt (adj.) Equity Adj. net debt / EBITDA October 213

16 Relative value chart Floating rate cash price development DM (bps) DFDSDC 5/2/16 DFDSDC 3/21/18 Source: Bloomberg, Moodys, Danske Bank Markets Moody's MIR BB+ category Moody's MIR BBBcategory Years to maturity Cash Price DFDSDC 5/2/16 DFDSDC 3/21/ May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Source: Bloomberg, Danske Bank Markets Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Debt composition Debt maturity profile Bank debt 3% DKKm 1, Bank and ship debt DFDCDC 216 DFDCDC 218 Other debt 4% Mortgages 38% Bond issues 19% >216 Table 9. Key ratios Adjusted ratios E Sales growth % -1% -2% 51% 18% 1% 5% EBITDA margin 2% 21% 22% 19% 18% 14% 14% EBIT margin 11% 8% 7% 8% 9% 5% 5% ROCE 11% 1% 6% 9% 1% 7% 7% EBITDA interest coverage 4.5x 3.4x 3.7x 4.6x 5.1x 4.7x 4.7x EBIT interest coverage 2.4x 1.4x 1.2x 2.x 2.5x 1.8x 1.8x FFO interest coverage 3.6x 2.5x 2.5x 3.2x 3.8x 3.6x 3.5x Net debt / EBITDA (reported) 2.9x 3.3x 5.x 3.4x 1.8x 1.9x 2.2x Net debt / EBITDA 4.9x 4.1x 5.1x 4.1x 2.7x 3.x 3.2x Gross debt / EBITDA 5.2x 4.3x 5.2x 4.4x 3.1x 3.7x 3.8x FFO / net debt 16% 18% 13% 16% 27% 25% 24% FFO / gross debt 15% 17% 13% 15% 23% 2% 2% Total debt / total capital 7% 67% 67% 57% 49% 47% 48% Net debt / total capital 66% 65% 66% 52% 42% 37% 4% Net gearing 222% 198% 198% 122% 82% 7% 77% Dividends / FFO 6% 9% % % 8% 16% 16% estimates October 213

17 Table 1. Financial statements Income statement (DKKm) E Total sales 8,31 8,194 6,555 9,867 11,625 11,7 12,285 Operating expenses -6,999-7,183-5,751-8,594-1,13-1,68-11,185 Non-recurring items EBITDA 1,311 1, ,375 1, ,1 EBITDA adjusted 1,311 1, ,273 1,495 1,92 1,1 Depreciation and amortisation EBIT EBIT adjusted Net interest Pre-tax profit Tax Net income Balance sheet (DKKm) E Fixed assets 7,156 6,554 7,526 9,43 9,182 8,357 8,728 Goodwill Associates Other non-current assets Working capital assets 1, ,445 1,847 1,919 2,15 Cash and cash equivalents , ,213 1,15 Other current assets Total Assets 9,61 8,61 9,298 13,849 12,795 12,3 12,62 Total Assets (adj.) 13,647 12,19 12,376 17,124 15,61 14,945 15,315 Total interest bearing debt 4,353 3,636 4,2 4,962 3,583 3,233 3,433 Total interest bearing debt adjusted 8,617 7,215 7,457 8,491 6,635 6,11 6,36 Net interest bearing debt 3,859 3,334 4,46 4,266 2,652 2,2 2,419 Net interest bearing debt adjusted 8,123 6,913 7,33 7,795 5,75 4,897 5,345 Working capital liabilities ,773 1,6 1,516 1,592 Other current liabilities Other non-current liabilities Total Equity 3,653 3,484 3,688 6,396 6,964 6,969 7,8 Total Equity and Liabilities 9,61 8,61 9,298 13,848 12,796 12,3 12,62 Total Equity and Liabilities (adj.) 13,648 12,19 12,376 17,123 15,62 14,945 15,315 Cash flow statement (DKKm) E EBITDA 1,311 1, ,273 1,495 1,92 1,1 Tax paid Net interest paid FFO 1, , FFO adjusted 1,321 1, ,284 1,556 1,247 1,272 Change in working capital Operating cash flow (CFO) 1, , CFO adjusted 1,273 1,224 1,56 1,216 1,658 1,195 1,252 Capex , ,5 Net acquisitions/disposals , Free operating cash flow (FOCF) , ,65-19 FOCF (adjusted) 1, ,352 1, Dividends paid Share buyback -45 Debt repayment ,137-1,886-1,56-5 Funding shortfall ,458-3,171-1, New debt 124 1,397 1, New equity 2,81 Other cash flow from financing activities Change in cash estimates October 213

18 DLG a.m.b.a. Company overview DLG (Dansk Landbrugs Grovvareselskab) is one of Europe s largest agricultural retailers and Denmark s 14th largest company. It is also one of Europe s largest buyers of fertilisers and raw materials. The company benefits from vertical integration with a diversified product mix. DLG s two main markets are southern Scandinavia and Germany, although the group has operations in more than 2 countries. The cooperative is fully owned by its 3, Danish members and generated revenues of more than DKK48bn (EUR6.5bn) with EBITDA of DKK1.2bn (EUR173m) last year. Key credit considerations Large scale and market-leading positions DLG has grown into a large international company with annual sales of more than DKK48bn. As the farming industry is characterised by consolidation (i.e. fewer and larger farms with international sourcing abilities), such size and scope is an important competitive factor in the feedstuff industry. DLG is also one of Europe s largest buyers of fertilisers and raw materials, which yields favourable prices. Consequently, DLG is the undisputed market leader in the feedstuff industry, with a market share above 5% in Denmark and around 4% in Northern Germany. Diversified operations across the value chain As a conglomerate, DLG is present throughout practically the entire agricultural value chain. This includes feedstuff, fertilisers and crop protection agents, agricultural machinery, food and vegetables for the foodstuff industry, as well as various services (electricity, fuel and oil, telecom and insurance). This also generates synergies and creates a diversified product mix for DLG, which is credit positive. Very stable profitability provides great visibility The majority of DLG s cost base consists of the cost of goods purchased. Due to the fact that DLG to some degree has control over its input costs and price fluctuations tend to be passed on to customers, the company benefits from very stable profit margins. In fact, DLG has been profitable every year since This provides great earnings visibility and mitigates the otherwise low-margin nature of the industry. Equity consolidation protects credit investors Due to the co-operative structure, DLG has to increase its equity base mainly through consolidation of earnings. 73% of equity is unallocated equity shielded from members leaving the co-operative, thus forming a buffer that protects creditors. DLG s articles of association also dictate that earnings must be used primarily for unallocated equity consolidation according to a minimum level depending on the company s equity ratio. Table 11. Key credit metrics and ratios Adjusted ratios Sales growth 42% 53% -9% 15% 4% 19% EBITDA (DKKm) ,126 1,23 1,391 EBITDA margin 2% 3% 3% 3% 3% 3% Coop FFO interest coverage.9x 1.1x 1.1x 1.4x 1.3x 1.8x Coop FFO / net debt 5% 8% 8% 7% 8% 9% Coop RCF / net debt 5% 8% 7% 6% 7% 8% Net debt / EBITDA 11.1x 7.4x 8.2x 7.4x 6.6x 6.8x Facts Sector: Non-cyclical consumer; Agriculture & Food conglomerate Corporate ticker: DLGFIN Equity ticker: Private Market cap: Private Equity book value: DKK4.1bn Ratings: Rating agencies: NR Danske Bank Markets: Corporate rating: BB- Senior Unsecured: BB- Analysts: Mads Rosendal madro@danskebank.dk Asbjørn Purup Andersen apu@danskebank.dk Key credit issues Strengths: Undisputed leader within feedstuff in the co-operatives main markets Highly stable profit margins evident also during times of recession Diversified operations across the value chain Equity consolidation favours unallocated equity shielding equity from members leaving the co-op Challenges: Consolidating customer base might result in less bargaining power Highly leveraged capital structure Material debt laddering Vulnerable liquidity profile Source: Danske Bank Markets October 213

19 Liquidity We consider DLG s liquidity profile to be somewhat vulnerable. In addition to the cdkk779m liquidity requirement for the Team AG acquisition, DLG also has a large proportion of short-term debt (DKK6.4bn including advance payments, equivalent to 72% of total unadjusted interest-bearing debt at the end of 212). This is partly from uncommitted bank loans, which increases liquidity risk. This is to some extent mitigated by strong relations with the company s banking group, which has historically refinanced the debt each year. In addition, the fact that DLG is planning to issue capital markets debt in order to extend its debt maturity profile and diversify its funding sources should improve the current liquidity profile. DLG had DKK96m in cash and cash equivalents at the end of 212. As of May 213, DLG a.m.b.a. had DKK1,485m available in undrawn committed credit facilities. We also note that while the main credit facility in HaGe is committed, it does not permit upstream loans to DLG and hence we do not treat these facilities as available liquidity. We expect cash flow generation over the next 12 months to be in the range of DKK5-1,m. Current performance drivers Growth strategy with ambitious goal for 216 DLG s Strategy 216 was outlined in 212 and included an ambition to increase revenues by 5% from DKK4.8bn in 211 to DKK6bn by 216 through both organic growth and acquisitions. Historically, DLG has expanded its operations through joint ventures and partnerships which has reduced financing requirements. Growth will be focused mainly on the Service & Energy division as well as international markets. In terms of products, focus will mainly be on the profitable vitamins and minerals segment, which DLG expects to double in turnover within three to five years. DLG also aims to generate more synergies between the business units by increasing co-operation between the individual subsidiaries. Considering that DLG s net sales rose 19% y/y in 212 to DKK48.5bn and that DLG will increase its ownership in Team AG during 213 (which will contribute some DKK12.bn to consolidated sales), this amounts to DKK6.6bn. Consequently, DLG will have achieved its DKK6.bn target, reducing the risk of large-scale M&A. Stable albeit highly leveraged capital structure DLG mainly manages its balance sheet by means of an equity ratio. Although the company has no official target for the equity ratio, it has been fairly stable in the range of 2-25% over the past 1 years, averaging 22.6%. By the end of 212, the equity ratio amounted to 23.5%. We note that the articles of association regulate how earnings are used for equity consolidation based on the equity ratio. In our view, this gives management an incentive to maintain focus on its balance sheet by managing the equity ratio. Still, we emphasise leverage being relatively high with an adjusted net debt/ EBITDA ratio of 6.8x in 212, although this is comparatively in line with industry peers (which reflects the very stable business risk profile). Outlook In accordance with the 212 results, management voiced expectations about increasing activity levels in alignment with the medium-term strategy plan while simultaneously focusing further on cost optimisation strengthening profitability. The company expects to be able to generate profits similar or better relative to 212 and thereby be able to achieve a satisfactory level of member payments without further defining this. We believe such results would result in at least DLG maintaining its current credit metrics. Vulnerable liquidity profile DKKm 1, 8, 6, 4, 2, Divisional sales 212 Crops & Vegetables, 34% Cash outflow Short term debt Equity payout (est.) CAPEX Service & Energy, 8% Stable equity ratio 3% Equity ratio 25% 2% 15% 1% 5% % Cash inflow Cash & Equivalents LTM CFO Committed facilities Livestock Nutrition, 29% Crop Production, 29% High but rather stable leverage ratio 12.x 1.x 8.x 6.x 4.x 2.x.x * Net debt / EBITDA (reported) October 213

20 1. Scandi High-Yield Handbook Relative value chart DM (bps) DLGFIN 6/25/18 Source: Bloomberg, Moodys Danske Bank Markets Moody's MIR B+ category Moody's MIR BBcategory 1 Years to maturity Floating rate cash price development Cash Price DLGFIN 6/25/ Jun-13 Jul-13 Aug-13 Sep-13 Source: Bloomberg, Danske Bank Markets Debt composition Debt maturity profile Other debt 23% Mortgage loans 26% Bank loans 51% DKKm Bank loans Mortgage loans Advance payments 6, 5, 4, 3, 2, 1, various Table 12. Key credit ratios Adjusted ratios Sales growth 9% 15% 42% 53% -9% 15% 4% 19% EBITDA margin 3% 3% 2% 3% 3% 3% 3% 3% EBIT margin 2% 2% 2% 2% 2% 2% 2% 2% ROE 7% 7% 8% 7% 6% 9% 8% 8% Coop EBITDA interest coverage 2.1x 2.x 1.5x 1.8x 1.7x 2.5x 2.4x 2.9x Coop EBIT interest coverage 1.2x 1.3x 1.1x 1.4x 1.1x 1.8x 1.7x 2.x Coop FFO interest coverage 1.6x 1.3x.9x 1.1x 1.1x 1.4x 1.3x 1.8x Net debt / EBITDA (reported) 9.7x 11.1x 11.5x 7.5x 8.5x 7.7x 6.9x 7.x Net debt / EBITDA 9.3x 1.5x 11.1x 7.4x 8.2x 7.4x 6.6x 6.8x Gross debt / EBITDA 9.5x 1.6x 11.3x 7.6x 8.3x 7.4x 6.6x 6.8x Coop FFO / net debt 8% 6% 5% 8% 8% 7% 8% 9% Coop FFO / gross debt 8% 6% 5% 8% 8% 7% 8% 9% Coop RCF / net debt 8% 6% 5% 8% 7% 6% 7% 8% Coop RCF / debt 7% 6% 5% 7% 7% 6% 7% 8% (Coop RCF-Capex) / debt 2% -2% -5% -4% -4% -5% -3% -1% Total member payments / debt.9%.8%.4% 2.1%.5%.5%.6%.6% October 213

21 Table 13. Financial statements Income statement (DKKm) Total sales 15,53 17,325 24,631 37,589 34,138 39,364 4,842 48,532 Operating expenses -14,645-16,916-24,82-36,71-33,356-38,361-39,727-47,244 EBITDA ,3 1,115 1,288 EBITDA adjusted ,126 1,23 1,391 Depreciation and amortisation EBIT EBIT adjusted Net interest Pre-tax profit Tax Minorities Net income Balance sheet (DKKm) Fixed assets 2,233 2,366 3,467 4,7 4,476 5,29 5,788 6,32 Goodwill Associates ,77 1,44 Other non-current assets Working capital assets 3,974 4,266 7,91 6,841 6,43 6,882 6,227 7,951 Cash and cash equivalents Other current assets Total Assets 7,352 7,894 12,279 13,12 13,22 14,955 14,92 17,479 Total Assets (adj.) 7,448 8,92 12,523 13,392 13,51 15,356 15,195 17,775 Total interest bearing debt 4,42 4,548 6,434 6,786 6,785 7,87 7,75 9,5 Total interest bearing debt adjusted 4,162 4,792 6,83 7,213 7,238 8,368 8,153 9,57 Net interest bearing debt 3,972 4,529 6,339 6,569 6,686 7,735 7,637 8,954 Net interest bearing debt adjusted 4,93 4,773 6,77 6,996 7,139 8,296 8,86 9,411 Working capital liabilities ,872 1,291 1,573 1,568 1,44 1,811 Other current liabilities , ,254 1,24 1,695 Other non-current liabilities Total Equity 1,694 1,823 2,37 2,769 2,98 3,358 3,651 4,14 Total Equity and Liabilities 7,352 7,894 12,279 13,12 13,22 14,955 14,92 17,479 Total Equity and Liabilities (adj.) 7,448 8,92 12,523 13,392 13,51 15,356 15,195 17,775 Cash flow statement (DKKm) EBIT Reversal of non-cash items Tax paid Other cash flow from operations Funds From Operations FFO adjusted Change in working capital , Operating cash flow (CFO) , , CFO adjusted , , Capex Net acquisitions/disposals Free operating cash flow (FOCF) FOCF (adjusted) Member payments (dividends) M&A based member payments Debt repayment Funding shortfall New debt New equity Other cash flow from financing activities Change in cash October 213

22 1. Scandi High-Yield Handbook Finnair Company overview Founded in 1923, Finnair (Finland s flag carrier) is one of the world s oldest commercial operating airlines. From its Helsinki-Vantaa hub, Finnair serves over 7 short-, medium- and long-haul destinations, primarily in Europe and Asia and is currently the third largest airline in Scandinavia in terms of scheduled passengers flown. Enjoying Finland s favourable geographical location, the airline has established a solid position in traffic to Asia, being the only carrier serving its Asian destinations in a 24-hour flight rotation. We emphasise that the shortest great circle route from Europe to Asia passes through Helsinki, which brings a lasting competitive advantage. Finnair has relatively diversified geographic operations, with a high focus on long haul and the membership of the global oneworld alliance ensures an extensive route network with significant connection and transfer opportunities. The group is majority owned by the Finnish state, which holds 55.8% of the equity capital and votes. Key credit considerations Cost reductions make the day As with most airlines, Finnair s margins have been under pressure since the outbreak of the financial crisis. However, due to a well-implemented cost-savings programme of EUR14m Finnair managed to improve its operational EBIT margin by 4.5pp from 211 to 212 and reported the best operating result since 27. An additional costsavings programme of EUR6m is currently being implemented and Finnair expects 213 to show a positive operating result. We note that despite the difficult market conditions in recent years Finnair has been well below its maximum targeted adjusted gearing level in every year and has been able to keep a relatively unchanged equity ratio of around 35%. Large upcoming fleet renewal Finnair has a strong liquidity position supported by 44% of its fleet being fully unencumbered. Of the 44 aircraft operated by Finnair, it owned 26 at end Q2 13. Furthermore, Finnair owned 25 aircraft operated by other airlines as of Q2 13. The relatively strong financial starting point is needed to keep a solid balance sheet in coming years, when Finnair plans to undertake a large fleet renewal programme with total planned investments averaging EUR24m per year from With the renewal of the fleet, Finnair has a strong competitive position to capture a larger share of the growing airline market from Asia. Table 14. Key credit metrics and ratios Adjusted figures E Sales growth 3% -19% 1% 12% 8% 1% EBITDA EBITDA margin 5% -1% 7% 4% 8% 8% FFO/interest coverage (x) FFO/net debt 39% 2% 18% 15% 33% 32% Net debt/ebitda (x) Total debt/total capital 5% 62% 6% 62% 56% 56% estimates Facts Sector: Airlines, Transportation Corporate ticker: FOY Equity ticker: FIA1S FH Market cap: EUR411m Equity book value: EUR82m Ratings: Rating agencies: Not rated Danske Bank Markets: Corporate rating: BB Senior Unsecured: BB Analysts: Brian Børsting brbr@danskebank.dk Mads Rosendal madro@danskebank.dk Key credit issues Strengths: Long history and the Finnish state as a majority shareholder. Relatively well-diversified operations with high exposure to attractive markets. Solid cost control and solid balance sheet. Strong position at main hub provides a competitive advantage on Europe-Asia lanes. Challenges: Exposure to cyclical and capitalintensive airline industry. Fierce price competition, limited visibility and exposure to exogenous shocks. Large outstanding investment programme. Strong niche position in Asian long haul could come under pressure from low-cost competition Source: Danske Bank Markets 2 21 October 213

23 Liquidity We believe that Finnair has a solid liquidity position, which gives the company high flexibility in order to secure future financing needs. We note that in addition to the cash funds on the balance sheet Finnair has the option of re-borrowing employment pension fund reserves worth approximately EUR43m from its employment pension insurance company. Drawing these reserves requires a bank guarantee. The company reported a net interest bearing debt position of EUR97m at end-q2 13. Current performance drivers Gearing markedly lower The difficult trading conditions in the airline industry resulted in negative EBIT margins from 28 to 211. Due to the relatively poor earnings, particularly in 28 and 211 financial gearing (net debt/ebitda) rose materially. We note that in 212 the gearing level decreased markedly almost reaching pre-financial crisis levels. In 212, the operating result was supported by cost savings implemented by the company and margins returned to positive territory. Our estimates for 213, which are based on 1% y/y revenue growth and an EBIT margin at the same level as in 212, point to a slight decrease in leverage despite investments in new aircraft taking place. Finnair is targeting a 6% EBIT margin based on a targeted EBITDAR margin of 17%. To reach this target, Finnair is currently implementing a structural cost-reduction programme. Should Finnair reach this EBIT margin target it would significantly deleverage the company based on the current capex-plans. Airline industry is cyclical and capital intensive not a good match The airline industry has historically been very cyclical in terms of earnings affected by changes in GDP growth, fierce price competition, limited visibility and exposure to exogenous shocks. Furthermore, the airline industry is capital intensive due to large investments in aircrafts and several capital-intensive support functions. This has made it difficult for the airline industry as such to make a return on invested capital that exceed the average cost of capital over an economic cycle. The improvement in some macroeconomic leading indicators, such as PMIs and so on, could signal increased demand and higher profitability for the airline industry as such. However, it is still early days and our estimates are based on relatively conservative forecasts and still we expect Finnair to continue to deleverage in 213, although this will be mitigated by increased capex spending due to the fleet renewal programme. Outlook Finnair estimates its 213 turnover to be approximately at the 212 level due to the pressure that the weak yen puts on the Japan generated unit revenues. Furthermore, the uncertain economic outlook in Europe, weakened consumer demand and slower growth in Asia increase the uncertainty of the future development of air traffic. We expect fuel costs to remain high in 213 as well. We expect unit costs excluding fuel to decrease compared with 212. Finnair estimates that its operational result will show a profit in 213. Liquidity profile Danske Bank Markets estimates EURm Regional sales breakdown 212 Profitability EURbn Cash uses Short term debt Hybrid bond redemption Capex / dividend Domestic, 7% Leisure, 1% Europe, 34% Credit metrics EURm Cash sources Cash & Equivalents FFO est Committed facilities North Atlantic, 4% Asia, 45% E 8% 6% 4% 2% % -2% -4% Revenue EBITDA EBITDA margin (rhs) E X Adj. Net debt Equity Adj. Net debt/ebitda October 213

24 1. Scandi High-Yield Handbook Relative valuation Spread development Z-spread FOY 5 18 Industrial 'BB-' category Years to maturity ASW (bps) Aug-13 Aug-13 Sep-13 Sep-13 FOY 5 18 Sep-13 Sep-13 Oct-13 Source: Bloomberg, Danske Bank Markets Source: Bloomberg, Danske Bank Markets Debt composition Other loans, Bank loans Financial 6% (fixed), 6% lease liabilities, 1% Bank loans (variable), 32% Debt maturity profile EURm Commercial paper, 46% Bank loans (fixed) Bank loans (variable) Bonds Commercial paper Financial lease liabilities Other loans Table 15. Key credit ratios Adjusted ratios E Sales growth % 3% -19% 1% 12% 8% 1% EBITDA margin 12% 5% -1% 7% 4% 8% 8% EBIT margin 7% 1% -8% 1% -1% 3% 3% ROCE 17% 2% -18% 2% -3% 7% 7% EBITDA interest coverage (x) EBIT interest coverage (x) FFO interest coverage (x) Net debt/ebitda (reported) (x) Net debt/ebitda (x) Gross debt/ebitda (x) FFO/net debt 57% 39% 2% 18% 15% 33% 32% FFO/gross debt 3% 19% 1% 1% 1% 19% 19% Total debt/total capital 45% 5% 62% 6% 62% 56% 56% Net debt/total capital 23% 24% 33% 36% 42% 32% 33% Net gearing 43% 49% 87% 89% 111% 74% 75% Dividends/FFO 4% 22% % % % % % October 213

25 Table 16. Financial statements Income statement (EURm) E Total sales 2,181 2,256 1,838 2,23 2,258 2,449 2,474 Operating expenses -1,926-2,165-1,891-1,99-2,188-2,275-2,37 EBITDA EBITDA adjusted Depreciation and amortisation Non-recurring items EBIT EBIT adjusted Net interest Pre-tax profit Tax Net income Balance sheet (EURm) E Fixed assets 1,169 1,272 1,469 1,47 1,468 1,363 1,398 Goodwill Associates Other non-current assets Working capital assets Cash and cash equivalents Other current assets Total assets 2,144 2,84 2,457 2,412 2,357 2,242 2,265 Total assets (adj.) 2,567 2,468 2,86 2,856 2,776 2,598 2,621 Total interest bearing debt Total interest bearing debt adjusted ,323 1,289 1,239 1,11 1,13 Net interest bearing debt Net interest bearing debt adjusted Working capital liabilities Other current liabilities Other non-current liabilities Total equity Total equity and liabilities 2,144 2,84 2,457 2,412 2,357 2,242 2,265 Total equity and liabilities (adj.) 2,567 2,468 2,86 2,856 2,776 2,598 2,621 Cash flow statement (EURm) E EBIT before non-recurring items Reversal of non-cash items Tax paid Other cash flow from operations Funds from operations FFO adjusted Change in working capital Operating cash flow (CFO) CFO adjusted Capex Other cash flow investing activities Free operating cash flow (FOCF) FOCF (adjusted) Dividends paid Share buyback -5 Debt repayment Funding shortfall New debt New equity Other cash flow from financing activities Change in cash October 213

26 1. Scandi High-Yield Handbook Fred. Olsen Energy Company overview Fred. Olsen Energy Group (FOE or the company) is an offshore drilling company with headquarters in Oslo, Norway. It has been listed on the Oslo Stock Exchange (OSE) since 1997, with a market capitalisation of approximately NOK18bn. The company is part of the Fred. Olsen sphere, with the two largest shareholders being listed companies Bonheur ASA and Ganger Rolf (51.9%). Bonheur and Ganger Rolf share the same governance structure, CEO (Anette Olsen) and Chairman (Fred Olsen). FOE s operations are dominated by mid-water drilling rigs on the Norwegian Continental Shelf (NCS) and the UK Continental Shelf (UKCS), with additional drilling operations in Brazil and one drillship in Mozambique. Its fleet consists of two deepwater floaters, five mid-water semi-submersible drilling units, one tender support and one accommodation semi-submersible rig in addition to two newbuilds equipped for ultra-deep water. FOE has a conservative financial risk policy and financial metrics in line with investment grade companies. It is a petroleum drilling contractor a capital intensive, volatile and oil price dependent industry. Key credit considerations Old fleet with uncertain maintenance costs The fleet has an average age of 35 years, which is above average age for the mid-water fleet of around 3 years. A key credit risk associated with FOE is the value of the old units and the risk of extraordinary maintenance costs in conjunction with its special periodic surveys (SPS). We have been relatively conservative in our forecast of SPS costs for the fleet, assuming SPS costs of USD1m for its semi-submersibles and three months of downtime. The company recently guided the Q4 13 SPS of Blackford Dolphin to cost USD9m, well above market expectations and previous indications (USD5-75m). Operational track-record and order backlog FOE is an established player with a strong operational track record and an order backlog of USD4.8bn with an average remaining contract period of 2.7 years as of Q2 13. FOE s counterparties are solely investment grade oil companies, and the order book is dominated by Anadarko (25%) and Chevron (21%). The leverage is conservative and its financial gearing is low. Based on LTM funds from operations (FFO) the company could repay 55% of existing debt and have no interest bearing debt within 1.8years. Its two newbuilds with delivery in Q4 13 and Q1 15 will increase its financial gearing, although limited to gross debt/ EBITDA within 2.5-3x and FFO/ net debt of 28-39% towards 215 based on our estimates. Table 17. Key credit metrics and ratios Facts Sector: Oil and Offshore Corporate ticker: FOENO Equity ticker: FOE NO Market cap: NOK17.9bn Equity book value: NOK7.9bn Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: BB+ Senior Unsecured: BB+ Analysts: Åse Haagensen ha@danskebank.com Kasper From Larsen kasla@danskebank.com Key credit issues Strengths: Conservative and prudent financial leverage Solid operational track record. Substantial order USD4.8bn backlog. Sound counter parties. Challenges: Old fleet with uncertain maintenance costs. Mid-sized player in a market dominated by larger players. Cyclical and oil price dependent industry. Source: Danske Bank Markets NOKm E 214E Total revenues EBITDA EBITDA margin 6 % 57 % 55 % 51 % 51 % 49 % Total assets (adjusted) TIBD / EBITDA (x) 1,7x 1,7x 1,7x 1,4x 2,4x 2,5x FFO/ Net debt (%) 75 % 77 % 89 % 87 % 46 % 39 % Total debt / Capital 55 % 45 % 43 % 39 % 5 % 53 % estimates October 213

27 Liquidity FOE s liquidity is excellent, as the company has a bank facility of USD1,5m (217), of which approximately USD7m was drawn as of Q2 13. Funds from operations (FFO) are expected to be NOK3bn in 213 and in the area NOK3-3.2bn in The marginal increase of EBITDA and earnings in 214 despite the delivery of the drillship Bolette is related to our relatively conservative assumptions regarding its three to four SPS in 214 and an expected utilisation for Bolette of 6-75% during its first year of operation. According to our forecast, FOE has no additional funding needs prior to delivery of Bollsta Dolphin in Q1 15. The ultra-deepwater semi-submersible rig has a total project cost of USD74m and a yard cost of USD62m. The company has not yet secured bank financing for the remaining 8% of the yard cost for Bollsta but we are comfortable with its financing capabilities given Bollsta s five-year contract with Chevron (Aa1/AA) with an estimated NPV (1%) of USD458m. FOE s two newbuilds are ordered from the South Korean yard Hyundai Heavy Industries (the world s largest yard), and FOE has secured bank financing of USD45m to finance the remaining 7% of the total cost of Bolette Dolphin with expected delivery in October 213. Current performance drivers Established player with a relatively old fleet FOE has an established market position with a strong operational track record but is a medium-sized player in a market dominated by larger players. FOE s fleet is dominated by Aker H3 rigs built in the late 197s with an average age of 35 years (excluding newbuilds). For comparison, the world s mid-water rig fleet has an average age of approximately 3 years, as most newbuilds are targeted for the ultra-deepwater segment. An overview of FOE s drilling units is presented to the right, with investment grade counterparties as Anadarko(Baa3/BBB- positive by S&P), Statoil (Aa2/AA-), Petrobras (A3/BBB negative outlook) and BP (A2/A positive outlook). FOE s main area of operations measured by revenues is the North Sea, the utilisation has been tight historically (graph to the right below) and the increased supply is expected to be accompanied by increased demand. Initiation of new projects (exploration drilling) is of course highly dependent on oil price development and the break-even cost is typically USD6-8m per barrel. Conservative management The company s investment policy is conservative. An example of this is FOE s rejection of a call option for one additional semi-submersible rig with the same specifications as Bollsta in November 212. Although a conservative investment policy is credit positive, in our view controlled and managed fleet renewal would strengthen FOE s business risk profile and is also necessary to sustain a strong cash generation profile in the long term. FOE s financial policy is conservative with low leverage and financial gearing, although FOE has paid an additional NOK1 per share in extraordinary dividend (NOK1,325m); this equals an average payout ratio of 56% relative to net income. A somewhat aggressive dividend policy is credit negative but must be seen in conjunction with its operational cash flow and dividend s discretionary nature. Outlook Our estimates are lower than consensus expectations, as 214 is particularly SPS heavy (3/4x) and due to our utilisation expectations for Bolette Dolphin and Bollsta Dolphin for its first six months of operations (6-75%). Our credit-influenced forecast assumes that each SPS will cost USD1m for its semi-submersible drilling rigs (USD6m for the drillship Belford) with three months of downtime. Post present contracts (including options), we have forecasted 9 days of downtime and a utilisation of 95% for all established units under operation October 213 Sources and uses E 214E 215E SPS capex (forecast) Running Maintenance capex (forecast) Net investments in fixed assets and intangibles Dividends paid OCF (adjusted) EBITDA E 214E 215E Source: Danske Bank Markets Fleet overview EBITDA adjusted EBITDA margin EBIT margin Current location Name Type Mozambique Belford Dolphin Drillship UDW Brazil Blackford Dolphin Semi 5G DW Norway Bideford Dolphin Semi 3G /2G MW Norway Borgland Dolphin Semi 3G /2G MW Norway Bredford Dolphin Semi 2G/3G MW Brazil Borgny Dolphin Semi 2G MW UK Byford Dolphin Semi 2G /3G MW UK Borgsten Dolphin Semi 2G-Tender support UK Borgholm Dolphin Semi - accommodation Mozambique Bolette Dolphin Drillship UDW UK Bollsta Dolphin Semi 6G HE UDW Source: Danske Bank Markets Utilization in the North Sea (MW) Total Rigs Contracted Rigs Rig-by-Rig Utilization Source: Riglogix, Danske Bank Markets 8,% 6,% 4,% 2,%,% 1 % 8 % 6 % 4 % 2 % %

28 Relative valuation Floating rate note cash price DM (bps) FOENO 5/12/16 Moody's MIR BB+ category Years to maturity Cash Price Jan-12 Mar-12 May-12 Jul-12 FOENO 5/12/16 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Source: Bloomberg, Moodys, Danske Bank Markets Source: Bloomberg, Danske Bank Markets Debt Composition Debt Maturity Profile Bank debt (secured) FOE4 Available credit facility (un-used) Bank loan principal Bank loan installments FOE Source: Danske Bank Markets Table 18. Key credit ratios Ratios (Adjusted) E 214E 215E Net sales growth 9 % 35 % 14 % -9 % 8 % 3 % -2 % 4 % -3 % EBITDA margin 46 % 58 % 6 % 57 % 55 % 51 % 51 % 49 % 45 % EBIT margin 34 % 45 % 46 % 36 % 35 % 32 % 3 % 28 % 26 % ROCE (%) 35 % 22 % 21 % 17 % 17 % 16 % 14 % 12 % 12 % EBITDA interest coverage (x) 24,9x 23,7x 24,4x 39,2x 36,5x 15,6x 2,1x 9,2x 8,x EBIT interest coverage (x) 18,6x 18,5x 18,4x 25,1x 23,4x 9,6x 11,9x 5,2x 4,6x FFO interest coverage (x) 21,7x 21,6x 22,6x 37,5x 34,6x 14,3x 18,1x 8,1x 6,9x FFO / TIBD (%) 39 % 3 % 54 % 57 % 57 % 63 % 38 % 36 % 29 % FFO / NIBD (%) 47 % 47 % 75 % 77 % 89 % 87 % 46 % 39 % 3 % FOCF / TIBD (%) -18 % 2 % 3 % 26 % 3 % 2 % -15 % 1 % -14 % TIBD / EBITDA (x) 2,2x 3,x 1,7x 1,7x 1,7x 1,4x 2,4x 2,5x 3,x NIBD/EBITDA (x) 1,9x 1,9x 1,2x 1,2x 1,1x 1,1x 1,9x 2,3x 2,9x TIBD/ (Equity + TIBD) (%) (Adjusted) 51 % 64 % 55 % 45 % 43 % 39 % 5 % 53 % 6 % Total equity / total assets (%) 44 % 34 % 41 % 51 % 54 % 5 % 45 % 43 % 37 % Dividends / Net income (%) 49 % 69 % 6 % 33 % 62 % 74 % 74 % 88 % 85 % October 213

29 Table 19. Financial statements Income statement (NOKm) E 214E 215E Offshore drilling - contracted Offshore drilling - forecast Total revenues OPEX Other costs 228 EBITDA book EBITDA adjusted Depreciation & amortization EBIT EBIT adjusted Interest expense (net book) Interest expense (net Adjusted) EBT EBT Adjusted Tax Net income Net income Adjusted Balance sheet (NOKm) E 214E 215E Fixed assets Goodwill Working capital assets Restricted cash Cash and cash equivalents Total assets Total assets (adjusted) Total interest bearing debt (TIBD) Total interest bearing debt (TIBD) (Adjusted) working capital liabilities Total equity Total equity and liabilities Total equity and liabilities (Adjusted) Cash flow statement (NOKm) E 214E 215E EBITDA Tax cost Net interest paid FFO FFO (Adjusted) Changes in working capital Operating cash flow (OCF) OCF (adjusted) Net investments in fixed assets and intangibles Running Maintenance capex (forecast) SPS capex (forecast) Free operating cash flow (FOCF) Debt principal and installments Dividends paid Funding shortfall New debt New equity Change in cash Source: Danske Bank Markets October 213

30 ISS Company overview Denmark-based ISS is one of the world s leading providers of facility services, with more than 53, employees in more than 5 countries. The company generated revenues of DKK79.5bn and EBITDA of DKK5.5bn in 212. In March 25 EQT and Goldman Sachs Capital Partners made a public tender offer to the shareholders of ISS A/S through an entity now named ISS A/S (previously ISS Holding). In May 25 the LBO was completed, which left the group with weak credit metrics. Under its new ownership ISS has made numerous acquisitions in order to broaden its scope of service offerings and geographical presence. In August 212 Ontario Teachers Pension Plan and KIRKBI Invest A/S agreed to invest EUR5m in ISS to take a combined 26% total holding of ISS. EQT and Goldman Sachs Capital Partners did not sell any shares as part of the transaction and remain majority owners of ISS. Key credit considerations Strong business risk profile... Being one of the world s leading providers of facility services ISS operates in a competitive and fragmented market with low entry barriers. However, as ISS is successfully focusing on Integrated Facility Services (IFS) and offers bundled services on a global scale, the entry barriers are raised in this part of the business. The operating margin and cash-generation ability have proven relatively resilient through the business cycle underpinned by ISS s highly flexible low-cost base, well-diversified service portfolio and customer base, high customer retention rate, good geographical diversification and the critical mass to benefit from economies of scale. but weak credit metrics despite deleveraging The strong business risk profile should be viewed in combination with weak credit metrics after the LBO and high M&A activity. Since 28 M&A activity has slowed materially and ISS now identifies organic growth and debt reduction as key priorities. This is underpinned by the sale of shares in August 212 and the recent sale of ISS pest control for about DKK2bn. Further divestments could take place in order to deleverage ahead of a potential IPO. Holding structure results in material subordination considerations ISS Global A/S (the issuer of pre-lbo EMTNs) is indirectly wholly-owned by ISS A/S (formerly ISS Holding A/S, issuer of 216 bonds) and the latter does not run any operational activities. This holding structure is key for credit investors due to a significant degree of contractual and structural subordination. Table 2. Key credit metrics and ratios Adjusted figures Sales growth 15% 8% % 7% 5% 2% EBITDA 4,868 5,119 4,931 5,316 5,437 5,461 EBITDA margin 7.6% 7.4% 7.1% 7.2% 7.% 6.9% FFO / Interest coverage 1.4x 1.7x 1.7x 1.8x 1.8x 1.8x FFO / Net debt 14% 16% 14% 15% 15% 16% Net debt / EBITDA 6.9x 6.6x 7.2x 6.7x 6.4x 5.7x Net debt / EBITDA (pro forma) 6.2x 5.9x 6.5x 6.x 5.8x 4.9x Total debt / Total capital 96% 12% 16% 16% 17% 1% estimates HOLD Sector: Industrials; Commercial Services Corporate ticker: ISSDC Equity ticker: Private Market cap: Private Equity book value: DKK5.bn Ratings: S&P: BB- /P Moodys: B1 /P Fitch: Not rated Analysts: Brian Børsting brbr@danskebank.dk Asbjørn Purup Andersen apu@danskebank.dk Key credit issues Strengths: Strong geographical and product diversification through integrated facility services. Highly diverse and recurring customer base. Defensive and stable industry characteristics. Flexible low-cost base. Challenges: High exposure to the weak European service market. Highly leveraged financial profile. Competitive and fragmented industry. Low entry barriers and ongoing price pressure. Source: Danske Bank Markets October 213

31 Liquidity We consider ISS liquidity profile as strong. As of end-h1 13 ISS had cash and cash equivalents of DKK4.7bn. Furthermore, in April 213 ISS announced a big refinancing and extension of a major part of its debt, which improves financial flexibility and supports the liquidity profile. ISS has extended the maturity of a total of DKK17.1bn of debt from December 214 and April 215 to December 217 or April 218. Thus the company s main concentration of debt maturities will be around 218. Looking at the pro-forma debt maturity profile following the refinancing, this should provide ISS with substantial flexibility to last post a potential IPO (planned for 215 at the latest). Current performance drivers Resilient profitability despite headwinds In the first half of 213 ISS delivered another solid result with organic growth of 3.5% y/y primarily driven by Emerging Markets with Asia once again reporting doubledigit organic growth. Start-up of the Barclays and Novartis contracts also supported the growth, which was mitigated by a continued low level of portfolio services and challenging macro-economic conditions in general. The operating margin was stable at 4.8% versus 4.9% in H1 12 and ISS continued to have a high cash conversion ratio 98% in H1 13 versus 99% in H1 12. For 213 ISS expects to realise organic growth of around 3% y/y supported by several large IFS contracts in 212. The EBIT-margin is expected to be slightly lower than the level realised in 212 due mainly to the divestment of the pest control activities. Cash conversion is expected to be above 9% in 213. New investors secured first deleveraging divestment secured second The proceeds from Ontario Teachers Pension Plan and KIRKBI Invest A/S s purchase of a 26% owner share were used to redeem the ISS Financing 214 notes after the December 212 call date. This equity injection enhanced ISS s credit profile, as it supports deleverage and strengthens free cash flow in 213 and 214 as a result of lower interest cost. Following the equity injection in 212, divestments and solid operating performance, the pro-forma net debt to EBITDA fell to 4.8x end-h1 13 from 5.8x end-211. We expect ISS to continue to deleverage in a process, which according to ISS will end up with a targeted IPO in 215 at the latest. Outlook and recommendation We have a Hold recommendation on ISS. The company is focused on deleveraging ahead of a potential IPO. We believe that this will mainly be achieved by gradual divestment proceeds, supported by a stable cash flow as well as reduced interest rate expenses after the ISS Financing 214 notes were fully redeemed last December using proceeds from the equity injection. We note that bondholders generally benefit from a strong carry, while a potential redemption presents a slight downside. Following the redemption of the ISS Financing 214 notes in December, the ISS 216 subordinated notes currently constitute the highest cost of interest for the company and consequently we expect ISS to redeem the ISS 216 subordinated notes when possible. In July ISS completed a partial redemption of an aggregate DKK1,73m of the 216 bonds and we expect the company to use proceeds from further potential divestments to redeem more of the outstanding bonds in the coming quarters. We recommend bondholders to hold the bonds until a potential call. The 214 bonds under the EMTN programme are not callable. However, the bonds can be purchased in the open market at any time (currently trading at a cash price of 13/14). Following ISS s tender offer in 27, the notes are very illiquid and we have no recommendation on the bonds. We expect ISS to let the bonds mature on 8 December 214. ISS liquidity profile DBM estimate DKKm 12, 1, 8, 6, 4, 2, Cash outflow Short term debt Dividend CAPEX Regional sales split 212 Divisional sales split 212 Credit metrics DKKbn Latin America 5% Asia 9% Eastern Europe 2% Property services 19% Catering 1% USA 4% Pacific 8% Western Europe 5% Support 8% Cash inflow Cash & Equivalents LTM CFO Committed facilities Nordic 22% Security 7% Facility mgmt. 5% Cleaning 51% x 7.5x 7.x 6.5x 6.x 5.5x 5.x 4.5x Net debt Equity Adj net debt/ebitda October 213

32 Relative valuation Z-spread 8 ISSDC 7 Industrial ' categor 6 (B3/B) 5 4 Industrial 'B' category ISSDC (B) Years to maturity Source: Bloomberg, Danske Bank Markets Spread development ASW (bps) Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Source: Bloomberg, Danske Bank Markets ISSDC (B) Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Debt composition Debt maturity profile (pro-forma)* Bond issues 11% Other debt 2% Bank loans / RCF 69% DKKm Source: Danske Bank Markets estimates *DKK1,73m of the 216 bond principal was redeemed in July 213 Source: Danske Bank Markets estimates Table 21. Key credit ratios Adjusted ratios Sales growth 15% 2% 15% 8% % 7% 5% 2% EBITDA margin 7% 7% 8% 7% 7% 7% 7% 7% EBIT margin 6% 6% 6% 6% 6% 6% 6% 6% ROCE 11% 1% 11% 11% 11% 12% 12% 13% EBITDA interest coverage 1.8x 1.6x 1.7x 2.x 2.x 2.1x 2.2x 2.2x EBIT interest coverage 1.5x 1.3x 1.4x 1.7x 1.7x 1.8x 1.8x 1.8x FFO interest coverage 2.x 1.5x 1.6x 2.1x 2.x 2.1x 2.1x 2.x Net debt / EBITDA (reported) 6.9x 6.6x 6.3x 6.x 6.5x 6.x 5.7x 5.x Net debt / EBITDA 7.6x 7.3x 6.9x 6.6x 7.2x 6.7x 6.4x 5.7x Gross debt / EBITDA 8.2x 7.9x 7.4x 7.2x 7.8x 7.3x 7.1x 6.4x FFO / net debt 15% 13% 14% 16% 14% 15% 15% 16% FFO / gross debt 14% 12% 13% 14% 13% 14% 14% 14% Total debt / total capital 9% 94% 96% 12% 16% 16% 17% 1% Net debt / total capital 84% 88% 89% 94% 96% 96% 96% 9% Net gearing 39% 51% 67% 957% 1594% 1336% 1663% 621% Dividends / FFO 187% 31% 21% % % % % % 3 21 October 213

33 Table 22. Financial statements Income statement (DKKm) Total sales 46,44 55,772 63,922 68,829 69,4 74,73 77,644 79,454 Operating expenses -43,131-51,793-59,242-63,899-64,262-68,956-72,41-74,19 EBITDA 3,39 3,979 4,68 4,93 4,742 5,117 5,243 5,264 EBITDA adjusted 3,46 4,154 4,868 5,119 4,931 5,316 5,437 5,461 Depreciation and amortisation Non-recurring items EBIT 2,296 3,19 3,639 3,753 3,277 4,192 4,165 4,13 EBIT adjusted 2,81 3,49 4,23 4,25 4,63 4,59 4,582 4,68 Net interest ,152-2,234-2,312-1,999-2,127-2,87-2,718 Pre-tax profit 1, ,45 1,441 1,278 2,65 1,358 1,385 Tax ,676-1,847-2,72-2,97-2,597-1,865 1,829 Net income , Balance sheet (DKKm) Fixed assets 1,956 2,163 2,223 2,276 2,4 2,55 2,77 1,887 Goodwill 22,995 26,178 27,293 27,259 27,434 27,747 27,17 25,841 Associates Other non-current assets -3,63 1,618 1,684 9,452 8,88 8,556 7,778 7,129 Working capital assets 7,864 9,65 1,363 1,361 1,433 11,214 12,25 11,745 Cash and cash equivalents 1,863 2,216 2,581 2,961 3,364 3,66 4,37 3,528 Other current assets 658 1,47 2,176 1,272 11,29 2,268 1,722 3,771 Total Assets 31,865 52,253 55,348 53,65 54,354 55,455 54,996 53,912 Total Assets (adj.) 34,618 55,435 58,775 57,45 57,794 59,67 58,518 57,491 Total interest bearing debt 24,685 28,64 31,921 32,489 34,359 34,244 33,959 29,618 Total interest bearing debt adjusted 28,271 32,77 36,72 36,763 38,636 39,33 38,653 34,738 Net interest bearing debt 22,822 26,424 29,34 29,528 3,995 3,638 29,922 26,9 Net interest bearing debt adjusted 26,48 3,491 33,491 33,82 35,272 35,427 34,616 31,21 Working capital liabilities 1,928 2,595 2,75 2,835 2,624 2,83 3,466 3,669 Other current liabilities 8,64 1,649 11,323 11,19 11,586 11,883 11,928 11,954 Other non-current liabilities 1,68 4,389 3,836 3,729 3,572 3,843 3,561 3,648 Total Equity 6,774 5,98 5,518 3,533 2,213 2,651 2,82 5,23 Total Equity and Liabilities 43,635 52,253 55,348 53,65 54,354 55,451 54,996 53,912 Total Equity and Liabilities (adj.) 46,388 55,435 58,775 57,45 57,794 59,63 58,518 57,491 Cash flow statement (DKKm) EBIT before non-recurring items 2,65 3,234 3,835 4,61 3,874 4,31 4,388 4,411 Reversal of non-cash items Tax paid Other cash flow from operations Funds From Operations 3,22 3,145 3,757 4,225 3,869 4,123 3,993 3,739 FFO adjusted 3,86 4,25 4,783 5,311 4,979 5,34 5,255 4,989 Change in working capital Operating cash flow (CFO) 3,84 3,195 3,713 4,334 3,732 4,36 3,676 3,855 CFO adjusted 3,922 4,75 4,739 5,42 4,842 5,217 4,938 5,15 Capex , ,1-881 Other cash flow investing activities -1,33-3,437-2,957-1, Free operating cash flow (FOCF) 1,232-1, ,791 1,9 3,319 3,437 3,18 FOCF (adjusted) 2,7-25 1,67 2,877 3,1 4,5 4,699 4,358 Dividends paid -7,229-1,26-1, Share buyback Debt repayment -1,479-13,43-1,31-5,177-3,395-1,11-5,18 Funding shortfall -5,997-12,824-14, , ,327-2,72 New debt 5,859 14,329 15,581 2,251 5,849 2, New equity ,696 Other cash flow from financing activities -1,821-1,78-1,387-2,289-2,219-2,287-2,325-2,24 Change in cash -1, October 213

34 J. Lauritzen Company overview J. Lauritzen (JL) is a Denmark-originated private shipping company dating back to JL is a shipping conglomerate with operations within four shipping areas: dry bulk, product tankers, gas carriers and shuttle tankers. The diversified shipping player is focused primarily on small- to medium-sized vessels. It is privately owned by the Lauritzen Foundation, a self-governing and independent institution with a balance sheet of DKK9bn (year-end 212) and limited cash. When evaluating JL from a credit perspective, we believe its liquidity and asset values are particularly important contingent on dayrate development for its different shipping segments. Key credit considerations Liquidity is key JL initiated a significant newbuild programme in 27 and was not positioned for the downbeat dry bulk market it has faced. Consequently, its financial risk profile is highly leveraged and its fleet is relatively young. We have previously stressed that JL is positioned for a difficult period and its cash position was USD176m at Q2 13. From a credit perspective, we are positive on JL s initiative to divest its product tanker vessels, which consist of eight wholly owned MR1 vessels and two newbuilds (average age of approximately three years). Assuming a vessel value of USD23m per MR1 vessel, this implies a positive cash effect of USD7m (LTV of 7%). Dayrate sensitivity Earnings with dayrates close to opex or below its costs related to time chartered (TC) vessels is obviously not a sustainable business model unless dayrates improve in line with market consensus expectations. Earnings are strictly dependent on dayrate development in a volatile environment and the sensitivity is particularly strong for its dry bulk Handysize and Handymax vessels with substantial spot rate exposure. The company reduced its EBITDA guidance for 213 to USD4-6m in August 213 (previously USD6-8m), which must be seen in conjunction with the deterioration in dry bulk markets and the counterparty default (STX Pan Ocean) announced in June. Highly leveraged We expect JL s leverage to improve in 214, subject to improved dayrates and the expiration of unfavourable agreements of chartering in vessels (Capesize and Handymax). The latter will also reduce the off-balance sheet liabilities we adjust for in line with rating agency methodology (the net present value of TC commitments). Although highly leveraged, JL s loan relative to book values has improved since yearend 212. The book value of JL s vessels was USD1,498m with a LTV of 78% based on interest bearing debt of USD1,172m at Q2 13. Facts Sector: Shipping Corporate ticker: LAURIT Equity ticker: Private Market cap: Private Equity book value: USD756bn Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: B Senior Unsecured: B- Analysts: Åse Haagensen ha@danskebank.com Brian Børsting brbr@danskebank.com Key credit issues Strengths: Long-standing customer relations Young fleet Diversified fleet with focus on smaller vessels Challenges: Highly cyclical industry Weak shipping markets Significant dry bulk exposure Highly leveraged financial risk profile with significant refinancing need in 215 Source: Danske Bank Markets Table 23. Key credit metrics and ratios USDm E 214E 215E Total revenues EBITDA adjusted EBITDA book EBITDA margin 4 % 28 % 17 % 13 % 28 % 26 % Total debt/ebitda (x) 6,2 11,9 15,7 21,5 9, 1,6 Net debt/ebitda (x) 5,6 1,5 13,6 2,2 8,6 1, Total equity/total assets (book) (%) 48 % 45 % 37 % 36 % 36 % 33 % estimates October 213

35 Liquidity JL is 1% privately owned by the Lauritzen Foundation, with limited cash but a balance sheet of DKK9bn (212). The balance sheet is dominated by its DFDS shares (37% ownership share market value DKK2.3bn) and its ownership in JL in addition to smaller venture capital investments and real estate (DKK1.6bn in 212). We have previously pointed out the possible access to funds based on its DFDS shares, through sales or a total-return-swap agreement with its banks. Based on an historical perspective, we believe the Lauritzen foundation would support JL if further equity is needed to prevent a potential default but the foundation is by no means obliged to do this based on its free mandate and objections to support Danish entrepreneurship, shipping and humanitarian work. The refinancing need in 215 is substantial, with bank loan principal of USD127m and instalments of USD91m in addition to its NOK7m 215 bonds. Current performance drivers Shipping conglomerate JL is an established player with a record of 129 years. Its fleet and operations are currently divided between four business areas with different strategies. Its dry bulk fleet (owns 25 vessels, partly owns 15 vessels) is dominated by smaller Handysize and Handymax vessels and its small-medium dry bulk vessels are targeted at the spot market. JL s gas carrier vessels (owns 23 vessels) are primarily in the spot market with some TC and CoAs. Although contract coverage is limited, we are positive on the high degree of recurring customers and the relatively stable earnings from its gas carrier vessels. As mentioned, JL is looking to divest its product tankers (1 MR1) and its fourth shipping business area offshore consists of three shuttle tankers operating in Brazil for Petrobras, of which two are on 11-year bareboat contracts. Loan-to-value and significant equity values As illustrated graphically to the right, JL has significant equity value despite significant writedowns (USD756m as of Q2 13). This is contingent on the valuation of book values, which were USD1,498m at Q2 13 (LTV of 78%). The valuation of JL s vessels based on the steel value disregards existing contracts and was USD1,322m in Q2 13 indicating an LTV of 88%, which is a marginal improvement since year-end 212. Outlook The outlook for JL is strictly dependent on dayrate development. Should dayrates continue to improve in line with consensus estimates, the company will be able to service its debt commitments and probably expand the dry bulk fleet (small vessels) and gas carriers. If dayrates fail to improve, we do not expect JL to renew its TC-in agreements and potentially look at asset sales for further assets than its announced MR1 portfolio. All else being equal, the contribution from its dry bulk portfolio will improve as unfavourable TC-in contracts mature in 214-plus (initiated at higher dayrates). This is particularly the case for its Handymax and Capesize vessels. Note that we have revised the fundamental assumptions behind our forecasts since we initiated coverage in March 213 (see J. Lauritzen A/S: Initiating coverage, 19 March). Forecast dayrates are based on our equity research analyst s estimates with a 1% haircut. We now include only JL s committed fleet, so the fleet is limited to owned vessels and existing TC-in contracts. This reflects JL s room for manoeuvre in a downbeat market and, consequently, the fleet and opex (include TC-in costs) are reduced in 214 and 215. We have previously assumed these TC contracts to be renewed (at different dayrates) at maturity a scenario that would be more likely if dayrates improve. Dayrate sensitivity 212 USDm per year Bulk (small) Gas Dayrate development Source: Clarksons, Danske Bank Markets Financial gearing 25, 2, 15, 1, 5,, Capesize Handymax E(Panamax) Source: Danske Bank Markets Balance sheet Q Source: Company data Bulk (large) Tank Panamax E(Capesize) E(Handymax) Net debt / EBITDA (x) (book values) Net debt/ebitda (x) Assets Equity & debt E TIBD 214E Non- IBD Equity 215E Fixed assets Other assets Restricted cash Cash October 213

36 Relative valuation (FRN) DM (bps) Source: Moodys, Danske Bank Markets LAURIT 1/24/17 Moody's MIR B category 6 Moody's 4 MIR B- category 2 Years to maturity Floating note cash price Cash Price LAURIT 1/24/ nov-12 des-12 des-12 jan-13 feb-13 feb-13 mar-13 apr-13 apr-13 mai-13 jun-13 jul-13 jul-13 aug-13 sep-13 sep-13 Source: Bloomberg, Danske Bank Markets Debt composition Debt Maturity Profile Bank debt (Term loan) 41 % Bond debt 17 % Revolving credit facility 18 % Bank loan installments JLA2 (NOK) Bank loan principal JLA1 (NOK) ECA 24 % Source: Danske Bank Markets Source; Danske Bank Markets Table 24. Key credit ratios USDm E 214E 215E Net sales growth -1 % -37 % 49 % -22 % 15 % -28 % -19 % -11 % EBITDA margin 32 % 38 % 4 % 28 % 17 % 13 % 28 % 26 % EBIT margin 11 % 23 % 33 % 13 % 6 % -39 % 11 % 8 % ROCE (%) 3 % 4 % 8 % 2 % 1 % -9 % 3 % 2 % EBIT interest coverage (x) 1,1 1,7 2,8 1,1,6-2,9,8,5 FFO interest coverage (x) 2,4 1,7 2,3 1,3,4 -,1 1,1,8 FFO/TIBD (%) 1,9% 6,7% 1,8% 4,6% 1,3% -,5% 5,8% 4,1% FFO/NIBD (%) 12,5% 7,5% 11,9% 5,2% 1,6% -,5% 6,1% 4,4% FOCF/TIBD (%) 4,5% -27,1% -8,8% -12,2% -3,8% -7,3% 3,% 1,3% Net debt/ebitda (x) 5,7 8,3 5,6 1,5 13,6 2,2 8,7 1,1 TIBD/(equity + TIBD) (%) 57,3% 61,% 61,3% 62,4% 69,5% 7,3% 66,9% 66,7% Total equity/total assets (book) (%) 59,3% 51,7% 48,% 44,8% 36,8% 37,3% 38,3% 36,7% Total equity/total assets less goodwill (%) 37,5% 36,8% 36,2% 35,7% 28,7% 28,9% 28,8% 29,2% Dividends/net income (book) 55 % % % % % % % % estimates October 213

37 Table 25. Financial statements Income statement (USDm) E 214E 215E Lauritzen Bulkers Lauritzen Kosan Lauritzen Offshore Services Lauritzen Tankers Other income Total revenues Operational costs EBITDA EBITDA adjusted Depreciation & amortisation EBIT EBIT adjusted Interest expense (net book) Interest expense (net adjusted) EBT EBT adjusted Tax Net income Net income adjusted Balance sheet (USDm) E 214E 215E Fixed assets Goodwill 2 Investments in JV/associates Total working capital assets Restricted cash Cash and cash equivalents Total assets Total assets (adjusted) Total interest bearing debt (TIBD) Total interest bearing debt (TIBD) (adjusted) Total working capital liabilities Total equity Total equity and liabilities Total equity and liabilities (adjusted) Cash flow statement (USDm) E 214E 215E EBITDA Tax cost Net interest paid FFO FFO (adjusted) Changes in working capital Operating cash flow (OCF) CFO (adjusted) Net investments Maintenance capex (forecast) Free operating cash flow (FOCF) Debt principal and instalments Dividends paid 85 Funding shortfall New debt New equity Change in cash estimates October 213

38 Meda Company overview Sweden-based Meda is an international specialty pharma company with a sales organisation in more than 55 countries, covering some 75% of the global pharmaceutical market, and full representation in Europe and the US. In total, Meda s pharmaceuticals are sold in more than 12 countries. Its business model is based on acquisitions, partnerships, in-licensing opportunities and development of drugs in a late clinical phase. Marketing and sales form a central part of Meda s strategy. At the end of 212, Meda had some 2,9 employees, of which 1,8 were in sales and marketing. Meda s largest shareholders include Stena Sessan Rederi AB (23% of share capital), Swedbank Robur Fonder (5%) and AMF (2%). Key credit considerations Good growth potential for pharma but with increasing price pressure We expect the global pharmaceuticals market to show good growth in coming years, supported by ageing populations and an increasing number of chronic disease patients. At the same time, price pressure has intensified due to the increased cost of publicly financed medicine, constrained government budgets and competition from generic drugs. The consolidation of the big pharma companies has opened up opportunities for specialty pharma companies that can focus on certain niches not targeted by the larger companies. Meda has taken advantage of this opportunity and has been growing rapidly over the past 1 years by building its own sales and marketing organisation, acquiring companies and product rights and long-term partnerships. The acquisitions have been financed with a mix of internally generated cash flow, debt and equity. Strong free cash flow generation Meda s credit profile is supported by the company s strong free cash flow generation. As Meda is not active in the early R&D-intensive phases of clinical drug development, capital intensity is low. Also, the dependence on individual products has gradually declined. In 211, the single largest product made up 6% of total sales, while the 1 largest products together made up slightly more than one-quarter of sales. At the same time, the sales and margins of some of Meda s products are exposed to strong competition from generic products. Due to its limited R&D capabilities, the company pursues an expansionary business model with growth based on acquisitions of companies and products, which entails integration risks. Positively, Meda has a good record in terms of integrating acquisitions and has managed to maintain profit margins at high levels, even though profit margins recently have come under pressure due to increased marketing spending. All in all, we view Meda as a BB credit assuming that leverage gradually declines towards 4x in coming quarters (Q x). Key credit metrics and ratios Adjusted figures Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Sales growth y/y 15% 5% -6% -8% -5% -3% LTM EBITDA (SEKm) 4,715 4,539 4,233 3,935 3,77 3,65 EBITDA margin 35% 31% 3% 29% 3% 29% LTM FFO/interest coverage (x) LTM FFO/net debt 2% 2% 21% 19% 19% 18% Net debt/ltm EBITDA (x) Total debt/total capital 53% 54% 52% 52% 52% 53% Facts Sector: Specialty pharma Corporate ticker: MEDA Equity ticker: MEDAA SS Market cap: SEK21.7bn Equity book value: SEK14.8bn Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: BB Senior Unsecured: BB Analysts: Louis Landeman louis.landeman@danskebank.com Jakob Magnussen, CFA jakja@danskebank.com Key credit issues Strengths: Demand for pharmaceuticals is supported by ageing populations and an increasing number of chronic disease patients. Competitive advantage through large sales and marketing. The company has a good record of integrating acquisitions. Profit margins are high and capital-intensity is low. Challenges: Meda pursues an expansionary business model with growth based on acquisitions of companies and products. Competition from generic drugs is increasing. Constrained government budgets put pressure on drug prices. A stricter regulatory framework means longer and fewer product approvals (especially in the US). Source: Danske Bank Markets October 213

39 Liquidity We regard Meda s liquidity position as satisfactory. At the end of June 213, the company had total debt, including pension obligations, of SEK16bn, of which shortterm debt amounted to SEK2.3bn. Cash and cash equivalents amounted to SEK248m. As at end-212, Meda had a liquidity reserve, consisting of cash and bank balances, current investment and the unused portion of confirmed credit facilities, of SEK8bn. The company s liquidity policy is to maintain a liquidity reserve of at least 5% of annual sales. Among other things, Meda has a SEK2bn credit facility with four Nordic banks that matures in November 215 and a SEK13.3bn credit facility in three tranches with nine banks that matures in The company s syndicated credit facilities are available provided that Meda meets certain financial key ratios such as net debt to EBITDA, net debt to equity and interest coverage. Current performance drivers Slow organic growth in Q2, with continued margin pressure In Q2 13, Meda s net sales in local currencies rose by 1% y/y, with organic sales growth of 2%. Sales in Western Europe rose by 1% in local currencies, while sales in the USA rose by 1%, with organic growth of positive 4%. While some older products in the US market face tough generic competition, Meda s next potential blockbuster drug Dymista showed good growth with sales of SEK177m (Q1 12 SEK63m). Sales in emerging markets rose by 3% in local currencies. Meda s EBITDA declined to SEK922m (Q2 12 SEK1bn), resulting in an EBITDA margin of 28% (Q2 12 3%). Selling expenses rose, due mainly to market investments and costs for Dymista. Due to the lower earnings, Meda s operating cash flow after working capital changes fell to SEK65m (Q2 12 SEK792m). Investments totalled SEK61m. A dividend of SEK2.25 per share (211 SEK2.25 per share), totalling SEK68m, was paid in early May. Net debt rose slightly to SEK15.7bn (Q1 13 SEK15.4bn). Adjusted net debt to EBITDA stood at 4.3x at end-june 213 (Q x). New CEO is announced Due mainly to the positive sales outlook for Dymista, Meda reiterated its organic growth outlook for FY 213 of 3-5% in conjunction with its Q2 earnings announcement; hence, indicating accelerated sales growth in coming quarters. In early October, Meda announced that its CEO of 14 years, Anders Lönner, had decided to step down from his position. Instead, Meda s board named Dr Jörg-Thomas Dierks as the new CEO. Dierks has been Meda s COO since 25 and has previously worked at companies such as NovoNordisk and Viatris. It remains to be seen whether the change of CEO will mean any changes in Meda s strategy. In conjunction with the announcement, the new CEO confirmed the company s previous guidance of 3-5% organic growth for 213. Outlook and recommendation In Q2, Meda s organic growth remained low even though its performance improved somewhat compared with Q1. Operating margins remained under pressure, due mainly to costs related to the launch of the new drug Dymista, and leverage rose somewhat further following the dividend payment in May. Positively, the company maintained its positive sales outlook for Dymista, which offers potential for improved organic growth in coming quarters if Meda can deliver on its ambitious targets. We maintain our view of Meda as a BB credit assuming that leverage gradually declines towards 4x in coming quarters. Adequate liquidity position YE 212 SEKm Intensifying margin pressure SEKm Liquidity reserve Short-term debt Long-term debt Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Business breakdown as of Q2 13 Rising leverage the past year SEKm % 35% 3% 25% 2% 15% 1% 5% % Net sales EBITDA LTM EBITDA-margin (rhs) OTC 23% Specialty products 64% Other sales 3% Branded generics 1% Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Net debt Equity net debt/ltm EBITDA (rhs) X October 213

40 Relative valuation 35 ASW or DM PEABSS 4/24/14 PEABSS 4.2 MEDAA 15 4/5/16 MEDAA 6/25/15 Source: Bloomberg, Danske Bank Markets SSABAS CLABSS 9/17/18 MIICF ; STERV PEABSS BILL MEDAA /27/18 4/5/18 1/24/16 Meda Years to maturity Floating rate cash price development Cash Price MEDAA 6/25/15 MEDAA 4/5/16 MEDAA 4/5/ Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Source: Bloomberg, Danske Bank Markets Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Debt composition YE 212 Debt maturity profile YE 212 Bank debt 64% Commercial papers 4% Other % Bonds 32% SEKm <1 year 1-2 years 2-5 years >5 years Key credit ratios Adjusted ratios Sales growth 262% 83% 55% 31% 23% -12% 11% 1% EBITDA margin 23% 35% 31% 33% 34% 38% 38% 31% EBIT margin 15% 28% 22% 23% 23% 23% 22% 15% ROCE 6% 16% 11% 9% 11% 1% 9% 6% EBITDA interest coverage (x) EBIT interest coverage (x) FFO interest coverage (x) Net debt/ebitda (reported) (x) Net debt/ebitda (x) Gross debt/ebitda (x) FFO/net debt 8% 22% 12% 12% 23% 2% 18% 19% FFO/gross debt 8% 21% 12% 12% 23% 2% 18% 18% Total debt/total capital 62% 54% 61% 56% 51% 51% 55% 53% Net debt/total capital 61% 54% 61% 56% 51% 51% 55% 53% Net gearing 157% 116% 155% 127% 13% 12% 121% 113% October 213

41 Financial statements Income statement (SEKm) Total sales 2,87 5,256 8,145 1,675 13,178 11,571 12,856 12,991 Operating expenses -2,28-3,443-5,696-7,25-8,791-7,265-8,173-9,56 Non-recurring items EBITDA 59 1,813 2,449 3,425 4,387 4,36 4,683 3,935 EBITDA adjusted 66 1,861 2,545 3,545 4,533 4,454 4,832 4,81 Depreciation and amortisation ,123-1,485-1,777-2,39-2,144 EBIT 349 1,434 1,67 2,32 2,92 2,529 2,644 1,791 EBIT adjusted 42 1,482 1,766 2,422 3,48 2,677 2,793 1,937 Net interest Pre-tax profit 556 1,678 2,178 3,186 3,52 3,81 3,248 2,339 Tax ,345-2,232-1,983-1,653-1,64 1,159 Net income ,537 1,428 1,68 1,18 Balance sheet (SEKm) Fixed assets Goodwill 5,298 5,82 11,584 14,256 13,26 13,235 14,361 13,89 Associates Other non-current assets 3,764 3,818 13,88 16,31 15,76 15,63 18,537 17,34 Working capital assets 1,342 1,319 2,53 3,638 3,494 3,235 3,724 3,86 Cash and cash equivalents Other current assets , Total assets 11,499 11,319 28,649 35,815 33,23 33,562 38,718 36,555 Total assets (adj.) 12,134 11,677 29, 36,35 33,55 34, 39,62 36,872 Total interest bearing debt 4,99 4,176 13,695 15,426 12,678 12,858 16,715 15,643 Total interest bearing debt adjusted 6,237 5,87 14,785 17,31 14,197 14,322 18,198 17,267 Net interest bearing debt 4,659 4,55 13,453 15,228 12,62 12,747 16,575 15,449 Net interest bearing debt adjusted 5,96 4,966 14,543 16,833 14,121 14,211 18,58 17,73 Working capital liabilities Other current liabilities 1, ,728 2,389 2,255 2,391 2,353 2,75 Other non-current liabilities 1,592 1,578 3,222 3,9 3,646 3,713 3,81 2,824 Total equity 3,76 4,297 9,364 13,29 13,664 13,925 14,971 15,113 Total equity and Liabilities 11,499 11,319 28,649 35,815 33,23 33,562 38,718 36,555 Total equity and Liabilities (adj.) 12,134 11,677 29, 36,35 33,55 34, 39,62 36,872 Cash flow statement (SEKm) Pre-tax profit 349 1,434 1,67 2,32 2,92 2,529 2,644 1,791 Reversal of non-cash items ,123 1,485 1,777 2,39 2,144 Tax paid Other cash flow from operations Funds from operations 445 1,61 1,662 2,3 3,87 2,734 3,13 3,51 FFO adjusted 481 1,91 1,74 2,98 3,29 2,86 3,262 3,181 Change in working capital Operating cash flow (CFO) ,238 1,95 3,124 2,536 2,858 2,813 CFO adjusted ,316 2,45 3,246 2,662 2,99 2,943 Capex , ,526-4,115-1,152 Net acquisitions/disposals -6, ,185-2, ,326-1,554 9 Free operating cash flow (FOCF) -5, ,93-2,152 2, ,811 1,67 FOCF (adjusted) -5, ,825-2,57 2, ,679 1,8 Dividends paid Share buyback Debt repayment -1, ,74-8, ,13-4,451 Funding shortfall -5, ,9-8,5-6,291-1,461-1,428-3,461 New debt 3, ,932 6,539 5,838 1,5 1,438 3,63 New equity 3,67 4 2,13 1,471 Other cash flow from financing activities Change in cash October 213

42 Nokia Company overview Finnish-based Nokia is one of the world s largest producers of mobile handsets, with sales of EUR3bn and a total of close to 98, employees in 212. In Q2 13, Nokia s Devices & Services unit accounted for 48% of total group sales. This unit is split into Smart Devices, which focuses on more advanced products including smartphones, and Mobile Phones, which focuses on mass market entry and feature phones and cheaper smartphones. In September 213 Nokia announced that it had agreed to sell effectively all of its Devices & Services business and licence patents to Microsoft for EUR5.44bn in cash, payable at closing. The transaction is expected to close in Q1 14, subject to approval by Nokia shareholders and regulatory approvals. In August 213 Nokia completed the acquisition of Siemens s stake in Nokia Siemens Networks for EUR1.7bn and renamed the company Nokia Solutions and Networks (NSN). NSN is now fully owned by Nokia. NSN designs and builds mobile and fixed network infrastructure and platforms and offers professional services to telecom operators. In Q2 13 NSN accounted for some 49% of group sales. The remaining part of group sales after the sale of Devices & Services will be the mapping and location services named HERE and Advanced Technologies (technology development and licensing). In total the new Nokia will have some 56, employees. On a pro-forma basis, the remaining parts of Nokia had net sales of EUR6.3bn with an adjusted operating margin of 12.1% in H1 13. Key credit considerations Strategic changes are positive but major challenges remain Following Microsoft s acquisition of Nokia s Devices & Services business, some 32, people will be transferred to Microsoft including 4,7 in Finland. In 212 the sold units had total sales of EUR14.9bn or almost half of Nokia s total revenues. We view the sale of Devices & Services as positive from a credit perspective. First, Nokia s operating margins and cash flow generation will improve substantially as the loss-making and cash-burning Devices & Services business is divested. Second, Nokia s already strong balance sheet will receive a further boost from the sales proceeds. The large majority of the new Nokia will be made up of the network business in NSN. NSN is one of the world s leading providers of mobile broadband equipment. Following its extensive restructuring programmes, its cost position is now also better aligned to its market position. At the same time, the overall market environment for telecom equipment is challenging, with fierce competition, cyclical demand and constant margin pressure, and NSN s customer base remains relatively concentrated. It therefore remains to be seen if NSN can maintain sound profitability and positive free cash flow generation over time. Table 26. Key credit metrics and ratios Adjusted figures Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Sales growth y/y -29% -19% -19% -2% -2% -24% LTM EBITDA (EURm) EBITDA margin -12.2% -5.3% -3.% 1.3% 3.5% 3.1% LTM FFO / Interest coverage -2.9x -.7x.5x.6x -2.5x -5.7x LTM FFO / Net debt -43% -16% 45% 15% -27% -79% Net debt / LTM EBITDA 1.4x.9x.4x.9x 2.x 5.2x Net debt / Capital -24.% -19.9% -13.3% -24.8% -28.6% -22.5% estimates HOLD Sector: Information technology, Communications equipment Corporate ticker: NOKIA Equity ticker: NOK1V FH Market cap: EUR19.7bn Equity book value: EUR8.6bn Ratings: S&P rating: B+/CW POS Moodys rating: B1/DEV Fitch rating: BB-/CW POS Analysts: Louis Landeman louis.landeman@danskebank.com Jakob Magnussen, CFA jakja@danskebank.com Key credit issues Strengths: Leading market position for mobile broadband equipment with large installed customer base. NSNs cost base has been lowered following the large restructuring programme. Net cash position further strengthened with proceeds being received from the sale of Devices & Services. Challenges: The global telecom equipment market is characterised by fierce competition and intense margin pressure. Rapidly evolving technological challenges. Risk of increased cyclicality in operating spending. NSN still needs to demonstrate that it can sustain its profitability and free cash flow generation over a longer period of time. Source: Danske Bank Markets 4 21 October 213

43 Liquidity We regard Nokia s liquidity position as strong and the company s balance sheet will strengthen substantially after the sale of Devices & Services. At the end of June 213 Nokia had cash, cash equivalents and liquid assets of EUR9.5bn (including NSN s cash, which amounted to EUR2.5bn). In addition, Nokia had a committed credit facility of EUR1.5bn maturing in 216. NSN, which finances itself separately, had a EUR75m revolving credit facility maturing in June 215. The facility includes some financial covenants related to a gearing test, leverage test and interest coverage test of NSN. Nokia s long-term debt amounted to EUR3.4bn at end June 213, while shortterm debt was EUR2bn. Nokia s main bond maturities are in February 214 (EUR1.25bn), 219 (EUR5m and USD1bn) and 239 (USD5m). In early April this year NSN issued a total of EUR8m in new bonds on a standalone basis, of which EUR45m mature in 218 and EUR35m mature in 22. On a pro-forma basis and including the proceeds from the sale of Devices & Services, Nokia would have had total cash of EUR14.9bn and net cash of EUR7.8bn as of end- June. Also deducting the debt maturing in Q1 14 and the repayment of financing facilities related to the NSN acquisition, Nokia s gross cash would be EUR11.4bn with net cash of EUR7.8bn. Importantly, Microsoft s ultimate cash payment to Nokia will be adjusted for various factors such as Devices & Services net cash and working capital at closing of the transaction and the entity s cash burn. This means that Nokia s net sale proceeds may ultimately be more or less than the announced EUR5.44bn. As part of the sale of Devices & Services, Microsoft has made EUR1.5bn available to Nokia in three convertible bonds maturing in five, six and seven years. Nokia issued these bonds in September. Once the sale of Devices & Services closes, these convertible bonds will be redeemed and netted against the deal proceeds. Current performance drivers NSN improved operating margins, with sales recently under pressure In recent years NSN has benefited from the increased demand for mobile data capacity. After some challenging quarters with large restructuring costs, NSN s profitability improved during the latter quarters of 212 and in Q4 12 the venture achieved an EBIT margin of 6.3%. In Q2 13 NSN s sales fell by 17% with an EBIT margin of.3% (Q2 12: negative 6.8%). Part of the decline in sales was due to the divestment of non-core businesses and the exiting of certain countries and customer contracts. Excluding such factors, the decline in sales was 11% due to reduced activity in wireless infrastructure deployment activity, mainly in Asia Pacific, Europe and Greater China. Outlook and recommendation We regard the sale of Devices & Services as a major positive event for Nokia as the company will get rid of its loss-making handset operations and can instead focus on the more stable business in NSN. Still, in spite of its recent restructuring efforts, NSN lacks scale in the equipment business compared with market leaders Ericsson and Huawei. There is therefore a risk that the company may seek to use part of the cash that it will receive from the sale of Devices & Services to strengthen its market position in telecom equipment. For example, it has been speculated that Nokia could be interested in acquiring the wireless unit of Alcatel-Lucent. While such a deal could be positive from a business scale point of view, it would also involve large execution risk. Following the announced sale of Devices & Services, the rating agencies took positive rating actions on Nokia and NSN and have indicated that they could potentially raise their ratings on the companies further depending on the outcome of the company s strategic review and the size of the potential dividend payout. Nokia and NSN s bonds tightened substantially following the sale announcement. We regard current valuations as fair and maintain our HOLD recommendation on the bonds. Adequate short-term liquidity Cash & liquid ass. Short-term debt Divisional sales Q2 13 Margins still under pressure EURm Devices & Services 48% Strong balance sheet EURm Long-term debt HERE 4% Nokia Siemens Networks 48% Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q % 1% 5% % -5% -1% -15% Net sales EBITDA EBITDA-margin (rhs) Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Net debt Equity October 213

44 2. Scandi High-Yield Handbook Relative valuation Z-spd HTOGA TITIM (Ba1/BBB- TITIM TITIM (Ba1/BBB (Ba1/BBB- (Caa1/B+) TLSGSV VATFAL 4.25 TITIM /*-) 14 TITIM (Ba1/BBB- 4 2 (Ba1/BBB- /*-) /*-) (Ba1/#N/A N/A) /*-) PORTEL /*-) 18 PORTEL (Ba2 NOKSIE (B1/B+ PORTEL 5 19 (Ba /*+/BB 2 (Ba2 TITIM 7 TITIM 17 (Ba1/BBB /*+/BB (Ba1/BBB- /*-) /*) /*-) /*+) /*) /*+/BB /*) HTOGA (Caa1/B+) NOKIA (B1/B+ /*) NOKSIE (B1/B+ TITIM 8.25 PORTEL 16 (Ba1/BBB (Ba2/*+) TITIM ALUFP /*-) (Caa1/CCC+) (Ba1/BBB- /*+/BB /*) PORTEL /*-) 16 (Ba2 /*+/BB /*) TITIM (Ba1/BBB- /*-) NOKIA (B1/B+ /*) HTOGA (Caa1/B+) Years to maturity Source: Bloomberg, Danske Bank Markets Nokia Spread development ASW (bps) NOKIA NOKIA apr-1 jul-1 okt-1 jan-11 apr-11 jul-11 okt-11 jan-12 apr-12 jul-12 okt-12 jan-13 apr-13 jul-13 Source: Bloomberg, Danske Bank Markets NOKIA NOKSIE NOKSIE Debt composition Debt maturity profile Other debt 5% Bank loans 13% Convertible 14% Bond issues 68% EURm beyond Source:. Excluding undrawn bank facilities Source: Source: Company data, Danske Bank Market. Excluding undrawn bank facilities Table 27. Key credit ratios Adjusted ratios Sales growth 16% 2% 24% -1% -19% 4% -9% -22% EBITDA margin 3% 3% 5% 7% 8% 1% 2% -2% EBIT margin 1% 1% 2% 4% 4% 6% -2% -7% ROCE 6% 14% 19% 16% 1% 18% -7% -21% EBITDA interest coverage 27.1x 32.5x 2.4x 15.5x 9.4x 12.5x 2.6x -1.6x EBIT interest coverage 14.6x 17.5x 11.5x 9.2x 4.5x 7.3x -1.6x -5.2x FFO interest coverage 75.7x 117.6x 57.6x 25.x 9.4x 8.1x 5.7x -.5x Net debt / EBITDA (reported) -8.6x -6.8x -4.9x -.7x -1.x -1.6x -1.5x n.m. Net debt / EBITDA -7.1x -5.6x -3.9x -.3x -.1x -.8x -3.4x n.m. Gross debt / EBITDA 1.1x 1.x 1.x 1.6x 2.4x 1.9x 1.x n.m. FFO / net debt -47% -73% -79% -586% -152% -75% -74% n.m. FFO / gross debt 291% 426% 31% 12% 41% 34% 25% -4% Total debt / total capital 1% 9% 12% 26% 35% 33% 36% 46% Net debt / total capital -215% -153% -117% -7% -2% -28% -24% -19% Net gearing -68% -6% -54% -6% -1% -22% -19% -16% October 213

45 Table 28. Financial statements Income statement (EURm) Total sales Operating expenses Non-recurring items EBITDA EBITDA adjusted Depreciation and amortisation EBIT EBIT adjusted Net interest Pre-tax profit Tax Net income Balance sheet (EURm) Fixed assets Goodwill Associates Other non-current assets Working capital assets Cash and cash equivalents Other current assets Total Assets Total Assets (adj.) Total interest bearing debt Total interest bearing debt adjusted Net interest bearing debt Net interest bearing debt adjusted Working capital liabilities Other current liabilities Other non-current liabilities Total Equity Total Equity and Liabilities Total Equity and Liabilities (adj.) Cash flow statement (EURm) Pre-tax profit Reversal of non-cash items Tax paid Other cash flow from operations Funds From Operations FFO adjusted Change in working capital Operating cash flow (CFO) CFO adjusted Capex Net acquisitions/disposals Free operating cash flow (FOCF) FOCF (adjusted) Dividends paid Share buyback Debt repayment Funding shortfall New debt New equity Other cash flow from financing activities Change in cash October 213

46 2. Scandi High-Yield Handbook North Atlantic Drilling Company overview North Atlantic Drilling (NADL) is operated as an integrated subsidiary of Seadrill (74% owned) and was established in February 211 as a carve-out of Seadrill s harsh environment units operating in the North Atlantic. NADL is a leading player in the tight Norwegian harsh environment market, with five floaters and three jackups (including two newbuilds). The cash flow visibility is strong with an order backlog of USD3.7bn (Q2 13) with no open positions before 215. NADL s financial metrics are in line with an aggressive financial risk profile, as a consequence of its aggressive dividend policy. NADL is registered in Bermuda and is currently listed on the OSE OTC exchange with the intention of an IPO on the NYSE expected in Q1 14. Key credit considerations Operational record and order backlog Despite its young age, NADL has an extensive record through its predecessor Smedvig ASA (acquired by Seadrill in 26) established in NADL has the longest operational record within the Seadrill group, with market-leading utilisation rates and opex control. NADL has an order backlog of USD3.7bn (including newbuild West Linus) and USD4.5bn if we include existing options as of Q2 13. The strong order backlog is backed by strong investment grade counterparties, namely Statoil, Total, Exxon Mobil, Shell and Conoco Phillips. Subsidiary of Seadrill Seadrill (not rated/bb+ by Danske Bank Markets) announced on 14 October that ongoing negotiations with an undisclosed strategic partner for NADL had been put on hold. The undisclosed potential partner has a strong industrial foothold in Russia. Since the establishment of NADL, it has been Seadrill s intention to reduce its ownership share in NADL and its search for a strategic partner to support further growth within harsh environment areas has been expected. Although the latest round of negotiations has been put on hold, we expect Seadrill to continue its strategy of reducing its ownership share in NADL, although Seadrill has stated that it is a committed long-term shareholder. Shareholder-friendly dividend practice NADL s financial risk profile is aggressive with a record and tradition of paying aggressive dividend payments, with a payout ratio of 92% in 212. We expect NADL to continue to pay USD.225 per share on a quarterly basis until delivery of West Rigel (USD.25 per share). Dividend payments are of course discretionary in nature and NADL has the flexibility to improve its financial metrics materially with a strong operating cash flow (USD4m in 213E) and annual dividend payments of USD26m (213E). Table 29. Key credit metrics and ratios USDm E 214E 215E Total revenues EBITDA adjusted Total assets adjusted EBITDA margin 59 % 54 % 38 % 39 % 41 % TIBD / EBITDA (x) 6,2x 4,4x 6,1x 5,3x 5,2x NIBD/EBITDA (x) 5,9x 4,2x 5,7x 5,2x 5,1x FFO / NIBD (%) 5 % 14 % 13 % 15 % 15 % estimates Facts Sector: Oil and Offshore Corporate ticker: NADLNO Equity ticker: NADL NO Market cap: NOK13bn Equity book value: USD857bn Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: BB Senior Unsecured: BB- Analysts: Åse Haagensen ha@danskebank.com Kasper From Larsen kasla@danskebank.com Key credit issues Strengths Operational record and experience. Market position and experience in the North Atlantic Basin. Contract backlog with solid investment grade counterparties. 74% owned by Seadrill Ltd, change of control clause. Challenges Cyclical and oil price dependent industry. Aggressive financial risk profile. Potential strategic partnership, and uncertainty with regard to Seadrills long-term commitment. Source: Danske Bank Markets DANSKE BANK MARKETS HAS BEEN APPOINTED JOINT LEAD MANAGER IN CONNECTION WITH THE UPCOMING OFFERING OF DEBT INSTRUMENTS BY NORTH ATLANTIC DRILLING October 213

47 Liquidity Based on our estimates, NADL will need to refinance parts of its instalments and shareholder loan in addition to new debt in 215. Forecast new debt in 215 relates solely to delivery of the newbuild West Rigel, with an estimated total project cost of USD65m (estimated LTV of 75%). Note that all new debt in 213 is committed facilities and for the forecast period (H2 13) the increased debt is limited to the committed financing of West Linus in Q4 13. The forecast refinancing in 214 and 215 could be drawn from NADL s available long-term credit facility; as of Q2 13 USD1,666m was drawn from NADL s USD2,m facility (matures 218). We have forecast new debt of USD487m in Q1 15 in conjunction with delivery of West Rigel, based on a total project cost of USD65m. Given the tight Norwegian market and NADL s strong operational record, we believe the lack of contract is opportunistic in nature and a credit negative. EBITDA Source: Danske Bank Markets EBITDA book EBITDA adjusted EBITDA margin 8 % 6 % 4 % 2 % % Seadrill s access to diversified funding sources supports NADL s liquidity profile, through Seadrill s access to capital markets, bank syndicates, export credit agencies and the bond market for both NOK and USD. Current performance drivers Relatively young fleet and excellent operational record NADL s drilling unit fleet is more diversified then for Seadrill, as the fleet includes units originated from Seadrill s acquisition of Smedvig in 26 with an age of years. All drilling units are positioned for HE with three heavy-duty jackups, four semisubmersibles (deep to ultra deep water) and one drillship equipped for deep water. Newbuild programme NADL has a newbuild programme of two drilling units, both under construction at the recognised Jurong shipyard in Singapore. The first is the harsh environment jackup West Linus with expected delivery in Q4 13. The jackup is funded (financial lease from Ship Finance) and West Linus has a four-year contract with Conocco Phillips (USD475m total project cost of USD377m). The semisubmersible West Rigel is built on spec with no contract at delivery in Q1 15 and without secured financing (total project cost of USD65m/yard cost USD568m). We expect NADL to be able to finance the delivery of West Rigel in Q1 15 provided the unit has been assigned a contract. Aggressive financial risk profile OCF relative to investments and dividends E 214E 215E OCF (adjusted) Investments and acquisitions Dividends paid Source: Danske Bank Markets Counterparties (order backlog) Shell Exxon Mobil Total Statoil NADL s financial risk profile is aggressive in our opinion, due primarily to its dividend payments. NADL is highly leveraged when we look at book values (75% debt/capital at Q2 13) but note that book values simply reflect depreciated historical costs. With two drilling units >2 years, we do not believe depreciated historical costs is a meaningful reflection of asset values. This supports a lower leverage; for comparison, debt relative to its order backlog including options was 61% and 58% if we look at debt/(market capitalisation + debt). Source: Danske Bank Markets Dividends Conoco Phillips Outlook Our estimates are lower than consensus expectations, as we forecast a running utilisation of 95%, somewhat higher opex expectations and down time of 5 days in conjunction with special product surveys. In addition, we forecast 5 days of down time before we expect the drilling units to be assigned a new contract Since inception of NADL, Seadrill s intention has been to reduce its ownership share and we expect this process to continue, although limited by the NADL 213/218 change of control clause ensuring that Seadrill cannot own less than 25% or that E Source: Danske Bank Markets 214E 215E October 213

48 2. Scandi High-Yield Handbook another shareholder could hold a majority stake (>5%). We would keep our eyes on a potential new strategic partner for the company. Relative valuation Floating rate note cash price DM (bps) NATCR 1/218 Moody's MIR BBcategory Moody's MIR BB category Please note that NADL (213/218) was issued on 18 October Years to maturity Source: Bloomberg, Moodys, Danske Bank Markets Source: Danske Bank Markets Debt composition Debt maturity profile Shareholder Loan Bonds (Related party) Ship Finance Bonds 213/218 Un-used credit facility Debt additions Bank debt Bank loan installments Shareholder Loan 2H 213 Loan principal Bonds (Related party) Ship Finance Bonds 213/218 Un-used credit facility Source: Danske Bank Markets Table 3. Key credit ratios Ratios (adjusted) E 214E 215E Net sales growth - 44% 32% 6% 7% EBITDA margin 59% 54% 38% 39% 41% EBIT margin 44% 39% 26% 28% 3% ROCE (%) 1% 12% 1% 1% 12% EBITDA interest coverage (x) EBIT interest coverage (x) FFO interest coverage (x) FFO/TIBD (%) 5% 13% 12% 14% 14% FFO/NIBD (%) 5% 14% 13% 15% 15% FOCF/TIBD (%) -2% 2% -1% 11% -3% TIBD/EBITDA (x) NIBD/EBITDA (x) TIBD/assets (book values) 74% 64% 73% 72% 75% TIBD/(equity + TIBD) (adjusted) (%) 83% 74% 79% 78% 81% Dividends/net income (book) (%) 46% 92% 89% 79% 72% estimates October 213

49 Table 31. Financial statements Income statement (USDm) E 214E 215E Contract backlog ,11 1, Offshore drilling forecast 455 Reimbursables Total revenues 724 1,45 1,382 1,46 1,566 Opex EBITDA EBITDA adjusted Depreciation & amortisation EBIT EBIT adjusted Interest expense (net book) Interest expense (net adjusted) EBT EBT adjusted Tax Net income Net income adjusted Balance sheet (USDm) E 214E 215E Fixed assets 2,579 2,665 2,998 2,93 3,37 Goodwill Working capital assets Restricted cash Cash and cash equivalents Total assets 3,596 3,98 4,17 3,965 4,371 Total assets (adjusted) 3,596 3,98 4,453 4,194 4,531 Total interest bearing debt (TIBD) 2,627 2,453 2,966 2,798 3,21 Total interest bearing debt (TIBD) (adjusted) 2,654 2,489 3,222 2,984 3,396 Working capital liabilities Total equity Total equity and liabilities 3,596 3,98 4,17 3,965 4,371 Total equity and liabilities (adjusted) 3,596 3,98 4,399 4,124 4,531 Cash flow statement (USDm) E 214E 215E EBITDA Tax cost Net interest paid FFO FFO (adjusted) Changes in working capital Operating cash flow (CFO) CFO (adjusted) Net investments in fixed assets and intangibles 1, SPS capex (forecast) 12 Free operating cash flow (FOCF) Debt principal and instalments 1, Dividends paid Funding shortfall -1, New debt 2, New equity 15 Other positive cash flow from financing activities Change in cash estimates October 213

50 2. Scandi High-Yield Handbook Odfjell SE Company overview Odfjell SE was established in 1914 by the Odfjell family and was one of the pioneers behind the chemical shipping trade that emerged in the late 195s and the tank storage business in the late 196s. Odfjell Tankers owned and operated a fleet of 86 chemical tankers as of Q2 13, transporting bulk-liquid chemicals, acids, edible oils, biofuel and petroleum products in regional and global trades. Odfjell Terminals operates 1 terminals offering storage facilities for bulk liquid chemicals in strategic cargo hubs worldwide. Odfjell recently re-entered the LPG/ethylene trade through the acquisition of six vessels and we expect further expansion within this segment. Its financial risk profile is best classified as highly leveraged in rating agency terms and we classify its business risk profile as fair. We assign a B+ corporate credit rating, with an unsecured bond issue rating of B to Odfjell. Key credit considerations Key tank terminal and chemical tanker markets to improve credit profile We consider Odfjell s business profile as fair in rating agency terminology. We consider its large fleet to be key credit strengths; scale is a clear advantage within chemical shipping, as it reduces the risk of being caught short on being able to serve customers needs locally, regionally or globally. We also find its strategy of obtaining a fleet with 5% time chartered vessels as credit strengths, as it gives the company the opportunity to scale down operations should the market turn sour. The company was one of the pioneers behind the establishment of the chemical tanker trade in the late 195s and is today the second-largest owner behind peer Stolt-Nielsen, a factor we consider a credit strength for Odfjell to establish and obtain strong customer relationships. Odfjell Terminals has a positive diversification effect for the company and prior to the shutdown of its Rotterdam terminal had secured stable revenues and strong margins, countering the weak market fundamentals in Odfjell Tankers. Key credit challenges taken into consideration revolve around the company s exposure to the highly cyclical chemical tanker market, which correlates strongly with global GDP and industrial production. The shipping segment is also capital intensive and fleet renewals are necessary ongoing investments for the company to remain competitive. The company has a highly leveraged profile following weak chemical tanker earnings and operational problems at the Rotterdam terminal. Its largest cost exposure is bunker prices, which are currently at elevated levels; hence, there is a risk higher bunker prices could deteriorate the cash flow contribution from the Chemical Tanker division. However, the company offsets part of the risk with bunker adjustment factors with its customers and bunker hedging instruments. Key financial ratios Adjusted ratios E 214E Sales growth -14.4% -2.% -6.9% 5.% -2.2% 6.9% EBITDA EBITDA margin 17.4% 16.9% 1.5% 1.2% 13.9% 15.7% FFO/interest coverage (x) FFO/net debt 3.3% 4.2% 2.% 2.2% 4.2% 8.% Net debt/ebitda (x) Total debt/total capital 71.9 % 72.8 % 64.8 % 64.6 % 66.8 % 65.1 % estimates Facts Sector: Industrials; Shipping Corporate ticker: ODFNO Equity ticker: ODF NO Market cap: USD591m Equity book value: USD944m Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: B+ Unsecured rating: B Analysts: Bjørn Kristian Røed bred@danskebank.com Åse Haagensen ha@danskebank.com Key credit issues Strengths: Diversified customer portfolio. Large fleet with a split of owned and time chartered/pooled vessels. Proven record within a shipping niche market. Diversified business portfolio. Supply/demand balance improving for Odfjell Tankers. Challenges: Highly cyclical market within its Chemical tanker division. Capital intensive industry. Highly leveraged company. High exposure to bunker fuel cost. Source: Danske Bank Markets October 213

51 Liquidity Odfjell had a cash position of USD228m as at 3 June 213, up from USD156m at year-end 212. Our EBITDA forecasts for 214 and 215 should be sufficient to cover interest rate costs and its working capital requirements, as we estimate it will generate FFO of USD112m and USD18m, respectively. We highlight that USD219m in cash proceeds through a sale of a 49% share of Odfjell Terminals to Lindsay Goldberg contributes positively in 213. Recently, the company completed the sale of bonds, increasing the nominal amount of its bond portfolio by a net of USD5m; we believe these funds will be used partly to fund instalments on its recent LPG newbuild orders. The company has an established relationship with numerous banks and has a proven record in capital markets, so we see limited risk of the company not being able to obtain bank or bond financing to meet its capex not yet secured financing. We highlight that Odfjell Terminal s EBITDA has been, and is expected to be, sufficient to cover its annual interest expenses alone, when the Rotterdam terminal starts operating fully a factor we find positive from a credit perspective. We estimate the EBITDA contribution from the Rotterdam terminal will reach pre-leakage level in Q1 15. Odfjell has approximately USD7m in undrawn debt facilities, while it has a potential USD1m available under a facility related to the Houston and Charleston terminal, if it meets certain metrics. The company has also commented that some unencumbered assets are available; we believe total unencumbered assets could be lower than USD5m, so not a significant amount but still an amount we find it positive that the company has in its toolbox. Current performance drivers Rotterdam terminal to reach monthly break-even from November The Rotterdam terminal is the largest terminal within Odfjell and consists mainly of chemical storage tanks, which offer the strongest margins (around 55%). The process of restarting the terminal has been delayed due to lack of engineer availability but this problem should reach a solution and, therefore, we expect Rotterdam to reach monthly break-even from November. Odfjell s Q3 13 results in November should bring further clarification on the process and development going forward. A return of the Rotterdam terminal is important for Odfjell s credit rating profile going forward. Slow but continual improvement in chemical tanker markets Peer company Stolt-Nielsen stated that it saw a further improvement in chemical tanker markets in the third quarter and in October its division reported its first positive result since 29. We view this as a positive read-through for Odfjell, with the company having a higher spot rate exposure than its closest peer company. We view comments from Odfjell s management about the state of the chemical tanker market as potential performance drivers for Odfjell s bonds going forward. Outlook We estimate chemical tanker demand will outpace supply growth during our forecast period mainly as a consequence of the limited supply growth, estimated to be 9.3% on a cumulative basis. With the chemical tanker demand/gdp growth ratio being below 1. only occurring three times in the past 22 years, we also see limited downside to demand going forward, with GDP growth estimated to grow at a cumulative pace of 9.3%. We estimate chemical tanker utilisation will improve to 91.4% in 215 from 85% estimated in 213. This leads us to estimate chemical tanker rates will improve by 4.5% in 213, 6.% in 214 and 8.9% in 215 on an average basis. Also, confirmation that the process to restart the Rotterdam terminal at full capacity is going according to plan will also count as a key factor for an improved credit rating profile for Odfjell SE. Liquidity profile E 214E 215E OCF (adjusted) Net acquisitions (sale of assets) Dividends paid Odfjell Terminal & Odfjell tankers likely to improve leverage ratios 16.x 14.x 12.x 1.x 8.x 6.x 4.x 2.x.x E 214E 215E EBITDA by division USDm Q1-24 Q3-24 Q1-25 Q3-25 Q1-26 Q3-26 Q1-27 Q3-27 Q1-28 Q3-28 Q1-29 Q3-29 Q1-21 Q3-21 Q1-211 Q3-211 Q1-212 Q3-212 Q1-213 Chemical shipping fleet development 8.% 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% Orderbook ratio Newbuilding orders (12M running) Newbuilding deliveries 12 M running % 7% 6% 5% 4% 3% % 1% 2% -1% -2% -3% Millions October 213

52 2. Scandi High-Yield Handbook Relative value chart DM (bps) TOO 1/25/16 TOO 1/27/17 TOO 1/25/18 Source: Bloomberg, Moodys, Danske Bank Markets Moody's MIR B+ category Moody's MIR BBcategory 1 Years to maturity Floating rate cash price development Cash Price TOO 11/29/13 TOO 1/25/ Feb-13 Mar-13 Apr-13 Source: Bloomberg, Danske Bank Markets TOO 1/27/17 TOO 1/25/18 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Debt composition Debt maturity profile Undrawn credit facility 6% Secured loans Balloon Leasing NOK bond 12/13 NOK bond 12/15 NOK bond 12/17 Bond debt 21% Financial leases 14% Bank debt 59% USDm Key credit ratios Adjusted ratios E 214E Net sales growth 13.9% 19.1% -14.4% -2.% -6.9% 5.% -2.2% 6.9% EBITDA margin 28.6% 21.8% 17.4% 16.9% 1.5% 1.2% 13.9% 15.7% EBIT margin 17.7% 12.2% 5.4% 5.1% -.1% -.6% 2.7% 4.9% ROCE (%) 8.1% 6.6% 2.3% 2.1%.% -.3% 1.2% 2.5% EBITDA interest coverage (x) EBIT interest coverage (x) FFO interest coverage (x) FFO/TIBD (%) 1.2% 7.6% 3.2% 4.% 1.8% 2.% 3.7% 7.% FFO/NIBD (%) 1.8% 8.% 3.3% 4.2% 2.% 2.2% 4.2% 7.9% FOCF/TIBD (%).5% -1.9%.5% 5.5% 13.8% -7.9% 2.4% -1.% TIBD/EBITDA (x) NIBD/EBITDA (x) TIBD/tangible assets 67.1% 68.5% 71.2% 66.3% 63.% 67.4% 68.% 66.9% TIBD/(equity + TIBD) (adjusted) (%) 75.% 74.% 71.9% 72.8% 64.8% 64.6% 66.8% 65.1% Total equity/total assets (%) 22.2% 23.1% 26.5% 24.1% 32.3% 31.1% 29.8% 31.1% Dividends/FFO (%) 2.% 21.1% 16.6%.% 41.9%.%.%.% estimates 5 21 October 213

53 Financial statements Income statement (USDm) E 214E 215E Total revenues 1,88 1,239 1,476 1,264 1,239 1,154 1,212 1,185 1,266 1,39 Opex , ,1 Other costs EBITDA book EBITDA adjusted Depreciation & amortisation EBIT EBIT adjusted Gain/loss from discontinued operations 288 Interest expense (net book) Interest expense (net adjusted) EBT EBT adjusted Tax Net income Net income adjusted Balance sheet (USDm) E 214E 215E Fixed assets 1,83 2,36 2,214 2,244 2,183 2,26 1,862 1,938 1,974 1,886 Goodwill Investments in associates Working capital assets Restricted cash Cash and cash equivalents Other current assets Total assets 2,189 2,379 2,585 2,698 2,58 2,531 2,574 2,434 2,48 2,455 Total assets (adjusted) 2,858 3,32 3,123 3,423 3,23 3,11 3,54 2,79 2,758 2,649 Total interest bearing debt (TIBD) 1,311 1,367 1,517 1,598 1,446 1,275 1,256 1,317 1,321 1,21 Total interest bearing debt (TIBD) (adjusted) 1,98 2,19 2,54 2,323 2,69 1,846 1,736 1,674 1,598 1,396 NIBD (book) 1,146 1,268 1,412 1,495 1,339 1,95 1,1 1,129 1, NIBD (adjusted) 1,815 1,92 1,95 2,22 1,962 1,665 1,58 1,485 1,416 1,181 Other long-term liabilities Working capital liabilities Other current liabilities Total equity , Total equity and liabilities 2,189 2,379 2,585 2,698 2,58 2,531 2,574 2,434 2,48 2,455 Cash flow statement (USDm) E 214E 215E EBITDA Tax cost Net interest paid FFO FFO (adjusted) Changes in working capital Other CF from operations Operating cash flow (CFO) CFO (adjusted) Net investments in fixed assets and Running maintenance capex (forecast) Net acquisitions (sale of assets) 219 Investments in associated companies Other positive cash flow from investing act Free operating cash flow (FOCF) Debt principal and instalments Dividends paid Funding shortfall New debt New equity Other cash flow from financing activities 6 58 FX fluctuations effect on cash Change in cash estimates October 213

54 2. Scandi High-Yield Handbook Prosafe SE Company overview Prosafe is a Cyprus-registered accommodation rig company, founded and listed on the Oslo Stock Exchange (OSE) in The company is a result of substantial acquisitions and divestments since establishment. Prosafe is the world s largest provider and operator of accommodation rigs, with 11 semi-submersible accommodation rigs in addition to two newbuilds. Prosafe has historically generated stable earnings and margins through its diversified accommodation rig fleet with main presence in the North Sea and the Gulf of Mexico (GoM). Prosafe s financial metrics are relatively conservative, with total interest bearing debt (TIBD)/EBITDA of 3.1x and FFO/NIBD of 27% based on LTM Q Key credit considerations Strong operational track-record and earnings Prosafe s counterparties are strong and solely investment grade oil companies. Its fleet utilisation has historically been high and is currently 84% (Q2 13), with a historical average of around 85% (number of rigs on contract/total number of rigs). Demand for accommodation rigs in the Northern hemisphere is highly seasonal with limited demand during the winter months with contracts <1 year. Prosafe has generated EBITDA margins between 55-65% (EBITDA of USD26-28m) the past three years, despite seasonal impact and short contracts for the important North Sea segment. The orderbacklog was consists of USD1,2m based on firm contracts (USD1,425m including options) as of Q Supply - Demand imbalances? The accommodation rig market has traditionally been under-invested with a marginal order book since the 199s. Demand for accommodation rigs is related to offshore activities requiring extraordinary personnel, in conjunction with maintenance and modification of installations on fields already in production, the hook-up and commissioning of new fields, tie-backs to existing infrastructure and decommissioning. The current accommodation rig/vessel market consist of 22 units and the market is expected to grow to 3 units in 216 based on the current order backlog (assuming no scrapping). We have previously pointed out the risk of potential over-supply in 214 and onwards, although several factors imply a fairly balanced market. It is uncertain whether all ordered accommodation units will get the necessary financing and we expect increased demand given the current shortage in certain regions (e.g. Norway and Brazil) in addition to increased commissioning projects (214+) and robust maintenance demand in Norway, the UK and Brazil. Table 32. Key credit metrics and ratios Facts Sector: Accommodation rigs Corporate ticker: PRSNO Equity ticker: PRS NO Market cap: NOK11.5bn Equity book value: USD661bn Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: BB Senior Unsecured: BB Analysts: Åse Haagensen ha@danskebank.com Kasper From Larsen kasla@danskebank.com Key credit issues Strengths: Strong operational track-record and order backlog. Dominant market position. Sound financial metrics. Strong management focus on core activities. Challenges: Limited cash flow visibility, short contracts in the North Sea. Increased supply. Oil price dependent. Aggressive dividend policy. Source: Danske Bank Markets USDm H 213 Total revenues EBITDA adjusted EBITDA margin 57,2% 68,9% 64,% 57,3% 54,5% 5,9% Total assets (adjusted) Total debt /EBITDA 3,4x 3,3x 2,5x 3,x 2,9x 3,1x FFO/ Net debt 26,4% 22,9% 4,6% 29,5% 34,% 27,% Total debt /Capital 88,5% 77,6% 63,2% 62,2% 61,1% 53,9% estimates October 213

55 Liquidity Prosafe s liquidity is strong with short-term sources relative to uses of 2x based on Q2 figures post its USD21m dividend payment in September 213 (.89 per share). Sources are defined as cash of USD78m, YTD operating cash flow of USD39m and un-used long-term revolver (217) of USD386m, relative to short-term interest bearing debt of USD4m. In 212, Prosafe ordered its first two newbuilds since the acquisition of Consafe Offshore in 26, and has secured bank financing for both its newbuilds with expected delivery in September and December 214 (LTV 6%). EBITDA % 6% 4% 2% Prosafe implemented an aggressive dividend policy in 211, which is credit negative although it must be seen in conjunction with its solid operating cash flow (USD243m with dividend payments of USD119m in 212). Although credit negative, the dividend policy supports access to the equity market, illustrated by its equity issue of USD135m in March 213. Current performance drivers Established player Prosafe is undisputable the world s largest accommodation rig provider with 11 rigs and two newbuilds relative to the current global fleet comprising 22 units. The second largest accommodation rig operator and owner is Floatel with two accommodation units in addition to three newbuilds. Prosafe s fleet is relatively old with an average age of 28 years (excluding the newbuilds), five of its rigs have the flexibility of both a DP (Dynamic Positioning) and anchored systems, one accommodation rig is solely based on DP and five are solely anchored rigs. Despite the relatively old fleet, accommodation vessels operating outside the GoM have been substantially upgraded e.g. Safe Caledonia was upgraded at a cost of USD125m earlier this year increasing the life expectancy by 2 years. The advantage of younger vessels is also not as apparent for accommodation units that compete on DP/moored capability, operational stability/gangway connection, bed capacity and price. EBITDA adjusted EBITDA margin Funds from operations % FFO Net acquisitions and other investments FFO / NIBD (%) 6% 4% 2% % Prosafe s fleet is dominated by accommodation rigs on time charter contracts in the North Sea (four in the UK and one in Norway), Asia, and Brazil. Regarding the company s operations in the GoM (five rigs) these are contracted on bareboat agreements with Pemex through the Cotemar Group. Robust earnings despite limited cash flow visibility In Prosafe s case, we believe it is valuable to look in the rear view mirror to form an opinion about future operations. The company has a history of delivering stable EBITDA margins with a fleet utilisation level of around 85%. Prosafe has an orderbacklog of USD1,2m (USD1,425m including options) for , the cash flow visibility is reduced as the important North Sea typically has contracts shorter than one year. In addition, its historical long-term BB contracts with Pemex in the GoM are maturing in 213 (Oct-Dec) and 214, the company expects these contracts to be renegotiated at maturity which is in line with its historical track record. Outlook The potential supply-demand imbalance is key going forward. The supply development and Prosafe s market share are illustrated to the right with the current order book. We expect the tight market in the North Sea to continue as demand is expected to increase further based on increased life expectancy of producing fields and hook-up and commissioning for new fields. In the long term, demand for accommodation vessels in the Mexican GoM is supported by its substantial unexplored deep-ultra deep water fields after years of under-investments under Pemex compared to the US GoM. Supply of accommodation rigs PRS acc. semis Other acc. semis PRS market share (%) Source: Danske Bank Markets 7 % 5 % 3 % 1 % -1 % October 213

56 Relative valuation DM (bps) PRSNO 2/8/17 PRSNO 2/25/16 PRSNO 1/22/18 PRSNO 1/17/2 Source: Bloomberg, Moodys, Danske Bank Markets Moody's MIR BB category Moody's MIR BB+ category Years to maturity Floating rate note cash price development Cash Price PRSNO 2/25/16 PRSNO 2/8/ May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Source: Bloomberg, Danske Bank Markets PRSNO 1/22/18 PRSNO 1/17/2 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Debt Composition Debt Maturity Profile Available credit facility Bank debt PRS7 PRS8 PRS9 PRS (218) Source: The Company, Danske Bank Markets USDm Bank debt PRS6 PRS7 PRS8 PRS9 Available credit facility PRS (218) Source: The Company, Danske Bank Markets Table 33. Key credit ratios Ratios (Adjusted) H 213 Net sales growth 18,1 % -1,2 % -5, % 7,8 %,9 % 5,8 % NA EBITDA margin 57,3% 57,2% 68,9% 64,% 57,3% 54,5% 5,9% EBIT margin 42,2% 47,3% 54,9% 5,% 42,8% 43,% 38,2% ROCE (%) 1,8% 13,4% 19,3% 19,3% 16,5% 17,1% 6,4% EBITDA interest coverage (x) 5,6x 5,3x 6,2x 6,6x 5,3x 6,5x 7,x EBIT interest coverage (x) 4,1x 4,4x 4,9x 5,2x 4,x 5,1x 5,3x FFO interest coverage (x) 4,5x 4,x 4,x 5,8x 4,1x 5,6x 3,5x FFO / TIBD (%) 17,8% 22,2% 19,3% 34,8% 25,7% 29,5% 24,3% FFO / NIBD (%) 2,2% 26,4% 22,9% 4,6% 29,5% 34,% 27,% FOCF / TIBD (%) -24,7% 39,3% 8,1% 39,6% 5,% 11,6% 1,9% TIBD / EBITDA (x) 4,5x 3,4x 3,3x 2,5x 3,x 2,9x 3,1x NIBD/EBITDA (x) 3,9x 2,9x 2,8x 2,1x 2,6x 2,6x 2,7x TIBD/ (Equity + TIBD) (%) (Adjusted) 56,5% 88,5% 77,6% 63,2% 62,2% 61,1% 53,9% Total equity / total assets (%) 39,6% 9,5% 19,5% 32,4% 33,6% 34,8% 44,% Dividends/FFO (%) 146,8%,% 29,% 25,1% 54,8% 49,6% 119,4% Source: The Company, Danske Bank Markets October 213

57 Table 34. Financial Statement Income statement (USDm) H 213 Charter revenues Other income Total revenues OPEX Other costs Other extraordinary gain/loss before EBITDA 5 EBITDA book EBITDA adjusted Depreciation & amortization EBIT EBIT adjusted Net profitt /loss from discontinued operations 38 Interest expense (net book) Interest expense (net Adjusted) EBT EBT Adjusted Tax Net income Net income Adjusted Balance sheet (USDm) H 213 Fixed assets Goodwill Tot. working capital assets Restricted cash Cash and cash equivalents Total assets Total assets (adjusted) Total interest bearing debt (TIBD) Total interest bearing debt (TIBD) (Adjusted) Tot. working capital liabilities Total equity Total equity and liabilities Total equity and liabilities (Adjusted) Cash Flow statement (USDm) H 213 EBITDA Other cash flow Tax cost Net interest paid FFO FFO (Adjusted) Changes in working capital Operating cash flow (CFO) CFO (adjusted) Net Investments Free operating cash flow (FOCF) Debt installments and principal Dividends paid Funding shortfall New debt New equity 129 Change in cash October 213

58 SAS AB Company overview SAS is the national flag carrier of Sweden, Norway and Denmark and 5% owned by the three AAA rated Nordic states. SAS is one of Europe s largest passenger airlines with total annual sales above SEK4bn and a leading position in the Scandinavian aviation market with its extensive network and a strong brand. SAS said its 212 market share was 31% in Sweden, 51% in Norway, 39% in Denmark and 31% between Scandinavia and the rest of the world. SAS has a high proportion of business travellers constituting about 6% of its passengers. However, in recent years SAS has heightened focus on leisure routes to capture a larger part of the total aviation market. SAS s high focus on intra-scandinavian and intra-european routes leaves the company exposed to short haul low-cost competition. SAS has implemented significant and ongoing cost-cutting initiatives to deal with the recurring cost pressure. In November 212, SAS launched the 4Excellence Next Generation (4XNG) plan aiming to enhance profitability by SEK3bn by 215. The plan also includes divestments in order to strengthen the company s liquidity by net proceeds of SEK3bn. Importantly, SAS has divested 8% of its shares in Widerøe for net proceeds of SEK2bn with final closing as of 3 September 213. Key credit considerations Highly leveraged cost cutting and divestments should lead to deleverage SAS s financial risk profile is highly leveraged due to the adverse effects of the financial crises combined with fierce low-cost competition. Furthermore, it has large debt maturities in 214 and 215. However, with the divestment of Widerøe and SAS s current guidance of EBIT margin exceeding 3%, material deleveraging is possible for the full-year 212/13. We estimate net debt to EBITDA could improve from 6.9x to 1.5x and adjusted net debt to EBITDA from 9.3x to 4.8x. We stress the airline industry is highly cyclical and capital intensive with low visibility, which increases earnings volatility. Clearly, SAS must complete its disposal and cost-cutting programme according to plan in order to deleverage and improve its liquidity position. S&P rating upgraded recently S&P upgraded SAS to B- with a Stable Outlook in August 213, based on progress on SAS s refinancing and restructuring plan, particularly the planned sale of Widerøe has reduced the near-term refinancing risk according to S&P. The Stable Outlook reflects S&P s view of SAS s improved liquidity and the opinion of improving efficiency linked to the cost reduction plan should allow SAS to improve its operating performance and maintain credit ratios commensurate with the B- corporate family rating. S&P views SAS as having limited importance and linkage with the governments involved, which is why S&P does not grant any rating support from government ownership. Table 35. Key credit metrics and ratios Adjusted figures Sales growth 1% 4% -15% -9% 1% -13% EBITDA (SEKm) 6,55 4,39 1,898 3,27 5,635 3,587 EBITDA margin 12.9% 8.3% 4.2% 7.4% 13.6% 1.% FFO / Interest coverage 3.1x 2.x.2x.8x 2.x 1.3x FFO / Net debt 19% 2% % 9% 8% 1% Net debt / EBITDA 4.2x 8.1x 17.1x 8.5x 5.7x 9.3x Total debt / Total capital 69% 85% 78% 71% 76% 77% estimates Facts Sector: Airlines, Transportation Corporate ticker: SAS Equity ticker: SAS SS Market cap: SEK6.3bn Equity book value: SEK11.2bn Ratings: S&P rating: B- /S Moodys rating: Caa1 /P Fitch: not rated Analysts: Brian Børsting brbr@danskebank.dk Mads Rosendal madro@danskebank.dk Key credit issues Strengths: Leading market position in the Nordics with extensive network and strong brand name. Markedly improving cost base. Divestments and lower cost base should lead to significant deleveraging of the balance sheet. Challenges: Exposure to cyclical and capitalintensive airline industry. Fierce price competition, limited visibility and exposure to exogenous shocks. Significant exposure to intra- European routes with high level of competitive pressure from lowcost carriers. Highly leveraged financial profile with relatively high level of nearterm debt maturities. Source: Danske Bank Markets October 213

59 Liquidity SAS s total interest bearing debt was SEK1.6bn as of Q3 12/13 and net financial debt was SEK5.8bn. We expect net financial debt to decrease to SEK4.bn at the end of the current financial year, due mainly to the divestment of Widerøe, continued cost reductions according to the 4XNG plan and the current EBIT margin guidance from SAS. SAS has a relatively front-end loaded maturity profile, with more than 4% of its debt maturing before the end of 215 this clearly increases refinancing risks. Importantly, SAS issued a SEK1.5bn unsecured bond as of 19 September 219, which improves the maturity profile and lowers the refinancing risk of SAS. As at end-q3 12/13, SAS had cash and cash equivalents of SEK3.bn and total undrawn credit facilities of SEK3.2bn. However, we believe that its revolving credit facility of SEK2.7bn, which is undrawn, is contingent on SAS not breaching its financial covenants. The facility is divided into two tranches with separate conditions for drawdown: one with maturity on 1 June 214 and one with maturity on 31 March 215. We understand that the credit facility is based on a pari passu basis. We note that post the sale of Widerøe, the total facility will be downscaled to SEK2.bn. As at the end of fiscal year 212 (January to October 212), SAS had pledged assets of SEK5.2bn, corresponding to 14% of total assets and 39% of tangible fixed assets. Out of this SEK5.2bn, the majority (SEK4.2bn) related to aircraft mortgages and the outstanding liability related to aircraft mortgages as at the end of the last fiscal year was SEK2.8bn. However, we understand that the vast majority of SAS s credit facilities are secured, such that notes issued under the EMTN programme and other unsecured borrowings are subordinated to a significant amount of priority debt, which would affect the recovery rate negatively in a potential default scenario. We note that Moody s assesses the expected family recovery rate at 5% (model produced 26 April 213). However, due to the high level of secured debt we expect the potential recovery rate for senior unsecured bonds to be lower than average. Given that SAS has granted only a small amount of guarantees to subsidiaries, etc. the risk of subordination is not substantial in our view. We note that Moody s (latest credit opinion dated 13 September 213) considers SAS s liquidity to be sufficient over a 12-month horizon, on the assumption that it retains access to its credit facilities. Moody s also notes that the renewal of, and continued access to, the revolving credit facility is critical to sustain adequate liquidity. We also note that S&P assesses SAS s liquidity position as less than adequate despite sources of cash covering uses by more than 1.2x (S&P s latest report dated 5 August 213). This is due to S&P s assessment that the revolving credit facility could become unavailable should SAS breach its financial covenants. Therefore, S&P excludes the revolving credit facility from its liquidity calculations. Outlook At the company s Q3 13 results, management stated expectations about an EBIT margin above 3% and positive pre-tax profits driven by progression in the ongoing restructuring supported by an improving yield trend during the first nine months of the fiscal year. However, such expectations are subject to the provision that no significant unforeseen events are to occur in the business environment. We note that the large-scale cost cutting programme is being implemented according to plan, which is vital for the company s ability to generate positive earnings going forward as low-cost competition is expected to continue to be intense. Furthermore, we highlight that the divestment programme the divestment of 8% of Wiederøe especially should contribute to a significant lower leverage and improve the overall financial structure of SAS. Liquidity profile DBM estimate SEKm 7, 6, 5, 4, 3, 2, 1, Regional sales split 212 Profitability SEKm 6, 5, 4, 3, 2, 1, Europe 15% Finland 3% Cash outflow Short term debt Dividend CAPEX Other countries 1% Denmark 12% Credit metrics SEKm 4, 35, 3, 25, 2, 15, 1, 5, Sweden 22% Cash inflow Cash & Equivalents LTM CFO Committed facilities Norway 38% % 14% 12% 1% 8% 6% 4% 2% % Net sales Adj. EBITDA Adj. EBITDA margin Adj. Net debt Equity Adj net debt/ebitda 18.x 16.x 14.x 12.x 1.x 8.x 6.x 4.x 2.x.x October 213

60 Relative valuation Z-spread SAS SAS Source: Bloomberg, Danske Bank Markets SAS 9 17 Industrial 'CCC+' category Industrial 'B- ' category Years to maturity Spread development ASW (bps) SAS SAS SAS Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Source: Bloomberg, Danske Bank Markets Debt composition Debt maturity profile as of 31 July 213 Other debt 46% Bank loans / RCF 35% SEKm 3, 2,5 2, 1,5 Bank Bonds 1, 5 Bond issues 19% FY13 FY14 FY15 FY16 FY17 FY18 FY19+ Table 36. Key credit ratios Adjusted ratios Sales growth -4% -1% 1% 4% -15% -9% 1% -13% EBITDA margin 1% 1% 13% 8% 4% 7% 14% 1% EBIT margin 6% 6% 1% 5% % 3% 8% 6% ROCE 7% 5% 11% 6% % 3% 8% 5% EBITDA interest coverage 1.6x 2.2x 3.9x 2.8x 1.5x 2.x 3.4x 2.1x EBIT interest coverage 1.x 1.5x 3.1x 2.x.2x.8x 2.x 1.3x FFO interest coverage.8x 1.7x 3.2x.8x.3x 1.6x 1.7x 1.9x Net debt / EBITDA (reported) 5.6x 1.6x.5x 8.9x -5.x 11.6x 2.3x 6.9x Net debt / EBITDA 11.7x 7.1x 4.2x 8.1x 17.1x 8.5x 5.7x 9.3x Gross debt / EBITDA 14.x 9.7x 5.9x 9.7x 21.4x 11.4x 6.9x 1.5x FFO / net debt 4% 11% 19% 2% % 9% 8% 1% FFO / gross debt 3% 8% 13% 2% % 7% 7% 9% Total debt / total capital 86% 74% 69% 85% 78% 71% 76% 77% Net debt / total capital 84% 67% 62% 83% 74% 64% 72% 75% Net gearing 524% 27% 161% 485% 286% 177% 26% 298% Dividends / FFO % % % % % % % % October 213

61 Table 37. Financial statements Income statement (SEKm) Total sales 55,51 5,152 5,598 52,87 44,918 41,7 41,412 35,986 Operating expenses -52,953-47,534-47,921-51,873-46,229-4,824-38,393-35,31 EBITDA 2,548 2,618 2, , , EBITDA adjusted 5,391 4,767 6,55 4,39 1,898 3,27 5,635 3,587 Depreciation and amortisation -2,17-1,757-1,457-1,55-1,845-1,885-2,413-1,426 Non-recurring items EBIT 677 1,5 1, ,82-1, EBIT adjusted 3,221 3,1 5,48 2, ,142 3,222 2,161 Net interest ,13-2, Pre-tax profit , ,423-3,69-1,629-1,245 Tax 51 4, , Net income 255 4, ,36-2,947-2,218-1, Balance sheet (SEKm) Fixed assets 16,24 12,61 12,295 13,122 14,555 13,771 13,117 12,31 Goodwill 3,217 2,88 1,141 1,1 1,19 1,11 1,27 1,33 Associates 1,214 1,12 1, Other non-current assets 15,768 15,236 12,164 12,86 13,74 15,515 15,422 16,24 Working capital assets 5,66 4,911 2,8 2,67 2,339 1,955 1,98 1,998 Cash and cash equivalents 8,684 1,83 8,891 5,783 4,189 5,43 3,88 2,789 Other current assets 7,287 4,261 1,416 8,71 6,331 4,236 3,514 2,275 Total Assets 58,16 51,164 48,77 43,364 42,495 41,825 39,185 36,754 Total Assets (adj.) 98,755 72,17 65,582 6,251 58,224 53,618 53,57 51,166 Total interest bearing debt 26,337 16,478 12,42 16,117 14,66 11,897 13,338 1,887 Total interest bearing debt adjusted 75,439 46,289 38,35 42,662 4,675 34,655 38,619 37,65 Net interest bearing debt 14,228 4,134 1,231 8,912 6,54 2,862 7,17 6,549 Net interest bearing debt adjusted 63,33 33,945 27,539 35,457 32,519 25,62 32,298 33,267 Working capital liabilities 4,481 3,531 2,128 2,75 1,751 1,765 1,564 1,929 Other current liabilities 1,674 1,457 12,885 12,4 9,354 9,136 7,968 9,672 Other non-current liabilities 4,443 4,31 4,566 5,46 5,341 4,589 3,882 3,11 Total Equity 12,81 16,388 17,149 7,312 11,389 14,438 12,433 11,156 Total Equity and Liabilities 58,16 51,164 48,77 43,364 42,495 41,825 39,185 36,754 Total Equity and Liabilities (adj.) 98,755 72,17 65,582 6,251 58,224 53,618 53,57 51,166 Cash flow statement (SEKm) EBIT before non-recurring items , ,156-1, Reversal of non-cash items 2,17 1,757 1,457 1,55 1,845 1,885 2,413 1,426 Tax paid Other cash flow from operations ,827-1, , Funds From Operations 1,774 2,544 2,177-1,849-2, ,319 FFO adjusted 2,376 3,643 5, ,423 2,656 3,23 Change in working capital , ,216 1,243 Operating cash flow (CFO) 1,57 2,12 2,866-2,651-3, ,562 CFO adjusted 2,19 3,21 5, ,36 1,44 4,473 Capex -1,827-2,299-2,98-4,448-4,661-2,493-2,41-2,595 Other cash flow investing activities 2,797 9,784 2,695 1,353 2, ,976 Free operating cash flow (FOCF) 2,477 9,587 2,653-5,746-6,25-1,951-2,6 1,943 FOCF (adjusted) 3,79 1,686 5,64-3,198-3, ,854 Dividends paid Share buyback Debt repayment -2,426-8,326-4,7-4,26-3,64-6,1-2,677-3,675 Funding shortfall 51 1,261-2,47-1,6-9,629-8,51-4,683-1,732 New debt ,74 2,8 4,241 3, New equity 5,88 4,678 Other cash flow from financing activities 182 Change in cash 51 2,149-1,839-3,84-1, ,243-1, October 213

62 Seadrill Limited Company overview Seadrill (the company, SDRL) is the world s largest offshore drilling player measured by enterprise value and the fourth largest measured by number of drilling units. Seadrill is Bermuda registered, was incorporated in 25 and has become one of the world s largest drilling rig players through extensive newbuild activity and acquisitions of drilling companies. Seadrill is positioned for increased demand for high-end drilling units, with floaters (drillships and semi-submersibles) in ultra-deepwater >1,-12,ft and high-specification jackups for different environments in shallow water. Seadrill has a substantial order backlog (USD19bn) and sound counterparties but the offshore drilling industry is highly oil price dependent and capital intensive. Key credit considerations Excellent cash flow and order-backlog Seadrill has an order backlog of USD19bn, of which 2% has a tenor of more than four years backed by international investment grade oil companies. Seadrill s largest customers measured by revenues are, in descending order, Petrobras ( BBB- [negative outlook] by S&P/ A3 [negative] by Moody s), Total S.A. ( AA- / Aa1 ), Shell ( AA / Aa1 ), Exxon ( AAA / Aaa ) and Statoil ( AA- / Aa2 ). The company generates substantial operating cash flow, with USD1.6bn in 212 and USD2.6bn in 213E. Aggressive capex programme and dividend policy The fleet is young and the newbuild programme is extensive, with remaining yard costs of USD6.6bn. Seadrill s newbuild programme includes nine drillships, two HE semisubmersibles targeting ultra-deepwater depths (UDW) and 13 high specification jackups. Seadrill has a record of issuing debt to finance newbuild capex and uses most of its operational cash flow on dividend payments in the magnitude of USD1.5bn annually (past three years). The aggressive dividend policy and newbuilds built on spec are credit negative, although this must be seen in conjunction with its substantial cash flow, earnings visibility and dividend discretionary nature. Strong market position and operational record Seadrill has a strong operational record, with an average utilisation >96% (disregarding the divested tender rig portfolio) in Q2 13. Seadrill is the world s largest drilling contractor measured by enterprise value, with a substantial newbuild programme and young fleet compared with sizeable competitors such as Transocean, Noble, Ensco and Diamond. Facts Sector: Offshore Drilling Corporate ticker: SDRLNO Equity ticker: SDRL NO Market cap: USD21.6bn Equity book value: USD7.8bn Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: BB+ Senior Unsecured: BB Analysts: Åse Haagensen ha@danskebank.com Kasper From Larsen kasla@danskebank.com Key credit issues Strengths: Substantial order-backlog. Modern fleet with a strong operational track-record. Diversified and strong investment grade counterparties. Challenges: Extensive newbuild programme. Aggressive dividend policy. Cyclical and oil price dependent industry. Source: Danske Bank Markets Key credit metrics and ratios USDm H1 13 Total revenues 3,254 4,41 4,192 4,478 2,533 EBITDA 1,73 2,83 2,318 2,49 1,319 EBITDA margin 52,% 52,% 55,% 54,% 52,% Total assets 13,924 17,551 18,348 19,71 21,87 Total debt/ebitda (x) 4,4 4,7 4,5 4,9 4,6 FFO/net debt 25,% 18,% 19,% 16,% 15,% Total debt/total capital 61,% 62,% 63,% 66,% 61,% Equity/total assets 35,% 34,% 34,% 31,% 36,% 6 21 October 213

63 Liquidity Seadrill has a substantial funding need for the period due to its extensive newbuild programme; newbuilds with delivery over the remainder of 213 have secured financing and its funding need in 213 is covered. We estimate Seadrill s funding need in 214 to be USD4.5bn including refinancing (net new debt of USD1.5bn) and USD6bn in 215 (new debt of USD3.5bn). This refinancing need is based on an operating cash flow of USD bn for the period , with contract coverage of 78% in 214 and 58% in 215. In addition to continuation of its aggressive dividend policy, with dividend payments of USD1.7bn in 214E and 215E, we believe Seadrill will be able to fund its significant funding need in supported by its strong bank relationships, access to capital markets and potential divestments/ipos/partnerships. Seadrill s debt sources are diversified, through bank syndicates, the USD and NOK bond markets and export credit agencies. Current performance drivers High specification fleet Seadrill s asset portfolio and newbuilds are dominated by new high-specification assets. The asset portfolio is divided between floaters (drillships and semisubmersible rigs) targeting the ultra-deepwater segment or harsh environment through its subsidiary North Atlantic Drilling and a dual fleet of jackups, with both sophisticated new HE jackups and jackups equipped for benign environments. The fleet consists of 64 units, of which 24 are newbuilds with expected delivery in The fleet consists of drillships (15), semisubmersible rigs (15), jackup rigs (31) and tender rigs (3). Nine of the 24 newbuilds have secured long-term contracts on delivery, with remaining yard instalments of USD6.6bn. Seadrill is a global player, with its North Sea operations organised under its subsidiary North Atlantic Drilling, in addition to drillships off the West African coast, semisubmersibles in Brazil, the Gulf of Mexico, Canada and West Leo in Ghana. Seadrill holds a leading market position and is positioned for increased demand for new high-specification drilling units. Candidate to get official credit rating Seadrill is a potential candidate to get an official credit rating and will have to pay a step-up coupon of 5bp on its senior unsecured 15/9/217 bonds if the company does not get official ratings from S&P and Moody s by March 214. The board stated in its Q2 report that it will conclude the rating process during Q1 14. The benefit of an official credit rating is uncertain, as Seadrill has diversified funding sources and access to capital markets in NOK and USD without any official credit rating. Outlook The newbuild programme is substantial and Seadrill is entering a period of substantial growth. The board of directors expects Seadrill to reach a consolidated EBITDA of USD4.5bn in 216 (note that our forecasts do not include Sevan Drilling as a subsidiary). This implies an expectation that the operating results will increase by more than 5% in 216 compared to 213. Seadrill increased its quarterly dividend payment to USD.91 per share as of Q2 13 (USD427m per quarter compared with USD413m previously) and dividend payments are expected to increase further provided newbuilds are assigned favourable contracts with secured financing. We are comfortable with a BB+ corporate credit rating on Seadrill given its excellent operational record, strong operating cash flow, young fleet and the discretionary nature of its dividend payment (as illustrated in 28). EBITDA Source: Danske Bank Markets OCF relative to Investments & dividends Source: Danske Bank Markets Funding need Source: Danske Bank Markets EBITDA contract back-log / historical E (EBITDA) 1% EBITDA margin 8% 6% 4% 2% % Maintenance capex Investments Dividends paid OCF (adjusted) E 215E Refinancing New debt 213E 214E 215E Order backlog (counterparties) BP Total Exxon Statoil Husky 6 % 6 % 21 % 9 % 1 % Petrobras Tullow Others 24 % 12 % 12 % Source: Company data October 213

64 Relative valuation Spread development fixed rate issues Z-spread SDR LNO SDRLNO Source: Bloomberg, Danske Bank Markets SDR LNO Industrials 'BB' category Years to maturity ASW (bps) SDRLNO SDRLNO May-13 May-13 May-13 SDRLNO Jun-13 Jun-13 Jul-13 Source: Bloomberg, Danske Bank Markets Jul-13 Aug-13 Aug-13 Sep-13 Sep-13 Oct-13 Debt composition Debt maturity profile Bank loan SDRLNO Float 14 4 SDRLNO 6,5 1/15 3 SDRLNO 5 5/8 9/17 2 SDRLNO 3 3/8 1/17 1 SDRLNO Float 18 Bank loan SDRLNO Float 14 SDRLNO 6,5 1/15 SDRLNO 5 5/8 9/17 SDRLNO 3 3/8 1/17 SDRLNO Float 18 SDRLNO 6 1/8 9/2 2H Key credit ratios USDm H1 13 Net sales growth 27% 39% 58% 25% 4% 7% n.a. EBITDA margin 4% 38% 52% 52% 55% 54% 52% EBIT margin 29% 27% 4% 4% 42% 4% 39% ROCE (%) 12% 6% 11% 11% 11% 1% 3% EBITDA interest coverage (x) 7,5 7,8 1,9 7,6 8,4 7,6 6,8 EBIT interest coverage (x) 5,4 5,6 8,4 5,8 6,4 5,7 5,1 FFO interest coverage (x) 5,1 6, 1,2 5,4 6,9 5,8 4,2 FFO/TIBD (%) 1% 8% 21% 15% 18% 15% 14% FFO/NIBD (%) 13% 9% 25% 18% 19% 16% 15% TIBD/EBITDA (x) 7, 9,4 4,4 4,7 4,5 4,9 4,6 NIBD/EBITDA (x) 5,1 8,8 3,7 4, 4,3 4,6 4,1 TIBD/(equity + TIBD) (adjusted) (%) 56% 7% 61% 62% 63% 66% 61% Total equity/total assets (%) 4% 26% 35% 34% 34% 31% 36% Dividends/net income (%) % -441% 17% 78% 112% 174% 6% Dividends/FFO (%) % 112% 12% 67% 76% 16% 52% October 213

65 Financial statements Income statement (USDm) H1 13 Operating revenues 1,319 1,868 3,45 3,823 4,95 4,295 2,34 Total revenues 1,676 2,16 3,254 4,41 4,192 4,478 2,533 OPEX 1,5 1,34 1,557 1,962 1,877 2,72 1,216 Other extraordinary gain/loss before EBITDA 61 EBITDA book 672 1,32 1,768 2,15 2,315 2,46 1,378 EBITDA adjusted ,73 2,83 2,318 2,49 1,319 Depreciation & amortization EBIT ,372 1,625 1,774 1,96 2,34 EBIT adjusted ,37 1,64 1,755 1, Interest expense (net book) Interest expense (net adjusted) EBT ,849 1,288 1,373 1,65 2,283 EBT adjusted ,298 1,423 1,475 1, Tax Net income ,729 1,129 1,184 1,418 2,19 Net income adjusted ,178 1,264 1,286 1, Balance sheet (USDm) H1 13 Drilling Units 2,452 4,646 7,514 1,795 11,223 12,894 12,891 Newbuilds 3,34 3,661 1,431 1,247 2,531 1,882 3,524 Goodwill 1,51 1,547 1,596 1,677 1,32 1,32 1,2 Investments in associates Working capital assets ,512 1,381 Restricted cash Cash and cash equivalents 1, ,22 1, ,373 Total assets 9,293 12,35 13,831 17,497 18,34 19,632 21,81 Total assets (adjusted) 9,327 12,399 13,924 17,551 18,348 19,71 21,87 Total interest bearing debt (TIBD) 4,61 7,437 7,396 9,591 1,428 11,696 12,24 Total interest bearing debt (TIBD) (adjusted) 4,675 7,572 7,516 9,699 1,528 11,84 12,132 Working capital liabilities ,147 1, ,524 Total equity 3,728 3,222 4,813 5,937 6,32 6,24 7,84 Total equity and liabilities 9,293 12,35 13,831 17,497 18,34 19,632 21,81 Total equity and liabilities (adjusted) 9,327 12,399 13,924 17,551 18,373 19,71 21,87 Cash flow statement (USDm) H1 13 EBITDA 672 1,32 1,768 2,15 2,315 2,46 1,378 Tax cost Net interest paid FFO ,598 1,479 1,93 1, FFO (adjusted) ,598 1,479 1,93 1, Changes in working capital Operating cash flow (CFO) ,452 1,3 1,816 1, CFO (adjusted) ,452 1,3 1,816 1, Net investments in fixed assets and intangibles 1,569 2, ,312 2,298 1, Investments in associated companies Other positive cash flow from investing act Free operating cash flow (FOCF) -1,89-3, Debt principal and instalments 2,212 2,18 2,491 1,87 4,116 2,752 1,388 Dividends paid ,44 1, Funding shortfall -3,31-6,175-2,162-3,857-6,373-4,447-1,568 New debt 3,947 5,15 2,47 3,92 5,929 3,477 2,62 New equity Other positive cash flow from financing activities Change in cash October 213

66 Stena AB Company overview Stena AB is a Swedish holding company with diversified operations, mainly within industrial sectors (passenger and freight ferry services, shipping, offshore drilling, real estate investments, venture capital investments and financial investments). The group is organised into five divisions: Ferry operations, Drilling, Shipping, Property and Adactum (venture capital investments). The group has offices and operations in Europe, North America, South America, Asia, Australia and Africa and employs a total staff of around 15,6 (of whom 45% are based in Sweden and 55% based at international subsidiaries). The Stena AB group is privately owned by the Sten A. Olsson family, which has 1% ownership. We consider the family as long-term, stable owners with a history that dates back to Key credit considerations Favourable operational diversification Stena s exposure to capital-intensive, cyclical industries is mitigated by its favourable operational diversification. Beside the company s offshore drilling and diversified shipping operations (ferries, freight transportation and crude oil transportation), Stena is exposed to low-risk real estate investments, which have stable and predictable cash flows. Through Adactum, Stena also invests in venture companies that have potential to become new business areas. Furthermore, Stena maintains a financial investment portfolio of equity and debt securities as well as other short-term investments. Stena is also well diversified geographically. Corporate structure and non-recourse debt As a result of the holding structure, senior debt issued by Stena AB is structurally subordinated. Furthermore, most of the debt in the real estate division is secured debt. For the purpose of the indenture governing senior bonds, the real estate and investment subsidiaries are designed as unrestricted subsidiaries (with no debt limitations). As a result, any new debt taken on by unrestricted subsidiaries must be non-recourse to Stena AB and its restricted subsidiaries. Both of the unrestricted divisions are financed through equity contributions with all existing debt also being non-recourse. Heightened focus on LNG segment with potential for an IPO Unlike other shipping segments, the market for gas transportation is growing with an expected CAGR of 8% the next 1 years. Consequently, LNG tanker rates have soared reflecting the current shortage of carriers. Mgmt. has previously voiced considerations about expanding the LNG fleet from three to 6-8 vessels, thus we view the primary investment risk being related to the LNG segment. However, the CEO stated in the 211 report that the company would assess a possible IPO to facilitate an expansion without further burdening the balance sheet, which clearly would be credit positive. Table 38. Key credit metrics and ratios Adjusted figures Sales growth -2% 18% 5% -2% 3% -2% EBITDA (SEKm) 6,618 7,335 7,72 7,555 8,537 7,414 EBITDA margin 29.5% 27.7% 27.7% 27.8% 3.5% 27.2% FFO / Interest coverage 2.4x 2.2x 2.x 1.8x 2.x 1.4x FFO / Net debt 12% 1% 11% 8% 8% 8% Net debt / EBITDA 7.1x 8.7x 7.2x 7.6x 7.x 8.9x Total debt / Total capital 64% 69% 65% 66% 66% 67% estimates BUY Sector: Industrials; Commercial Services Corporate ticker: STENA Equity ticker: Private Market cap: Private Equity book value: SEK31.3bn Ratings: S&P: BB /S Moodys: Ba3 /S Fitch: Not rated Analysts: Brian Børsting brbr@danskebank.dk Asbjørn Purup Andersen apu@danskebank.dk Key credit issues Strengths: Diversified conglomerate with stable ownership. Market leader in the majority of operational segments. Exposure to stable and highly profitable real estate portfolio. Exposure to very profitable drilling rigs with good earnings visibility. Challenges: Aggressive growth strategy and investment policies. High financial leverage and negative free operating cash flow. Exposure to capital-intensive industrial segments. Weak industry fundamentals in shipping and ferry operations. Source: Danske Bank Markets October 213

67 Liquidity We view Stena as having strong liquidity. At the end of Q2 13 the company had SEK9.bn in cash, cash equivalents and marketable securities. S&P estimates that about SEK1bn in cash is needed for ongoing operations and working capital fluctuations. Stena also has access to several committed credit facilities. In September 21 Stena entered into a 217 revolving credit facility of SEK6.6bn with a guarantee provided by the Swedish Export Association. As of end-q2 13 SEK5.7bn of this facility was utilised. This compares with short-term debt of SEK2.3bn, expected capex needs of SEK1.5bn (the total committed outstanding capex for 213 was SEK1.5bn as of end-q2 13) and expected dividends of around SEK2-3m. We believe that the combination of solid short-term liquidity prospects and a back-end loaded maturity profile supports the overall liquidity profile. Current performance drivers Diversification mitigates divisional earnings volatility Stena s consolidated profit margins adjusted for normal seasonality are fairly stable. The weak industry conditions and high competition in the ferry and shipping operations are offset by strong performance in drilling and properties. Earnings in the drilling division are positively correlated with oil prices, while earnings in the shipping division are negatively correlated with oil prices. Hence the portfolio of Stena s operations offers valuable diversification, despite the cyclical nature of some of the divisions. Consequently, Stena was also able to maintain relatively strong earnings during the economic downturn. Higher leverage triggered rating downgrade Despite the divestment of assets like Stena Tay, high leverage due to an ambitious growth strategy has resulted in weaker credit metrics and, during the summer of 211, both S&P and Moody s placed Stena s credit ratings on negative outlook. On 31 May 212 S&P lowered its credit rating by one notch to BB. On 1 July 212 Moody s followed suit and lowered the CFR rating by one notch to Ba3, which resulted in a senior unsecured rating of B2 (i.e. a two-notch differential). Surprisingly, Moody s kept the outlook on negative, while S&P has a stable outlook on the credit rating. However, in December 212 after the release of the solid Q3 12 result Moody s upgraded the outlook to Stable from Negative and kept a CFR of Ba3 and senior unsecured rating of B2. Negligible capex budget paves the way for lower leverage After several years of significant capex spending the outstanding committed capex is now at a lower level. As of Q2 13 the total remaining capital expenditure commitment for new buildings on order was SEK5.3bn. Importantly, this is back-end loaded with SEK1.5bn due 213, SEK.1bn due in 214, SEK.4bn due in 215 and SEK3.4bn due in 216. We note that the company has previously indicated a net debt/ebitda target range of x. This implies that debt reductions are likely going forward. End Q3 12 we see the adjusted net debt to EBITDA at 6.9x (restricted group) hence we see a high likelihood that Stena will consolidate its balance sheet in the coming quarters, which is likely, we believe, to support the bond valuation. Outlook and recommendation We have a Buy recommendation on Stena. We see the company as a quality high-yield name with attractive valuation relative to the credit ratings despite the continued weakness in Ferry and Shipping (which is mitigated by strong and stable performance in Drilling and Properties). Furthermore, the benefits from diversification of operations mitigate the financial risk to a certain extent, as profitability volatility remains very low. Liquidity profile DBM estimate SEKm 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, Divisional sales split 212 Drilling 26% Profitability SEKm 9, 8, 7, 6, 5, 4, 3, 2, 1, Investment activities 9% Cash outflow Short term debt Dividend CAPEX New business - Adactum 18% Shipping 9% Credit metrics SEKm Cash inflow Cash & Equivalents LTM CFO Committed facilities Ferry operations 38% Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Net sales EBITDA EBITDA-margin 35% 3% 25% 2% 15% 1% 5% % 7, 9.x 6, 8.x 5, 7.x 6.x 4, 5.x 3, 4.x 2, 3.x 2.x 1, 1.x.x Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Net debt Equity Net debt/ltm EBITDA October 213

68 Relative valuation Z-spread STENA (B2/BB) Source: Bloomberg, Danske Bank Markets STENA (B2/BB) STENA (B2/BB) Industrial 'BB-' category Industrial 'BB' category Years to maturity Spread development ASW (bps) STENA STENA STENA Oct-8 Feb-9 Jun-9 Oct-9 Feb-1 Jun-1 Oct-1 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Source: Bloomberg, Danske Bank Markets Debt composition as of Debt maturity profile as of Other debt 23% Bond issues 15% Bank loans / RCF 62% SEKm Bank loans Bond loans 3 Financial leasing Other liabilities <1 year 1-2 years 2-5 years > 5 years Source: Danske Bank Markets estimates Source: Danske Bank Markets estimates Table 39. Key credit ratios Adjusted ratios Sales growth 17% 17% -2% 18% 5% -2% 3% -2% EBITDA margin 28% 33% 3% 28% 28% 28% 31% 27% EBIT margin 15% 22% 22% 18% 15% 14% 18% 13% ROCE 6% 9% 8% 6% 5% 5% 6% 4% EBITDA interest coverage 3.6x 3.6x 3.1x 3.1x 3.4x 3.4x 3.4x 2.7x EBIT interest coverage 2.1x 2.5x 2.4x 2.2x 2.x 1.8x 2.x 1.4x FFO interest coverage.1x.1x.1x.1x.1x.1x.1x.1x Net debt / EBITDA (reported) 5.2x 4.x 6.1x 7.4x 6.2x 6.8x 6.1x 8.x Net debt / EBITDA 6.4x 4.9x 7.1x 8.7x 7.2x 7.6x 7.x 8.9x Gross debt / EBITDA 7.1x 5.x 7.2x 8.3x 7.x 7.6x 6.9x 8.7x FFO / net debt 1% 11% 12% 1% 11% 8% 8% 8% FFO / gross debt 9% 11% 12% 13% 15% 1% 1% 1% Total debt / total capital 72% 67% 64% 69% 65% 66% 66% 67% Net debt / total capital 7% 66% 64% 69% 65% 65% 65% 67% Net gearing 236% 197% 178% 217% 182% 189% 188% 22% Dividends / FFO 5% 5% 1% 5% 2% 6% 4% 4% October 213

69 Table 4. Financial statements Income statement (SEKm) Total sales 19,619 22,895 22,42 26,472 27,812 27,15 27,968 27,284 Operating expenses -14,492-15,674-16,262-19,599-2,395-19,888-19,773-2,172 EBITDA 5,127 7,221 6,14 6,873 7,417 7,262 8,195 7,112 EBITDA adjusted 5,58 7,586 6,618 7,335 7,72 7,555 8,537 7,414 Depreciation and amortisation -2,734-2,634-1,68-2,51-3,415-3,74-3,617-3,749 Non-recurring items EBIT 2,393 4,587 4,46 4,372 4,2 3,558 4,578 3,363 EBIT adjusted 2,846 4,952 4,938 4,834 4,287 3,851 4,92 3,665 Net interest ,994-1, ,799-1,624 Pre-tax profit 2,462 4,73 4,461 1,378 2,344 2,68 2,779 1,739 Tax Net income 2,289 4,362 3,829 1,745 2,364 2,566 2,526 1,72 Balance sheet (SEKm) Fixed assets 15,491 16,563 23,347 35,163 36,94 39,639 44,512 48,324 Goodwill ,512 1,376 1,286 1,54 2,21 Associates , ,115 1,25 1,374 1,73 Other non-current assets 27,763 34,611 45,74 43,24 4,493 4,613 4,42 42,775 Working capital assets 2,417 2,324 3,88 4,324 3,899 3,399 3,85 3,515 Cash and cash equivalents 3, ,431 1,183 1,665 1,587 1,581 Other current assets 4,259 4,95 7,373 1,767 7,235 7,131 5,727 6,26 Total Assets 54,812 6,417 81,524 97,369 92,25 94,938 98,596 15,495 Total Assets (adj.) 62,354 66,53 89,492 15,64 97,97 99,823 14,298 11,528 Total interest bearing debt 3,272 29,487 38,291 52,174 47,422 51,235 51,941 58,83 Total interest bearing debt adjusted 39,696 37,778 47,734 61,136 54,246 57,28 58,65 64,735 Net interest bearing debt 26,528 28,63 37,583 5,743 46,239 49,57 5,354 57,222 Net interest bearing debt adjusted 35,952 36,894 47,26 59,75 53,63 55,543 57,18 63,154 Working capital liabilities 3,45 3,793 4,47 4,64 3,545 3,649 3,96 4,439 Other current liabilities ,165 2,296 1,379 2,489 3,487 Other non-current liabilities 5,56 7,76 11,58 11,512 9,759 9,227 9,863 7,513 Total Equity 15,263 18,749 26,386 27,454 29,183 29,448 3,397 31,253 Total Equity and Liabilities 54,812 6,417 81,524 97,369 92,25 94,938 98,596 15,495 Total Equity and Liabilities (adj.) 62,354 66,53 89,492 15,64 97,97 99,823 14,298 11,528 Cash flow statement (SEKm) EBIT before non-recurring items 2,393 4,587 4,46 4,372 4,2 3,558 4,578 3,363 Reversal of non-cash items 2,734 2,634 1,68 2,51 3,415 3,74 3,617 3,749 Tax paid Other cash flow from operations -2,44-3,899-2,567-1,3-1,531-2,973-3,49-1,98 Funds From Operations 2,742 3,311 3,529 5,788 5,962 4,276 4,79 5,36 FFO adjusted 3,672 4,15 5,518 8,1 7,919 5,627 5,924 6,164 Change in working capital , , Operating cash flow (CFO) 2,45 3,579 4,586 5,381 7,84 5,65 4,895 5,34 CFO adjusted 3,335 4,373 6,575 7,594 9,41 6,416 6,11 6,162 Capex -5,23-8,169-8,368-9,696-9,23-1,189-1,692-1,917 Other cash flow investing activities 2, ,494 2,299 2, , Free operating cash flow (FOCF) ,72-8,276-2, , ,519 FOCF (adjusted) 385-2,926-6, ,585-3, ,391 Dividends paid Share buyback Debt repayment -1, ,688-3,631-2,6-6,491-2,452-3,13 Funding shortfall -2,289-4,339-11,514-6,37-1,568-11,423-3,376-9,882 New debt 1,277 6,76 9,868 9,827 4,795 6,25 3,827 7,622 New equity Other cash flow from financing activities 2,376-4,597 1,47-3,67-3,475 5, ,254 Change in cash 1,364-2, October 213

70 Stolt-Nielsen Company overview The company was established in 1959 by Jacob Stolt-Nielsen with one operating parcel tanker and has since grown to become the world s largest operator of chemical tankers: sophisticated vessels designed to transport chemicals in bulk, a shipping niche market. The company later diversified into terminal operations, with six wholly-owned and nine majority-owned terminals worldwide and 3,49 tank containers completing an integrated factory-to-door transport solution for its customers. The company is also involved in farming of turbot, caviar, sturgeon and sole and operates bitumen carriers through Stolt Bitumen carriers and LPG tankers through its joint venture Avance Gas. SNI s business risk profile is best classified as satisfactory, while its financial risk profile can be best classified as aggressive in rating agency terms. We repeat our BB+ corporate credit rating, with an unsecured bond issue rating of BB to Stolt-Nielsen (SNI). Key credit considerations Company transformation shielded SNI from weak shipping markets We view Stolt-Nielsen s business risk profile as satisfactory in rating agency terms, as the company has used the trough of the chemical tanker cycle to differentiate itself as an integrated chemical logistics provider. The key credit strength for SNI is the growth within Stolthaven Terminals, which offers stable returns and strong margins. The company has also developed into the world s largest provider of chemical tank container transport, where scale is a competitive advantage. This is a service that offers a total factory-to-door logistics solution for its customers. The company is also the market leader in the chemical tanker market, a shipping niche market with high barriers to entry, and is one of the few companies in a position to renew its fleet while many of its peers are struggling with continued oversupply and weak earnings. SNI has also diversified into fish farming, bitumen transport and storage and a strong LPG market, through its joint venture Avance Gas, held jointly with Sungas Holdings and Frontline 212. The key credit challenges taken into consideration revolve around the company s exposure to the highly cyclical parcel tanker market, which correlates strongly with global GDP and industrial production. This shipping segment is also capital intensive and fleet renewals would be ongoing investments for the company to remain competitive. The company has an aggressive financial leverage following the growth within Stolthaven Terminals and Stolt Tank Containers in recent years. SNI s largest cost exposure is bunker prices, which are currently at elevated levels; hence, there is a risk higher bunker prices could deteriorate cash flow contribution from the chemical tanker division. The company, however, mitigates part of the risk with bunker adjustment factors with its customers. Table 41. Key financial metrics and ratios Adjusted ratios E 214E Sales growth -17.7% 1.1% 12.1% 5.9% -1.6% 7.8% EBITDA EBITDA margin 12.7% 17.5% 15.9% 17.6% 18.2% 19.3% FFO / Interest coverage 4.9x 6.1x 3.4x 2.7x 2.6x 2.4x FFO / Net debt 11.2% 19.7% 14.3% 14.8% 13.3% 14.% Net debt / EBITDA 7.4x 4.4x 5.5x 4.9x 5.2x 4.8x Total debt / Total capital 5.7% 47.7% 54.1% 56.5% 59.2% 59.1% estimates Facts Sector: Industrials; Shipping Corporate ticker: SNINO Equity ticker: SNI NO Market cap: USD1.8bn Equity book value: USD1.4bn Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: BB+ Senior Unsecured: BB Analysts: Bjørn Kristian Røed bred@danskebank.com Åse Haagensen ha@danskebank.com Key credit issues Strengths: Diversified customer portfolio. Terminal business with proven record of stable returns and margins. Worlds largest chemical shipping and tank container operator. Shipping niche market with high barriers to entry. Controlling each element of the chemical logistics value chain. Challenges: Highly cyclical market within its Chemical tanker division. Capital-intensive industry with continual renewal needs. Aggressive financial leverage following latest expansion. High cost exposure to bunker fuel. Source: Danske Bank Markets October 213

71 Liquidity SNI had a cash position of USD39.m as at 3 October 213, down from USD65m at year-end 212. Our EBITDA forecast for 213 and 214 should be more than sufficient to cover interest rate costs and its working capital requirements, as it will generate estimated FFO of USD251m and USD286m, respectively. The company has an established relationship with numerous banks and has a proven track record in capital markets, so we see limited risk of the company not being able to obtain bank or bond financing to meet its capex not yet secured financing. We highlight that the company s EBITDA from its stable terminal division has been and is expected to be sufficient to cover its annual interest expenses a factor we find positive from a credit perspective. SNI had USD34m in undrawn debt facilities as at 3 October 213. The company has also highlighted USD4m in unencumbered assets related mainly to its container division, with up to USD3m in financing potentially available. Further sources of improved liquidity include the recent listing of 31.3%-owned Avance Gas valued at USD123.9m at the Norwegian OTC market with a OSEBX/NYSE listing to follow. We forecast the balloon payment of approximately USD1m will be refinanced in 214 and SNI s liquidity should therefore be viewed as sufficient to meet its working capital needs, capex commitments and debt repayments going forward. Current performance drivers Strong growth in Stolthaven Terminals to improve EBITDA in Stolthaven Terminals has developed to be a cornerstone for the company, generating stable returns and attractive EBITDA margins averaging 53% since 25 and climbing as high as 61% in 212. The company will in total invest USD331m in 214 and 215 for a growth of 4% in storage capacity, which will improve EBITDA contribution from Stolthaven Terminals in 214 and 215 by an estimated USD22m and USD32m, respectively. Margin pressure in Stolt Tank Containers, slow improvement in shipping Stolt-Nielsen stated that it saw a further improvement in chemical tanker markets during the third quarter and its division reported its first positive result since 29 in October. The company s operational results are highly sensitive to the developments in this division and it plays a key role in improved credit metrics for Stolt-Nielsen. The company reported margin pressure within Stolt Tank Containers, which is a cause for concern and will be on the agenda for the company. Outlook We estimate chemical tanker demand will outpace supply growth during our forecast period, mainly as a consequence of the limited supply growth, estimated to be 9.3% on a cumulative basis. With the chemical tanker demand/gdp growth ratio being below 1. only occurring three times in the past 22 years, we also see limited downside to demand going forward, with GDP growth estimated to grow at a cumulative pace of 9.3%. We estimate chemical tanker utilisation will improve to 91.4% in 215 from 85% estimated in 213. This leads us to estimate chemical tanker rates will improve by 4.5% in 213, 6.% in 214 and 8.9% in 215 on an average basis. We also pay close attention to the bunker price development, the company s largest cost exposure and its potential to deteriorate cash flow contribution should prices escalate. Liquidity profile E 214E 215E OCF (adjusted) Dividends paid TIBD/EBITDA: Improved EBITDA used to increase debt. Ratio to remain stable 1.x 9.x 8.x 7.x 6.x 5.x 4.x 3.x 2.x 1.x.x EBIT by division 21 Sale of assets Debt principal and installments (Est) Parcel tankers Terminals Containers Stolt Sea Farm Corporate & Others Chemical shipping fleet development 8.% 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% E Orderbook ratio Newbuilding orders (12M running) Newbuilding deliveries 12 M running 214E E Millions October 213

72 Relative valuation DM (bps) SNINO 6/22/16 SNINO 3/19/15 SNINO 3/19/18 SNINO 9/4/19 Moody's MIR BB category Moody's MIR BB+ category Years to maturity Floating rate note cash price development Cash Price SNINO 3/19/15 SNINO 6/22/ Jan-12 Mar-12 May-12 SNINO 3/19/18 SNINO 9/4/19 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Source: Bloomberg, Moodys, Danske Bank Markets Source: Bloomberg, Danske Bank Markets Debt composition Debt maturity profile Drawdown on short-term credit lines 6% 5 Amortization Balloons Maturing bonds Revolver maturity Bonds 31% Bank debt 63% USDm Table 42. Key credit ratios E 214E Net sales growth 11.5% 13.4% -17.7% 1.1% 12.1% 5.9% -1.6% 7.8% EBITDA margin 12.6% 1.5% 12.7% 17.5% 15.9% 17.6% 18.2% 19.3% EBIT margin 1.% 9.8% 8.5% 8.8% 7.4% 8.6% 8.3% 9.9% ROCE (%) 9.6% 7.3% 4.6% 5.2% 4.7% 5.4% 5.% 6.2% EBITDA interest coverage (x) 4.9x 5.4x 5.8x 7.1x 4.3x 3.7x 3.7x 3.6x EBIT interest coverage (x) 3.9x 5.x 3.9x 3.6x 2.x 1.8x 1.7x 1.8x FFO interest coverage (x) 4.3x 4.6x 4.9x 6.1x 3.4x 2.7x 2.6x 2.4x FFO / TIBD (%) 17.6% 11.5% 11.% 19.1% 13.9% 14.3% 12.7% 13.8% FFO / NIBD (%) 18.3% 11.7% 11.2% 19.7% 14.3% 14.8% 13.3% 14.% FOCF / TIBD (%) -3.7% -3.5% 2.2% 23.9% -17.8% -5.9% -12.6% -3.9% TIBD / EBITDA (x) 4.9x 7.5x 7.6x 4.5x 5.7x 5.1x 5.5x 4.9x NIBD/EBITDA (x) 4.7x 7.4x 7.4x 4.4x 5.5x 4.9x 5.2x 4.8x TIBD/ tangible assets 38.7 % 53.9 % 5.2 % 45.9 % 55.4 % 59.1 % 65.9 % 64.9 % TIBD/ (Equity + TIBD) (%) (Adjusted) 44.6% 53.9% 5.7% 47.7% 54.1% 56.5% 59.2% 59.1% Total equity / total assets (%) 48.2% 39.8% 43.9% 46.1% 39.6% 36.7% 34.9% 34.7% Dividends/FFO (%).% 33.1% 17.2% 11.% 11.5% 5.3% 16.7% 2.4% Source: Danske Bank Markets 7 21 October 213

73 Financial statements Income statement (NOKm) E 214E 215E Total revenues 1,763 1,999 1,646 1,811 2,31 2,151 2,118 2,284 2,462 OPEX 1,381 1,632 1,32 1,378 1,558 1,63 1,63 1,695 1,743 Other costs EBITDA EBITDA adjusted Depreciation & amortization EBIT EBIT adjusted Net profitt /loss from discontinued operations Interest expense (net book) Interest expense (net Adjusted) EBT EBT Adjusted Tax Net income Net income Adjusted Balance sheet (NOKm) E 214E 215E Fixed assets 1,915 2,368 2,552 2,163 2,63 2,88 2,966 3,117 3,195 Goodwill Investments in associates Working capital assets Restricted cash Cash and cash equivalents Other current assets Total assets 2,476 3,82 3,211 2,964 3,533 3,791 4,26 4,147 4,286 Total assets (adjusted) 2,835 3,379 3,52 3,398 3,899 4,67 4,193 4,268 4,372 Total interest bearing debt (TIBD) 74 1,276 1, ,457 1,659 1,956 2,22 1,97 Total interest bearing debt (TIBD) (Adjusted) 1,1 1,573 1,59 1,426 1,823 1,935 2,124 2,142 2,56 NIBD (Book) 697 1,242 1, ,397 1,594 1,855 1,982 1,914 NIBD (Adjusted) 1,56 1,539 1,551 1,384 1,763 1,87 2,23 2,13 2, Working capital liabilities Other current liabilities Total equity 1,365 1,346 1,546 1,565 1,544 1,492 1,462 1,483 1,67 Total equity and liabilities 2,476 3,82 3,211 2,964 3,533 3,791 4,26 4,147 4,286 Cash flow statement (NOKm) E 214E 215E EBITDA Tax cost Net interest paid FFO FFO (Adjusted) Changes in working capital Other CF from operations Operating cash flow (CFO) CFO (adjusted) Net investments in fixed assets & intangibles Running Maintenance capex (forecast) Sale of assets 71 Investments in associated companies Other cash flow from investing act. 4 Free operating cash flow (FOCF) Debt principal and instalments Dividends paid Funding shortfall New debt New equity Other positive cash flow from financing activities Change in cash Source: Danske Bank Markets October 213

74 Stora Enso Company overview Stora Enso is one of the three largest diversified forest product companies globally, with leading positions in newsprint, fine paper, magazine paper, consumer board, packaging and wood products. The company has c28, employees and almost 9 production facilities in more than 35 countries, with sales focused mainly on Europe. The company enjoys a stronger-than-average cost position supported by relatively efficient machinery and a relatively high degree of vertical integration into the key inputs of fibre, energy and pulp. The largest owners are Foundation Asset Management (Wallenberg family) with 1% of shares and 27% of votes and the Finnish state (Solidium Oy) with 12% of shares and 25% of votes. Key credit considerations Well-diversified operations only partially mitigate strong cyclicality Stora Enso has a well-diversified product mix and enjoys leading market positions in newsprint, magazine paper, fine paper and packaging. Demand patterns across different forest products offering some diversification benefits and sales are reasonably well diversified regionally. This partially mitigates against exposure to the highly competitive, capital-intensive, commoditised, fragmented and cyclical forest product industries. Pricing power is generally weak, increasing the exposure to input cost volatility. Relatively strong operational efficiency and vertical integration The company benefits from relatively low-cost production capabilities driven by material economies of scale and relatively efficient machinery. Vertical integration into key inputs is relatively high with Stora Enso being self-sufficient in pulp, around 6% self-sufficient in energy, and about 1% in fibre. Stora Enso benefits from increased low-cost eucalyptus-based pulp sourcing from Latin American assets. We expect the company to downsize further high-cost Finnish capacity in the medium term, expecting Stora s large new 1.3m tpa Uruguayan pulp mill to become operational during H2 13. Small improvements in costs but declining demand and pricing The pulp and paper industry is challenged by declining structural demand for paper as well as an uncertain macro environment following the European debt crisis. About 43% of Stora Enso s 212 sales were generated in the graphic paper segments, with roughly 29% of revenues stemming from the more stable and profitable consumer and industrial packaging segments. While forest products have largely experienced flat sales growth, biomaterials took a beating with revenues down 7% y/y in 212 driven by markedly lower pulp prices. Although the company expects overall sales to remain largely unchanged, EBIT could decline by around one-third due to deterioration in the European paper as well as Building and Living markets. Table 43. Key credit metrics and ratios Adjusted ratios Sales growth 3% -7% -19% 15% 6% -1% EBITDA (DKKm) 1,577 1, ,222 1,334 1,17 EBITDA margin 13% 9% 9% 12% 12% 1% FFO / Interest coverage 3.3x 2.1x 2.9x 7.x 5.9x 3.4x FFO / Net debt 31% 13% 2% 35% 23% 21% Net debt / EBITDA 2.5x 3.9x 4.1x 2.6x 3.x 3.9x Total debt / Total capital 44% 51% 51% 47% 54% 61% SELL Sector: Paper & Forest Products Corporate ticker: STERV Equity ticker: STERV FH Market cap: EUR5.4bn Equity book value: EUR5.3bn Ratings: S&P: BB /N Moodys: Ba2 /N Fitch: BB- /S Analysts: Mads Rosendal madro@danskebank.dk Kasper From Larsen kasla@danskebank.dk Key credit issues Strengths: Leading market positions and benefits from economies of scale High diversification across forest product categories Relatively cost-efficient machinery Increased integration with lowcost Latin American pulp sourcing Improved presence in Asian markets Challenges: Exposed to highly competitive, commoditised and cyclical forest product industry Structural demand challenges and excess capacity in some segments Exposure to input cost volatility and limited pricing power Weak and cyclical credit metrics (unsatisfactory for the rating) Source: Danske Bank Markets October 213

75 Liquidity Overall we view the liquidity profile of Stora Enso as adequate to strong in rating agency terms. At the end of 212, cash and equivalents amounted to around EUR1.8bn. In addition, Stora has unutilised committed credit facilities amounting to EUR7m, which are free of covenants. The company also has access to various other long-term funding sources of up to EUR6m, mainly from Finnish pension funds. This compares with EUR788m maturing over the next 12 months. Furthermore the company used EUR337m of the bond proceeds from a February 212 issue to tender a part of existing bonds maturing in 214, effectively extending the debt maturity profile. The issued bonds have no financial or change of control covenants. Current performance drivers Q2 13: Stable results in weak paper market Stora Enso presented fairly stable results for Q2 13. Sales were almost exactly flat year on year, but EBIT was down 12% y/y which was mainly due to weaker pricing in printing and reading. Furthermore, Stora Enso had non-recurring items with a negative impact of approximately EUR33m, which were primarily related to the group s restructuring efforts. The Printing and Reading segment continues to underperform with sales dropping 7.6% and operational EBITDA dropping about 52.8%. Building and Living was the best-performing segment with sales increasing about 13% y/y and EBITDA almost doubling to EUR39m (Q2 12: EUR21m). The group s sales outlook for Q3 13 is expected to be lower than Q2 13 and operational EBIT is expected to be in line with or slightly higher than Q2 13. Unchanged leverage on the back of decent cash flow Cash flow from operations was solid at EUR222m compared with EUR24m in Q2 12. However, due to a dividend payment of about EUR237m, net debt levels remained flat sequentially. Adjusted net debt to LTM EBITDA was 4.3x (same as Q2 13) and LTM FFO to adjusted net debt was up slightly, landing at 24.6% which is still above the 2% threshold commensurate with the BB rating from S&P). Gearing increased mildly and is now 54% compared with 49% in the previous quarter. Stora should improve credit metrics to maintain its current rating Following the Q2 13 report, Stora Enso s credit metrics are not fully commensurate with S&P s rating requirements (adjusted net debt to EBITDA is above x). However, the agency has previously stated that it will allow the group some time to capitalise on its recent Chinese and Uruguayan investments. Still, in our view, the risk of a downgrade in the medium term cannot be ruled out as Stora Enso s rating is placed on negative outlook by both S&P and Moody s. Outlook and recommendation Reflecting the weakening market conditions and mounting rating pressure, we retain our Sell recommendation on Stora Enso. The dull industry outlook for pulp and paper embeds aggressive investment needs to mitigate the high exposure to the deteriorating printing and reading paper segment (Stora Enso will invest around EUR76m through 216 related to its new Chinese operations, of which EUR9m will be in 213). On a more positive note, we believe that Stora Enso s plan to reorganise its business units (which should save EUR2m annually) could help mitigate the negative structural trend in the graphic paper segment as long as cost restructuring efforts stay ahead of the ongoing price pressure, which until now has proven to be difficult. We have a Sell recommendation on the STERV 214, 218 and 219 bonds (trading at around ask ASW 15.3bp, 269.5bp, and 596.5bp, respectively) and recommend buying 5Y protection on Stora Enso (trading around ask 273bp). We view the cash spread as being too tight, as we do not believe that current pricing adequately reflects the risk factors inherent in the paper and forest industry October 213 Sound short-term liquidity EURm 4, 3,5 3, 2,5 2, 1,5 1, 5 Divisional sales 212 Aggressive financial leverage EURm 7, 6, 5, 4, 3, 2, 1, Renewable packaging 29% Profitability EURm 12, 1, 8, 6, 4, 2, Cash outflow Short term debt Dividend CAPEX Other 8% Building and living 15% Cash inflow Cash & Equivalents LTM CFO Committed facilities Biomaterials (pulp etc.) 5% Printing and Reading 43% Adj. Net debt Equity Adj net debt/ebitda % 15% 1% 5% % Net sales Adj. EBITDA Adj. EBITDA margin

76 Relative value chart all issues are fixed cpn rated Ba2/BB Spread development Z-spread 35 3 STERV Industrials 25 STERV 5 18 'BB' STERV STERV category 15 1 STERV STERV Years to maturity Source: Bloomberg, Danske Bank Markets ASW (bps) STERV STERV Apr-8 Aug-8 Dec-8 Apr-9 Aug-9 Source: Bloomberg, Danske Bank Markets STERV STERV 5 18 STERV STERV Dec-9 Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Debt composition Debt maturity profile Other debt 1% Bond issues 6% Bank loans / RCF 3% EURm Bank loans Bond loans 18 Financial leasing Other liabilities Table 44. Key credit ratios Adjusted ratios Sales growth -8% 1% 3% -7% -19% 15% 6% -1% EBITDA margin 13% 15% 13% 9% 9% 12% 12% 1% EBIT margin % 7% 7% 4% 4% 8% 8% 6% ROCE % 6% 7% 4% 4% 9% 9% 6% EBITDA interest coverage 8.2x 6.8x 5.9x 5.4x 7.x 1.5x 8.8x 5.8x EBIT interest coverage.2x 3.4x 3.3x 2.1x 2.9x 7.x 5.9x 3.4x FFO interest coverage 5.9x 4.6x 4.6x 2.8x 5.9x 9.6x 5.9x 4.9x Net debt / EBITDA (reported) 3.7x 2.5x 1.9x 3.x 3.2x 2.x 2.1x 2.5x Net debt / EBITDA 4.3x 3.2x 2.5x 3.9x 4.1x 2.6x 3.x 3.9x Gross debt / EBITDA 4.5x 3.6x 3.4x 4.7x 5.7x 3.9x 4.2x 6.x FFO / net debt 17% 21% 31% 13% 2% 35% 23% 21% FFO / gross debt 16% 19% 23% 11% 15% 23% 16% 14% Total debt / total capital 51% 47% 44% 51% 51% 47% 54% 61% Net debt / total capital 48% 43% 33% 41% 37% 31% 38% 39% Net gearing 87% 69% 51% 7% 65% 51% 66% 73% Dividends / FFO 2% 31% 29% 68% 23% 14% 22% 26% October 213

77 Table 45. Financial statements Income statement (EURm) Total sales 11,343 11,46 11,849 11,29 8,945 1,297 1,965 1,815 Operating expenses -9,87-9,763-1,279-1,2-8,122-9,81-9,657-9,732 EBITDA 1,473 1,697 1,57 1, ,217 1,38 1,83 EBITDA adjusted 1,481 1,75 1,577 1, ,222 1,334 1,17 Depreciation and amortisation -1, Non-recurring items , EBIT EBIT adjusted Net interest Pre-tax profit Tax Net income Balance sheet (EURm) Fixed assets 9,937 9,154 6,477 5,414 4,7 5,67 4,943 5,49 Goodwill Associates ,155 1,43 1,481 1,744 1,913 1,965 Other non-current assets 1,158 1,469 1,888 1,68 1,445 1,517 1,39 1,113 Working capital assets 4,337 4,176 4,56 3,277 2,644 3,96 3,183 3,146 Cash and cash equivalents ,111 1,139 1,85 Other current assets Total Assets 17,831 17,382 15,311 12,241 11,593 13,37 12,999 13,694 Total Assets (adj.) 17,981 17,524 15,431 12,346 11,685 13,141 13,464 14,133 Total interest bearing debt 5,854 4,929 4,35 4,33 3,923 4,4 4,369 5,129 Total interest bearing debt adjusted 6,718 6,142 5,318 4,873 4,675 4,793 5,584 6,689 Net interest bearing debt 5,52 4,32 2,955 3,124 2,594 2,41 2,746 2,757 Net interest bearing debt adjusted 6,367 5,533 3,923 3,965 3,345 3,199 3,961 4,316 Working capital liabilities 2,4 1,993 1,971 1,62 1,473 1,697 1,679 1,686 Other current liabilities Other non-current liabilities 2,12 1,941 1, Total Equity 7,314 8,21 7,665 5,651 5,183 6,255 5,96 5,876 Total Equity and Liabilities 17,831 17,382 15,311 12,241 11,593 13,37 12,999 13,694 Total Equity and Liabilities (adj.) 17,981 17,524 15,431 12,346 11,685 13,141 13,464 14,133 Cash flow statement (EURm) Net profit Reversal of non-cash items 1, Tax paid Other cash flow from operations , Funds From Operations 1,59 1,168 1, , FFO adjusted 1,84 1,195 1, , Change in working capital Operating cash flow (CFO) 672 1, , CFO adjusted 698 1, , Capex -1, Net acquisitions/disposals Free operating cash flow (FOCF) , FOCF (adjusted) , Dividends paid Share buyback -345 Debt repayment , Funding shortfall -1, New debt 1, ,472 New equity Other cash flow from financing activities Change in cash October 213

78 Tallink Grupp Company overview Estonian Tallink Grupp (Tallink) is the dominant passenger ship operator in the Northern Baltic Sea. The group offers passenger and cargo transportation on routes connecting Finland, Sweden, Estonia and Latvia. Tallink also operates hotels in Estonia and Latvia. Group metrics are rather weak but on an improving path due to high focus on deleveraging. Key credit considerations Dominant passenger and truck borne cargo transporter in the Baltic Sea Tallink is the largest operator of seaborne passengers and cargo transportation in the Baltic Sea with a market share of over 49% on its routes. The group transported over 9.2 million passengers and 284, cargo units in its latest financial year. Tallink has a fleet of 19 cruise ships and ferries with an average fleet age of 13 years. Tallink also operates hotels in Latvia and Estonia, as well as port shuttle services, allowing it to offer full-service journey packages to its customers. A large part of Tallink s revenues are secured from onboard services, such as restaurants, shops and entertainment. Satisfactory business risk and exposure to strong economies Tallink s overall business risk is satisfactory, underpinned by its dominant position in the Northern Baltic Sea, with limited competition on its main routes. Furthermore, Tallink derives the bulk of its earnings from politically and economically strong geographical areas. Group earnings are relatively low cyclical, as the cyclicality of cargo transportation is mitigated by stable passenger growth across cycles. Aggressive financial risk profile, credit metrics are improving Tallink s financial risk profile is aggressive. Q2 13 adjusted net debt to EBITDA of 5.x and adjusted net debt to capital of 54% paints a picture of a rather leveraged business. We note, however, that a high focus on deleveraging in the past couple of years has led to a significant reduction in leverage. Key credit considerations Fundamentally, we believe Tallink is a sound business. Years of high investments in new vessels have been replaced by a high focus on deleveraging in recent years. The underlying business is strong, with dominant market positions in all its main routes and relatively low exposure to cyclicality. However, Tallink s deleveraging efforts could be impaired by future investments in vessels as a modern and young fleet is key to maintaining customers. Table 46. Key credit metrics and ratios Adjusted figures Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Sales growth y/y 5.8% 6.9% 6.6% 4.% -1.7% 1.7% LTM EBITDA (EURm) EBITDA margin 5.8% 19.3% 27.6% 14.9% 4.3% 19.3% LTM FFO / Interest coverage 3.9x 4.2x 4.9x 3.5x 3.7x 3.3x LTM FFO / Net debt 17.5% 18.6% 19.5% 2.2% 19.9% 2.5% Net debt / LTM EBITDA 5.9x 5.5x 5.3x 5.x 5.1x 5.x Total debt / Total capital 59.8% 58.4% 55.7% 54.7% 55.9% 55.9% estimates Facts Sector: Industrials; transportation Corporate ticker: TALLNK Equity ticker: TAL1T ET Market cap: EUR642m Equity book value: EUR719m Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: BB Senior Unsecured: BB- Analysts: Jakob Magnussen, CFA jakja@danskebank.dk Kasper From Larsen kasla@danskebank.dk Key credit issues Strengths: Growing passenger volumes. Relatively young ferry fleet. Somewhat low exposure to economic cycles. Dominant operator on key routes. Improving credit metrics. Challenges: Modest size. Exposed to commodity and currency volatility. Slightly high cruise ship fleet age. Aggressive financial risk profile. High asset encumbrance. Source: Danske Bank Markets October 213

79 Liquidity Tallink s short-term liquidity situation is strong as of end-q2 13 with a cash & equivalents balance of EUR68m. Based on past 12 months FFO, Tallink could see cash inflows in the coming year of around EUR165m. These means of cash will be adequate to cover short-term debt maturities of EUR92m and projected capex of EUR54m. At the beginning of Q3 13, Tallink paid out some EUR34m in dividends to its shareholders. In spite of this, we still see Tallink as having a robust short-term maturity profile, underpinned by the NOK9m FRN bond issue the Group did in July 213, not maturing until 218. The proceeds were used to repay existing ship financing loans. Further alleviating funding pressure is Tallink s access to unused committed credit facilities of EUR45m. Tallink does not plan to increase these, as the group expects to repay drawn portions of the facility with cash flow from the coming quarter s cash flow, which are traditionally peak seasons in terms of earnings and cash generation. Current performance drivers Seasonally strong operational performance The Q2 13 result were strong sequentially, as Q2 and Q3 are the traditional peakseasons for Tallink. The results were also solid y/y, with revenues up 2% at EUR249M, primarily driven by solid growth in cargo transportation sales but also due to decent growth in the important onboard restaurants & shops segment. In terms of routes, the Finland-Estonia stretch saw decent growth partly offset by negative growth in the Finland-Sweden stretch. Tallink s stronger top-line also filtered through to EBITDA, that grew by 1.3% y/y landing at EUR47m. Because Tallink paid out a dividend this year, according to Estonian law, the company will be paying a corporate tax relating to the dividend of EUR9m. As Tallink did not pay a dividend tax last year, the company s net income was down 53% y/y reported at EUR9m. Improving credit metrics in spite of higher investments in Q2 13 Tallink booked strong funds from operations in Q2 13 up 5% y/y. Due to the EUR3m acquisition of the cruise ferry M/S Isabella, group free operating cash flow fell 53% y/y landing at positive EUR22m. Subsequently Tallink s reported net debt fell 2% sequentially now standing at EUR767m. We subsequently see adjusted net debt to LTM EBITDA at 5x down from 5.1x last quarter. LTM FFO to net debt improved to 2.5% from 19.9% last quarter. Given the stable positive development in the underlying business and the slight deleveraging, we maintain our indicative issuerrating on Tallink at BB, and issue rating of BB- due to high contractual subordination relating to ship pledges. Outlook In connection with the Q1 13 report Tallink guided for improvement in group results relative to 212. This outlook was not repeated in the Q2 13 report. We interpret this as a sign of lower confidence in the remaining two quarters. Until now the net result of the first half of 213 is negative EUR8m compared to positive EUR1m for the same period in 212. The difference mainly relates to the dividend tax paid in 213. We got the impression that Tallink s implicit less rosy view on the rest of 213 is rooted in higher competition on especially the Finland-Sweden stretch, which could imply lower margins. Other factors that could explain lower growth in the rest of the year are the current economic uncertainty and the risk of higher bunker fuel prices, which could assert negative pressure on group results. Growth in 213 could be spurred by online sales improvement and dynamic pricing. From a credit perspective, though, we remain confident in Tallink s ability to generate adequate free cash flows to support the group s deleveraging plan. Adequate short-term liquidity EURm Cash outflow Cash inflow Short term debt Cash & Equivalents Dividend LTM CFO CAPEX Committed facilities EBIT across routes Profitability EURm Swe-Est 9% Fin-Swe 14% Other 16% Improving credit metrics EURm Swe-Lat % Fin-Est 61% Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 3% 2% 1% % Net sales EBITDA LTM EBITDA-margin (rhs) Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 X 5.2 Net debt Equity net debt/ltm EBITDA (rhs) October 213

80 Relative valuation Floating rate cash price development DM (bps) TALLNK 1/18/18 Moody's MIR BBcategory Moody's MIR BB category 1 Years to maturity Cash Price TALLNK 1/18/ Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Source: Bloomberg, Moody's, Danske Bank Markets Source: Bloomberg, Danske Bank Markets Debt composition Debt maturity profile (as of end 212) Bonds 13% Overdraft 1% EURm Bank loans 86% >17 Table 47. Key credit ratios Adjusted ratios 6/7 7/8 8/9 9/ Sales growth 3.3%.8% 2.8% 2.2% 3.% EBITDA margin 21.% 16.2% 17.1% 18.2% 17.% 18.% EBIT margin 13.3% 8.4% 8.3% 9.3% 1.1% 1.4% ROCE 4.1% 3.8% 4.4% 5.8% 6.3% EBITDA interest coverage 3.3x 2.2x 1.8x 2.8x 2.9x 3.5x EBIT interest coverage 2.2x 1.2x.9x 1.4x 1.7x 2.x FFO interest coverage 3.1x 2.2x 1.8x 2.9x 3.2x 3.6x Net debt / EBITDA (reported) 5.4x 8.4x 8.5x 7.x 5.4x 4.7x Net debt / EBITDA 5.5x 8.5x 8.7x 7.1x 6.2x 5.x Gross debt / EBITDA 6.x 9.x 9.1x 7.5x 6.7x 5.4x FFO / net debt 17% 12% 12% 15% 18% 21% FFO / gross debt 15% 11% 11% 14% 16% 19% Total debt / total capital 6% 64% 66% 63% 6% 55% Net debt / total capital 58% 62% 65% 61% 58% 53% Net gearing 1.4x 1.7x 1.8x 1.6x 1.4x 1.1x October 213

81 Table 48. Financial statements Income statement (EURm) 6/7 7/8 8/9 9/ Total sales Operating expenses Non-recurring items EBITDA EBITDA adjusted Depreciation and amortisation EBIT EBIT adjusted Net interest Pre-tax profit Tax Net income Balance sheet (EURm) 6/7 7/8 8/9 9/ Fixed assets Goodwill Associates Other non-current assets Working capital assets Cash and cash equivalents Other current assets Total Assets Total Assets (adj.) Total interest bearing debt Total interest bearing debt adjusted Net interest bearing debt Net interest bearing debt adjusted Working capital liabilities Other current liabilities Other non-current liabilities Total Equity Total Equity and Liabilities Total Equity and Liabilities (adj.) Cash flow statement (EURm) 6/7 7/8 8/9 9/ Pre-tax profit Reversal of non-cash items Tax paid Other cash flow from operations Funds From Operations FFO adjusted Change in working capital Operating cash flow (CFO) CFO adjusted Capex Net acquisitions/disposals Free operating cash flow (FOCF) FOCF (adjusted) Dividends paid Share buyback Debt repayment Funding shortfall New debt New equity Other cash flow from financing activities Change in cash October 213

82 Talvivaara Mining Company overview Talvivaara is an internationally significant base metals producer, with its primary focus on nickel and zinc, aiming to achieve profit margins equal to or better than those achieved by comparable base metal mining companies. For the past six years, the primary focus of operations has been on the effective development of the Talvivaara deposits into a well managed, profitable mining operation. Upon reaching its currently planned full production capacity of approximately 5, tonnes of nickel annually, the Talvivaara mine will be one of the 1 largest nickel mines globally. The Finnish government holds some 17% of the equity through Solidium Oy. Key credit considerations Cost-efficient nickel mine due to deposit features and scalable technology Talvivaara deposits were originally discovered in However, due to relatively low grade ore (.22% nickel), excavation did not commence until 28 after successful completion of metals recovery trials on the innovative organic bioheapleaching technology. The polymetallic ore deposits are mined as large open pits since this suits the Talvivaara ore body well due to thin overburden, favourable resource geometry and a low 1/1 waste to ore ratio. The open-pit structure does, however, have drawbacks as it exposes the mine to rainfall, which can significantly set back production. Highly exposed to nickel prices Talvivaara s earnings are exposed to the volatility of nickel commodity prices. As nickel prices are related to the global construction activity level, this makes Talvivaara exposed to overall global macroeconomic activity. The nickel price has dropped significantly during the first half of 213 and is now just under USD14./t. At these prices nickel mining is unprofitable, not just for Talvivaara but especially for smaller mines, which should hopefully see some supply coming off stream. Additional funds needed to avoid restructuring As Talvivaara has suffered from weak production and low nickel prices, its cash burn has been significant in recent quarters. This has seen liquidity dwindle and the group is currently investigating options to secure additional funds to continue operations. Key credit considerations Fundamentally, we see Talvivaara as a highly speculative investment. Production issues as well as pricing have seen immense amounts of value being eroded since the mine commenced production in 28 and liquidity is under pressure for the second time within a year. In the current environment it could be difficult to find investors willing to provide the cash needed to save the company; however, we do think stakeholders could have incentives to keep the mine running, as a shutdown would have negative consequences from both a social and an environmental perspective. Key credit metrics and ratios Facts Sector: Metals and Mining Corporate ticker: TALVLN Equity ticker: TLV1V FH Market cap: EUR117m Equity book value: EUR54m Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating : CC Senior Unsecured: CC Analysts: Mads Rosendal madro@danskebank.dk Louis Landeman llan@danskebank.com Key credit issues Strengths: Cost-efficient production technology. Long-term take-off agreements. Stable operating environment. Highly experienced management team. Challenges: Vulnerable financial position. Reduced nickel output due to production issues. Single-mine operation entails concentration risk. High exposure to volatile nickel price environment. Source: Danske Bank Markets Adjusted figures Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Sales growth y/y -41 % -11 % -26 % -61 % -29 % -61 % LTM EBITDA (EURm) EBITDA margin 3.3% 5.4% 19.1% % -25.3% -81.1% LTM FFO / Interest coverage.x -.1x -.2x -1.2x -1.4x -1.8x LTM FFO / Net debt -.4% -1.3% -2.3% -1.8% -13.7% -22.8% Net debt / LTM EBITDA 7.5x 1.x 13.3x -18.8x -13.9x -8.1x Total debt / Total capital 41.3% 46.2% 46.% 47.6% 45.8% 37.4% estimates 8 21 October 213

83 Liquidity Talvivaara s short-term liquidity situation is dismal as of end-q2 13. Due to the very weak nickel price and low production levels, we expect Talvivaara to spend between EUR1-15m in cash during the coming year. Also, the group has already used up a significant part of the funds received from the EUR26m rights issue in Q1 13 (cash position of EUR11m by end-q2 13). Talvivaara has drawn around EUR7m on its EUR1m revolving facility, thus its current short-term funds will be inadequate to cover the expected cash outlay, short-term debt maturities of EUR18m as well as projected capex of EUR7m. Furthermore, Talvivaara has a significant amount of debt maturing during the coming years (about EUR5m until 217) and unless the group manages to secure additional funding it could be facing restructuring of its debt. Current performance drivers Low production and weak nickel price drags on result Q2 13 has been disappointing for Talvivaara. Group revenues are down 61% y/y and 51% on a sequential basis (The weak result was somewhat anticipated as Talvivaara guided for very low production ahead of results in July). Talvivaara s production during Q2 was still affected by water balance issues as well as a scheduled maintenance stop in late May. Nickel production during the quarter was low at 1,776t versus 3,194t in Q2 12 and Talvivaara has withdrawn its previous FY 213 production guidance of 18,t due to uncertainty regarding the production ramp up. Weak output and suppressed pricing led to a negative EBITDA of EUR11m, which is slightly worse than in Q1 13, when EBITDA was negative by EUR7m. Liquidity back in focus In Q2 13 Talvivaara had a negative cash flow from operations of about EUR66m, partly related to a continued build up in working capital. Still, net debt decreased by about 23% sequentially due to proceeds from the recent rights issue. As both EBITDA and FFO are negative Talvivaara s credit metrics are less meaningful measures of the group s financial strength. At the current cash burn rate the group is facing a liquidity squeeze. To help slow down its cash consumption Talvivaara has initiated a very ambitious cost cutting programme, which should have an expected net cash impact of about EUR1m over the next twelve months. Naturally this is credit positive but due to lack of details on the programme we remain sceptical as to whether such a high level of savings can actually be achieved. Outlook We have changed our rating on Talvivaara from CCC to CC. Since Talvivaara issued its EUR11m bond in March 212, the group has been affected negatively by numerous issues such as tanking nickel prices, production problems and accidents, which have increased the group s cash burn rate significantly. Q2 13 did not see a turnaround in the operating result due to continued production difficulties stemming from water balance issues as well as a very weak nickel price. In October the group updated on the expected nickel production for Q3 13 which, at around 2.5t, was not significantly higher compared to the previous quarters. Still, at the current nickel spot price even an increase in production would, in our view, be insufficient to achieve positive free cash flow and Talvivaara would need an additional liquidity injection to stave off default. The groups situation looks bleak at the moment, in our view. However, as stakeholders (in particular the Finnish government) have an incentive to keep the mine running, we view some sort of restructuring as more likely than outright bankruptcy (in case the group fails to secure additional funding). The mine would be costly to shut down both from an environmental and a social perspective (Talvivaara employs some 7 people in the highly remote Sotkamo region of Finland). Insufficient short-term liquidity EURm Cash uses Short term debt CFO (negative) CAPEX Nickel price development (vs. 5y avg.) USD/T 2, 19, 18, 17, 16, 15, 14, 13, 12, Unprofitable operations EUR m Credit metrics EURm Cash sources Cash & Equivalents Committed facilities Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Net sales EBITDA EBITDA-margin (rhs) Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Net debt Equity Net debt/ltm EBITDA (rhs) 4 % 2 % % -2 % -4 % -6 % -8 % 14.x 12.x 1.x 8.x 6.x 4.x 2.x.x October 213

84 Valuation Z-spread TALVLN Years to maturity Source: Bloomberg, Danske Bank Markets Spread development ASW (bps) TALVLN 4 15 (conv) TALVLN Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Source: Bloomberg, Danske Bank Markets Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Debt composition Debt maturity profile (as of end H1 13) Overdraft 15 % Bank Loans 13 % EURm Bonds 72 % Corporate Revolver Senior unsecured bonds Convertible Bonds* WC loans Finance lease *Convertible bond maturity reflects accreted principal Key credit ratios Adjusted ratios Sales growth % % % 191% 52% -38% EBITDA margin % % -234% 51% 34% -23% EBIT margin % % -724% 17% 13% -58% ROCE 2% -1% -7% 3% 3% -7% EBITDA interest coverage.4x.4x -.9x 2.2x 2x -.7x EBIT interest coverage -.2x -.7x -2.3x 2.9x 1.3x -2.9x FFO interest coverage -.5x.9x 4.2x 4.1x 4.5x 1.2x Net debt / EBITDA -39.3x 145.1x -28.8x 4.x 5.8x -18.6x Gross debt / EBITDA.5x 186.6x -29.6x 6.x 6.3x -19.7x FFO / net debt -9.4% -5.5% 21.7% 19.1% 24.2% 6.1% FFO / gross debt 817% -4% 21% 12% 22% 6% Total debt / total capital.5% 46.7% 53.8% 56.% 6.7% 66.3% Net debt / total capital -65.6% 4.6% 53.1% 45.5% 58.7% 64.9% Net gearing % 87% 115% 126% 154% 196% October 213

85 Financial statements Income statement (EURm) Total sales Operating expenses Non-recurring items EBITDA EBITDA adjusted Depreciation and amortisation EBIT EBIT adjusted Net interest Pre-tax profit Tax Net income Balance sheet (EURm) Fixed assets Goodwill Associates 6 Other non-current assets Working capital assets Cash and cash equivalents Other current assets Total assets Total assets (adj.) Total interest bearing debt Total interest bearing debt adjusted Net interest bearing debt Net interest bearing debt adjusted Working capital liabilities Other current liabilities Other non-current liabilities Total equity Total equity and liabilities Total equity and liabilities (adj.) Cash flow statement (EURm) Pre-tax profit Reversal of non-cash items Tax paid Other cash flow from operations Funds From operations FFO adjusted Change in working capital Operating cash flow (CFO) CFO adjusted Capex Net acquisitions/disposals Free operating cash flow (FOCF) FOCF (adjusted) Dividends paid Share buyback Debt repayment Funding shortfall New debt New equity Other cash flow from financing activities Change in cash October 213

86 Teekay Offshore Partners LP Company overview Teekay Offshore Partners is the leading provider of marine-based transportation to the global offshore oil industry, operating amongst others the largest shuttle tanker fleet worldwide but also offering floating production storage and offloading systems (FPSO). Operating in the North Sea and Brazilian offshore regions, the company s customer portfolio primarily comprises global oil majors. The company generated revenues of USD926m and EBITDA of USD393m in 212. We assign a BB- credit rating, assessing the business risk as Satisfactory, with an Aggressive financial risk profile and adequate liquidity profile. Due to structural subordination, we lower the current outstanding bond issues by one notch. Key credit considerations Market leader in a growing industry Being the undisputed market leader within the shuttle tanker segment, Teekay Offshore Partners has a unit-based market share of around 33% followed by Knutsen NYK (21%), the company is well positioned to capture at least its fair share of the growing market. Global demand for shuttle tankers increased materially in as a result of increased average sailing distances from the offshore field to the onshore terminal and increasing activity in offshore exploration. Moreover, we do not expect the current high number of units on order to have a material impact on fleet utilisation, if any at all. This reflects the oligopolistic market conditions, high capital intensity, and that most newbuilds have already secured contracts. Moreover, the company has firmly cemented itself in the growing floating production industry with a leading top-five position in both the FPSO and FSO segments again being positioned well to benefit from increasing deep-water exploration. Industry consultants such as the International Maritime Association (IMA) currently forecast project activity supporting between new FPSO units a year during In comparison, the average annual project orders was 23 during 28-12, suggesting an increase in activity levels of up to c.65% driven by continued high oil prices. Low risk business model yields stable earnings and cash flows The company has implemented a conservative business model including a long-term fixed-rate contract structure and avoidance of speculative newbuilds. Teekay Offshore and its sponsor, Teekay Corporation, have implemented a process denominated the dropdown predecessor serving to lower risk. This structure ensures that assets acquired by Teekay Offshore being fully financed, having at least a three-year contract, and full counterpart approval from customers and has resulted in high and relatively stable earnings margins and cash flows. Table 49. Key credit metrics and ratios Adjusted ratios E 214E Sales growth -1% 3% -3% 6% % 14% EBITDA EBITDA margin 4% 42% 41% 44% 46% 51% FFO / Interest coverage 2.7x 5.x 5.5x 4.9x 2.4x 2.6x FFO / Net debt 1% 18% 16% 2% 14% 18% Net debt / EBITDA 6.1x 4.5x 5.4x 4.x 5.1x 4.x Total debt / Total capital 86% 71% 8% 72% 78% 79% estimates Facts Sector: Industrials; Shipping, Oil Services Corporate ticker: TOO Equity ticker: TOO US Market cap: USD2.7bn Equity book value: USD866m Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: BB- Senior Unsecured: B+ Analysts: Kasper From Larsen kasla@danskebank.dk Åse Haagesen ha@danskebank.com Key credit issues Strengths: Market leading position within shuttle tanker segment. High barriers to entry. Long-term contract structure with large stable counterparties. Proven business model generating stable earnings and cash flows. Diversified earnings contribution from multiple segments. Challenges: Cyclical exposure could prompt uncertain asset market values. High operational leverage. Might prove difficult to divest highly specialised assets. Aggressive financial risk profile. Source: Danske Bank Markets October 213

87 Liquidity When including a committed USD174m project bond (to be issued during H2 13) and an additional USD2m credit facility relating to the Varg FPSO, the company has a reasonable short-term liquidity reserve. Aside from the aforementioned debt instruments, the company had USD163m in cash and USD123m in undrawn committed revolving credit facilities resulting in an actual liquidity position of USD487m at end-q2 13. Given that management relies on external funding for expansionary investments and that the company has historically been able to utilise around 8% debt financing, we cannot completely rule out that the company might tap the primary markets in the next six to 12 months. In agency terms, this corresponds to an adequate short-term liquidity reserve. However, the current cash drain must be analysed in conjunction with Teekay Offshore executing an historically high expansionary investment budget (USD521m in H1 13 alone), which is clearly expected to result in improved full-year earnings and cash flows from 214 and beyond. Current performance drivers Low-risk business model yields sound earnings and cash flows The conservative business model has resulted in an improving underlying operational performance with the company having achieved an EBITDA margin expansion of largely 1pp during the past five years. Indeed, Teekay Offshore s operations have been profitable for the past eight years, providing reasonable earnings visibility despite operating in a cyclical industry. Solid order backlog further supports visibility The operational performance is furthermore supported by a solid order backlog comprising forward revenues of around USD5bn with an average duration of more than five years. This covers more than five years of last year s revenues (book-to-bill of 5.2x) and covers total interest-bearing debt by 2.6x. Historically high investment requirements weigh on metrics The company is executing an historically high expansionary investment budget this year, taking delivery of four shuttle tankers and one FPSO unit, with two of these shuttle tankers still to be delivered. This is likely to result in deteriorating credit metrics at end However, the current aggregate capital commitment for of USD234m (excluding maintenance) is markedly lower than that of 213. Consequently, credit metrics could improve again throughout 214, contingent on no major new capital commitments. Aggressive cash distribution policy Being constructed as a Master Limited Partnership (MLP) the company has a history of aggressive cash distribution (dividend) with a payout ratio well above 1% in recent years. This reflects the partnership agreement and management s view that it can finance expansionary capex from external sources amongst others benefitting from a continuous equity market access. We do not expect this policy to change near term. Outlook Having completed a number of acquisitions and taken delivery of three shuttle tankers so far during Q2-Q2 13 the company is firmly on track to meets its target for EBITDA growth of around USD7m during 214. This is further supported by Teekay Offshore continuing to bid on new FPSO projects and the company is also currently working on three customer funded front-end engineering and design studies. Moreover, the company is engaged in development studies for next generation of DP highload offtake units through its relationship to Norwegian based Remora AS. Adequate short-term liquidity USDm 1,2 1, Cash outflow Short term debt Dividend CAPEX Cash inflow Cash & Equivalents LTM CFO Committed facilities Very stable operational cash flows USDm FFO (adj.) FOCF (adj.) E214E Strong EBITDA margin performance USDbn % 45% 4% 35% 3% 25% 2% 15% 1% 5% % E Net sales EBITDA EBITDA margin (rhs) Volatile yet improving trend in metrics USDbn X E Net debt Equity Net debt/ebitda (rhs) October 213

88 Relative value chart DM (bps) TOO 1/25/16 TOO 1/27/17 TOO 1/25/18 Source: Bloomberg, Moodys, Danske Bank Markets Moody's MIR B+ category Moody's MIR BBcategory 1 Years to maturity Floating rate cash price development Cash Price TOO 11/29/13 TOO 1/25/ Feb-13 Mar-13 Apr-13 Source: Bloomberg, Danske Bank Markets TOO 1/27/17 TOO 1/25/18 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Debt composition Debt maturity profile Bond issues 18% Term-loans / Mortgages 37% Other debt 4% RCF's backed by mortgages 41% USDm Bank debt TOO 213 TOO 216 TOO 217 TOO >217 Table 5. Key credit ratios Adjusted ratios E 214E Sales growth % 23% -1% 3% -3% 6% % 14% EBITDA margin 4% 37% 4% 42% 41% 44% 46% 51% EBIT margin 24% 7% 19% 2% 17% 21% 24% 28% ROCE 1% 4% 8% 8% 6% 8% 9% 11% EBITDA interest coverage 1.9x 2.9x 4.3x 6.3x 6.5x 6.3x 3.4x 3.6x EBIT interest coverage 1.2x.6x 2.1x 3.x 2.7x 3.x 1.8x 2.x FFO interest coverage 1.x 2.2x 2.7x 5.x 5.5x 4.9x 2.4x 2.6x Net debt / EBITDA (reported) 5.2x 5.4x 6.x 4.4x 5.4x 4.x 5.1x 4.x Net debt / EBITDA 5.7x 5.7x 6.1x 4.5x 5.4x 4.x 5.1x 4.x Gross debt / EBITDA 6.1x 6.1x 6.4x 4.9x 5.9x 4.5x 5.5x 4.4x FFO / net debt 9% 13% 1% 18% 16% 2% 14% 18% FFO / gross debt 9% 12% 1% 16% 14% 17% 13% 17% Total debt / total capital 8% 87% 86% 71% 8% 72% 78% 79% Net debt / total capital 75% 82% 82% 64% 74% 64% 73% 72% Net gearing 385% 657% 576% 22% 373% 223% 331% 344% Dividends / FFO 25% 43% 57% 55% 55% 53% 57% 44% estimates October 213

89 Table 51. Financial statements Income statement (USDm) E 214E Total sales ,53 Operating expenses Non-recurring items EBITDA EBITDA adjusted Depreciation and amortisation EBIT EBIT adjusted Net interest Pre-tax profit Tax Net income Balance sheet (USDm) E 214E Fixed assets 1,663 2,28 2,121 2,247 2,54 2,327 2,812 2,738 Goodwill Associates Other non-current assets Working capital assets Cash and cash equivalents Other current assets Total Assets 2,184 2,522 2,651 2,843 3,145 3,53 3,471 3,468 Total Assets (adj.) 2,597 2,862 2,851 2,983 3,249 3,127 3,562 3,559 Total interest bearing debt 1,517 1,837 2,45 1,717 2,29 1,77 2,22 2,264 Total interest bearing debt adjusted 1,931 2,177 2,245 1,857 2,133 1,843 2,311 2,355 Net interest bearing debt 1,396 1,75 1,936 1,551 1,849 1,563 2,77 2,7 Net interest bearing debt adjusted 1,89 2,45 2,136 1,691 1,953 1,637 2,167 2,161 Working capital liabilities Other current liabilities Other non-current liabilities Total Equity Total Equity and Liabilities 2,184 2,522 2,651 2,843 3,145 3,126 3,471 3,468 Total Equity and Liabilities (adj.) 2,597 2,862 2,851 2,983 3,249 3,2 3,562 3,559 Cash flow statement (USDm) E 214E Pre-tax profit Reversal of non-cash items Tax paid Other cash flow from operations Funds From Operations FFO adjusted Change in working capital Operating cash flow (CFO) CFO adjusted Capex Net acquisitions/disposals Free operating cash flow (FOCF) FOCF (adjusted) Dividends paid Share buyback Debt repayment Funding shortfall ,1-75 New debt New equity Other cash flow from financing activities Change in cash estimates October 213

90 UPM-Kymmene Company overview Finnish group UPM-Kymmene is among the top three diversified forest product companies globally with a market-leading position in magazine paper, newsprint and fine paper. The company is also strongly positioned within label materials and wood products. UPM enjoys an industry-leading operating efficiency and asset quality. With production facilities in 17 countries, the company employs about 22, people. Despite its global presence, Europe remains the single most important region for UPM, accounting for c67% of 212 sales. UPM is listed on the NASDAQ OMX Helsinki and has a very diversified and international shareholder structure with no majority owner. Key credit considerations Well-diversified operations only partially mitigate strong cyclicality UPM has a well-diversified product mix with sales also reasonably diversified across geographies with Europe, the US, China and Rest of World, accounting for 67%, 16%, 6% and 11% of 212 group sales, respectively. This partially mitigates the exposure to the highly competitive, capital-intensive, commoditised, fragmented and cyclical nature of forest product industries. Demand patterns across different forest products overlap but are only partially correlated, offering some diversification benefits. Pricing power is generally weak, increasing the exposure to input cost volatility. Superior operational efficiency and high vertical integration The company benefits from substantial economies of scale, a low cost base, best-inclass asset quality and a high degree of vertical integration into key inputs. UPM is currently self-sufficient in pulp and almost self-sufficient in energy, through ownership stakes in part-owned energy companies that entitle UPM to acquire power at generation cost. However, its own wood resources are limited. Continued decline in structural paper demand As part of the pulp and paper industry, UPM is challenged by a structural demand decline for paper as well as an uncertain macro environment following the European debt crisis. The relatively more cyclical graphic paper segment (newsprint, magazine and coated fine paper), which suffers from a greater adverse demand development, constituted almost 7% of UPM s 212 sales. Overall, European consumption of paper and board fell by about 5% in 212. Nonetheless, UPM managed to maintain its stable financial position through restructuring and divestments of part of its paper mills. Table 52. Key financial ratios Adjusted ratios Sales growth % -6% -18% 16% 13% 4% EBITDA (DKKm) 1,552 1,29 1,66 1,348 1,4 1,287 EBITDA margin 15% 13% 14% 15% 14% 12% FFO / Interest coverage.4x 2.6x 1.7x 7.6x 7.9x 5.6x FFO / Net debt 24% 16% 17% 29% 26% 26% Net debt / EBITDA 3.x 4.x 4.x 2.9x 3.1x 3.x Total debt / Total capital 44% 5% 45% 41% 45% 48% HOLD Sector: Paper & Forest Products Corporate ticker: UPMKYM Equity ticker: UPM1V FH Market cap: EUR5.7bn Equity book value: EUR7.4bn Ratings: S&P: BB /S Moodys: Ba1 /S Fitch: BB /S Analysts: Mads Rosendal madro@danskebank.dk Kasper From Larsen kasla@danskebank.dk Key credit issues Strengths: Leading market positions and benefits from economies of scale Leading industry cost curve Well diversified across various forest product segments Highly integrated into energy and low-cost LatAm pulp sourcing Challenges: Exposed to highly competitive, commoditised and cyclical forest product industry Structural demand challenges and excess capacity in some segments Exposure to input cost volatility and limited pricing power Weak and cyclical credit metrics Source: Danske Bank Markets October 213

91 Liquidity UPM has a strong liquidity profile in rating agency terms. The company s cash position was EUR314m by Q2 13 with an additional EUR1.3bn in undrawn committed credit facilities. These facilities include financial covenants for gearing not to exceed 11%. The current gearing level of 48% leaves ample headroom to this covenant, even considering UPM s own objective of maintaining leverage below 9%. The company had short-term debt of EUR58m as of end June 213. This amount is relatively small and the maturity profile is fairly back-end loaded. Consequently we argue that short-term refinancing risk is rather limited. Looking at the company s longer-term debt laddering (less committed facilities), EUR484m and EUR478m is due to mature by 214 and 215 respectively. We expect UPM to generate a free operating cash flow of ceur6m in 213, which, combined with the company s credit facilities, should be more than sufficient to cover the current medium-term debt obligations. Current performance drivers New business structure by end-213 UPM is to implement a new business structure by 1 November this year. The new structure is part of the company s strategy to further simplify operations, achieving a stronger focus on improving profitability within the individual business units. The new UPM is to comprise the following business areas and reporting segments: UPM Biorefining, UPM Energy, UPM Raflatac, UPM Paper Asia, UPM Paper Europe and UPM Plywood. Forests and wood procurement will be reported in Other operations. Such reorganisation is positive in our view, as we expect it to result in incremental cost reductions combined with UPM s already ongoing cost optimisation efforts. Expansionary capex likely to weigh on metrics in the medium term Aside from comprehensive capacity adjustments to its paper mills, UPM is also investing heavily in other business segments such as Energy, Biorefining and UPM Paper Asia. The company has communicated total investments of ceur44m alone in the latter two segments. Although somewhat countered by smaller divestments, such investment level is likely to have an adverse impact on credit metrics in the medium term since commissioning cannot be expected until at least late during 214. Credit metrics in line with expectations for BB rating Following the full-year dividend being paid out in Q2 13 causing a hike in LTM FFO/adjusted net debt to 25% and adjusted net debt/ltm EBITDA to 3.8x, UPM s financial position is only partially commensurate considering S&P s thresholds for the current BB rating. However, since the spike in credit metrics most likely will be temporary, we do not expect any imminent material changes to the current rating. Moreover, S&P has previously said it might consider positive rating actions in the event of a reduced likelihood of expansionary investments or if market conditions were to improve beyond its expected base case scenario. Outlook and recommendation We maintain our Hold recommendation based on the UPMKYM CDS. We are positive on UPM s substantial economies of scale, low cost base, best-in-class asset quality and high degree of vertical integration into key inputs. Moreover, we are positive on the relatively strong credit metrics. However, given the bleak outlook for the pulp and paper industry, we would require a decent risk premium to invest in UPM. UPM has no outstanding EUR benchmark bonds. If/when general market risk sentiment improves, we would expect UPM to consider a refinancing in the debt capital market. We are neutral on the 5Y CDS, trading around 245/255bp. Strong liquidity profile EURm 3, 2,5 2, 1,5 1, 5 Cash outflow Short term debt Dividend CAPEX Divisional sales 212 Significant financial leverage EURm 8, 7, 6, 5, 4, 3, 2, 1, Margin compression evident EURm 12, 1, 8, 6, 4, 2, Paper 67% Cash inflow Cash & Equivalents LTM CFO Committed facilities Label 12% Plywood 4% Other % Energy 2% Pulp 8% Forest and Timber 7% Adj. Net debt Equity Adj net debt/ebitda % 15% 1% 5% % Net sales Adj. EBITDA Adj. EBITDA margin October 213

92 Relative value chart Z-spread 4 35 UPMKYM (Ba1/BB) 3 UPMKYM 25 UPMKYM Industrials 'BB' 2 (Ba1/BB) (Ba1/BB) category 15 1 UPMKYM (Ba1/BB) Years to maturity Source: Bloomberg, Danske Bank Markets Spread development ASW (bps) UPMKYM UPMKYM Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Source: Bloomberg, Danske Bank Markets UPMKYM UPMKYM Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Debt composition Debt maturity profile Bond issues 27% Other debt 12% Bank loans / RCF 61% EURm Bank loans Bond loans 14 Financial leasing Other liabilities Table 53. Key credit ratios Adjusted ratios Sales growth -5% 7% % -6% -18% 16% 13% 4% EBITDA margin 15% 17% 15% 13% 14% 15% 14% 12% EBIT margin 6% 7% 8% 5% 4% 8% 7% 5% ROCE 4% 6% 7% 5% 3% 7% 6% 5% EBITDA interest coverage 9.x 8.8x.8x 5.9x 6.4x 13.9x 15.7x 13.2x EBIT interest coverage 3.6x 3.8x.4x 2.6x 1.7x 7.6x 7.9x 5.6x FFO interest coverage 7.x 6.3x.6x 3.8x 4.5x 11.8x 12.8x 1.3x Net debt / EBITDA (reported) 3.4x 2.4x 2.6x 3.6x 3.5x 2.4x 2.6x 2.4x Net debt / EBITDA 3.8x 2.8x 3.x 4.x 4.x 2.9x 3.1x 3.x Gross debt / EBITDA 4.1x 3.x 3.2x 4.6x 4.7x 3.4x 3.9x 3.7x FFO / net debt 2% 26% 24% 16% 17% 29% 26% 26% FFO / gross debt 19% 24% 22% 14% 15% 25% 21% 21% Total debt / total capital 47% 43% 44% 5% 45% 41% 45% 48% Net debt / total capital 43% 41% 41% 43% 39% 35% 36% 39% Net gearing 74% 65% 68% 8% 65% 55% 59% 65% Dividends / FFO 35% 32% 36% 5% 28% 2% 25% 31% 9 21 October 213

93 Table 54. Financial statements Income statement (EURm) Total sales 9,348 1,22 1,35 9,461 7,719 8,924 1,68 1,438 Operating expenses -7,92-8,344-8,489-8,255-6,657-7,581-8,685-9,169 EBITDA 1,428 1,678 1,546 1,26 1,62 1,343 1,383 1,269 EBITDA adjusted 1,433 1,683 1,552 1,29 1,66 1,348 1,4 1,287 Depreciation and amortisation Non-recurring items ,88 EBIT ,35 EBIT adjusted Net interest Pre-tax profit ,245 Tax Net income ,254 Balance sheet (EURm) Fixed assets 7,316 6,5 6,179 5,688 6,192 5,86 6,242 4,846 Goodwill 1,514 1,514 1, ,17 1,22 1, Associates 1,34 1,177 1,193 1, Other non-current assets 2,457 2,164 2,14 2,491 2,819 3,12 3,431 3,386 Working capital assets 2,99 2,912 3,59 3,4 2,558 2,96 3,432 3,361 Cash and cash equivalents Other current assets Total Assets 15,541 14,469 13,953 13,781 13,65 13,812 15,389 12,893 Total Assets (adj.) 15,623 14,567 14,54 13,844 13,678 13,94 15,75 13,228 Total interest bearing debt 5,32 4,345 4,315 5,71 4,464 3,979 4,633 3,917 Total interest bearing debt adjusted 5,894 5,43 4,922 5,616 5,33 4,574 5,44 4,756 Net interest bearing debt 4,836 4,48 3,973 4,321 3,73 3,286 3,592 3,1 Net interest bearing debt adjusted 5,428 4,746 4,58 4,866 4,299 3,881 4,399 3,849 Working capital liabilities 1,364 1,399 1,443 1,258 1,26 1,417 1,667 1,564 Other current liabilities Other non-current liabilities 1,519 1,417 1,369 1,282 1, ,57 1,422 Total Equity 7,348 7,289 6,783 6,12 6,62 7,19 7,477 5,921 Total Equity and Liabilities 15,541 14,469 13,953 13,764 13,378 13,538 15,39 12,893 Total Equity and Liabilities (adj.) 15,623 14,567 14,54 13,827 13,451 13,629 15,76 13,228 Cash flow statement (EURm) Net profit ,254 Reversal of non-cash items Tax paid Other cash flow from operations ,558 Funds From Operations 1,87 1,194 1, ,121 1, FFO adjusted 1,16 1,212 1, ,142 1,138 1,7 Change in working capital Operating cash flow (CFO) 853 1, , ,41 1,14 CFO adjusted 872 1, ,276 1,3 1,65 1,51 Capex Net acquisitions/disposals Free operating cash flow (FOCF) , FOCF (adjusted) , Dividends paid Share buyback Debt repayment , , Funding shortfall ,34-1, New debt , New equity Other cash flow from financing activities Change in cash October 213

94 Vestas Wind Systems Company overview Danish-based Vestas Wind Systems (Vestas) is the global market leader within wind turbine manufacturing employing just over 17, people. The group develops, produces and sells wind turbines and provides service and maintenance. Consequently, the company s product diversification is rather limited. Partially mitigating this factor, in our view, is the company s strong geographical diversification and its marketleading position in wind technology. Vestas is currently executing a material cost reduction programme in order to align production capacity with demand an exercise being undertaken by the vast majority of turbine makers throughout the industry. Key credit considerations Market leader in a competitive environment Vestas maintained its global market leading position in 212 siding with GE, both having a market share of c.11.8%. While GE clearly benefited from very high activity in its US home market, Asian turbine makers experienced a material drop in global market share in contrast. This followed the Chinese government curbing the country s wind power market. However, the two largest wind power markets the US and China have both re-ignited wind power support in early 213, extending crucial tax subsidies in the US, while China has recently approved a further 28GW of capacity to be installed by 22. Moreover, we estimate Vestas having regained the sole market leadership position during H1 13 based on the announced order intake. Vestas s ability to maintain its market-leading position is founded on its strong track record of delivering high quality and reliable wind turbines. Vestas expects strong growth in the offshore wind segment in which the group s current position is relatively soft. However, as appropriate onshore locations for wind turbines are becoming increasingly scarce and achieved load factors are higher in offshore, we expect the offshore market to grow significantly in importance in the coming years. Multiple turbine makers are investing considerable resources to develop offshore turbines, which combined with Vestas having had a stretched financial profile during 212, has prompted the company to seek a strategic partnership within offshore development. Macro themes supporting expansion of wind power generation Vestas is comfortably aligned with the public focus on climate change and despite subsidies having been lowered in recent years, the support for alternative energy has far from fallen off a cliff. Furthermore, improving levelised cost of energy continues to increase the competitiveness of wind power relative to fossil fuel based power generation which, combined with a heightened focus on nuclear power safety, further stimulates demand for alternative energy sources such as wind turbines. Table 55. Key credit metrics and ratios Adjusted figures Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13E Sales growth y/y 15% 49% 23% -1% -26% -29% LTM EBITDA (EURm) EBITDA margin 4.4% 6.% 7.2% 8.3% 8.1% 9.% LTM FFO / Interest coverage.4x 1.3x 3.7x 3.1x 2.6x 2.8x LTM FFO / Net debt % 8% 25% 28% 29% 3% Net debt / LTM EBITDA 4.8x 3.5x 2.x 1.9x 1.7x 1.7x Total debt / Total capital 43% 46% 54% 52% 49% 47% estimates BUY Sector: Industrials; Capital goods Corporate ticker: VWSDC Equity ticker: VWS DC Market cap: EUR4.3bn Equity book value: EUR1.4bn Ratings: Rating agencies: not rated Danske Bank Markets: Corporate rating: BB Senior Unsecured: BB Analysts: Kasper From Larsen kasla@danskebank.dk Jakob Magnussen jakja@danskebank.dk Key credit issues Strengths: Global market leader in wind turbine generator technology. A truly global diversified organisation. Strong order backlog. Improving credit metrics due to cost reduction and focused investments. Challenges: Intense competition and high technology risk. Subsidy-dependent industry vulnerable to policy changes. Moderate inflow of new orders. Source: Danske Bank Markets October 213

95 Liquidity Vestas s short-term liquidity profile improved further by end-q2 13 and is currently not in itself concerning. Including undrawn credit facilities we estimate the company having c.eur1.2m in liquidity reserve against short-term debt and estimated capex totalling about EUR61m. This reflects a continued low capex budget in 213 and we believe in 214 too. The strong cash position allows Vestas some headroom for disappointment on free operating cash flow before potentially having to tap primary markets. Note that the seasonality in cash flow has historically shown an outflow in H1 due to the shipment cycle and increasing working capital requirements (ramping up for higher activity in Q2- Q4), while the company usually generates cash inflows in H2. This has, however, changed this year with Vestas generating the first positive H1 free cash flow in at least a decade. Indeed, Vestas is well under way in repaying its debt facilities, further rebuilding creditor confidence in the company. Combined with the improving credit metrics, this supports our view that the company will be able to refinance its EUR6m 215 bond issue and is very likely to be able to exercise the option for a two-year extension of the EUR65m syndicated revolving credit facility. Current performance drivers Improving underlying operational performance The Q2 13 results revealed an operational improvement resulting in a markedly y/y margin improvement with an underlying LTM EBIT margin of 1.1%, in line with management s full-year guidance. The results also confirmed sound progression in Vestas s cost reduction programme with the company having carved out more than 3% of its structural costs. Very solid new order inflow New order inflow of 1.6GW in Q2 13 was a material improvement q/q but new orders have yet to regain previous strength. We do not expect orders to revert to the very strong levels of but do expect orders to recover towards the past seven-year average of around 5.7GW, supporting annual sales volumes of 5-6GW. This would be in line with the period 28-1 before new orders peaked in Improving credit metrics prompt us to place VWSDC on positive outlook Metrics have improved since Vestas had to waive its covenant testing in mid-212, resulting in credit metrics having continued to improve during Q2 13. Adjusted net debt/ebitda of 1.7x and FFO/net debt of 29% is materially better than a year ago. Providing the company meets its earnings guidance and sticks to its lower capex run-rate, we would expect metrics to improve further in 213 having prompted us to place our BB corporate shadow rating on positive outlook. Outlook and recommendation In accordance with the Q2 13 results, Vestas upgraded its free cash flow guidance to at least EUR2m (previously a positive FCF) retaining its credit positive sales and EBIT guidance for EUR5.5bn with at least 1% underlying margin, implicitly guiding for a markedly margin improvement during H2 13. Such earnings improvement is clearly supported by the company s ongoing cost reduction programme and management s heightened focus on a value-enhancing development effort. We note that the guidance continues to reflect an industry characterised by intense competition but also strongly influenced by expectations for lower project completions in the US in 213. Moreover, guided shipments are materially below the average in the financial crisis of 28-11, which suggests a realistic volume guidance. We retain our Buy recommendation emphasising the Vestas 4⅝ 215 currently trades at an ASW spread of 463/526bp. Having placed our BB shadow rating on positive outlook we argue this is an unwarranted discount to the BB fair market curve spread of 17bp. Adequate short-term liquidity EURm 1,6 1,4 1,2 1, Cash outflow Short term debt Dividend CAPEX Recovery in new order inflow MW 3,5 3, 2,5 2, 1,5 1, 5 Stronger book-to-bill (x) Improving credit metrics EURm 4, Cash inflow Cash & Equivalents LTM CFO Committed facilities Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q ,5 3, 2,5 2, 1,5 1, 5 Book-to-bill LTM sales volume (x) Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Net debt Equity Net debt/ltm EBITDA (rhs) 6.x 5.x 4.x 3.x 2.x 1.x.x October 213

96 Relative valuation Spread development Z-spread 6 ASW (bps) 2 Vestas Vestas 4⅝ 3/15 Nordex 6⅜ 4/16 Industrials 'B-' category Industrials 'BB' category 1 Years to maturity Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Source: Bloomberg, Danske Bank Markets Source: Bloomberg, Danske Bank Markets Debt composition Bond issues 45% Other debt 12% Bank loans 3% RCF 13% Debt maturity profile EURm Bank debt Vestas 215 EUR bond 1,2 1, <1 year 1-5 years >5 years Table 56. Key credit ratios Adjusted ratios E Sales growth 16.6% -8.4% 54.2% -14.% 36.2% -15.7% 23.6% -19.6% EBITDA margin 8.% 9.2% 13.3% 1.1% 11.4% 6.% 7.2% 9.2% EBIT margin 4.9% 5.4% 1.6% 5.2% 7.% -.4%.3% 1.7% ROCE 18.6% 26.7% 52.6% 12.5% 15.9% -.7%.7% 3.8% EBITDA interest coverage 6.7x 16.x 39.8x 6.9x 7.5x 2.8x 5.5x 6.x EBIT interest coverage 4.2x 9.7x 32.1x 3.7x 4.7x.x.9x 1.3x FFO interest coverage 1.7x 26.9x 4.1x 5.2x 4.3x 1.1x 3.2x 4.9x Net debt / EBITDA (reported) -.8x -1.8x -.1x -.3x.8x 1.8x 1.9x 1.4x Net debt / EBITDA -.8x -1.5x.1x.x 1.x 2.x 2.1x 1.6x Gross debt / EBITDA.6x.7x.4x 1.x 1.4x 3.1x 3.7x 2.2x FFO / net debt -31.% % 676.5% % 56.8% 17.8% 24.6% 49.3% FFO / gross debt 41.4% 239.% 283.6% 77.9% 39.6% 11.6% 13.7% 36.9% Total debt / total capital 14.5% 17.5% 14.9% 16.3% 28.6% 29.4% 54.3% 42.% Net debt / total capital -19.6% -38.3% 6.8%.2% 2.9% 2.% 31.8% 33.5% Net gearing 17.% 21.2% 17.6% 19.5% 4.% 41.7% 118.6% 72.3% October 213

97 Table 57. Financial statements Income statement (EURm) E Total sales 4,179 3,828 5,94 5,79 6,92 5,836 7,216 5,83 Operating expenses 3,848 3,49 5,155 4,61 6,236 5,531 6,917 5,352 Non-recurring items EBITDA EBITDA adjusted Depreciation and amortisation EBIT EBIT adjusted Net interest Pre-tax profit Tax Net income Balance sheet (EURm) E Fixed assets ,3 1,461 1,74 1,898 1,286 1,224 Goodwill Associates Other non-current assets 2,463 3,54 4,644 5,596 4,639 5,51 4,424 4,432 Working capital assets 2,66 3,77 4,19 4,74 3,676 3,751 3,446 3,476 Cash and cash equivalents Other current assets Total Assets 3,732 5,298 6,327 7,959 7,66 7,689 6,972 6,36 Total Assets (adj.) 3,745 5,398 6,48 8,1 7,25 7,84 7,143 6,532 Total interest bearing debt , Total interest bearing debt adjusted ,12 1,73 1,924 1,167 Net interest bearing debt Net interest bearing debt adjusted , Working capital liabilities 2,55 3,488 4,182 4,387 3,4 3,822 3,213 3,366 Other current liabilities Other non-current liabilities Total Equity 1,121 1,188 1,587 2,542 2,754 2,576 1,622 1,614 Total Equity and Liabilities 3,732 5,298 6,327 7,959 7,66 7,689 6,972 6,36 Total Equity and Liabilities (adj.) 3,746 5,398 6,48 8,1 7,25 7,84 7,143 6,532 Cash flow statement (EURm) E Pre-tax profit Reversal of non-cash items , Tax paid Other cash flow from operations Funds From Operations FFO adjusted Change in working capital Operating cash flow (CFO) CFO adjusted Capex Net acquisitions/disposals Free operating cash flow (FOCF) FOCF (adjusted) Dividends paid Share buyback Debt repayment Funding shortfall , New debt New equity Other cash flow from financing activities Change in cash October 213

98 Table 58. Instrument price list Company Ticker Coupon (%) Coupon type Coupon currency Final maturity Maturity type Issue rating Indicative ASW ASK (bps) Indicative DM ASK (bps) Akelius Fastigheter AKFAST Floating SEK 25/6/215 Callable 242 Color Group COLLIN 6.23 Floating NOK 28/8/214 At Maturity 155 Color Group COLLIN 6.48 Floating NOK 16/11/215 At Maturity 336 Color Group COLLIN 6.97 Floating NOK 25/8/216 At Maturity 421 Color Group COLLIN 6.99 Floating NOK 18/9/219 At Maturity 513 DFDS DFDSDC 5.22 Floating NOK 2/5/216 At Maturity 147 DFDS DFDSDC 4.63 Floating NOK 21/3/218 At Maturity 223 DLG Finance DLGFIN Floating DKK 25/6/218 At Maturity 325 Finnair FOY 5. Fixed EUR 29/8/218 At Maturity 295 Finnair FOY Variable EUR 29/11/249 Perp/Call Fred Olsen Energy FOENO 5.96 Floating NOK 12/5/216 At Maturity 241 ISS Global ISSDC 4.5 Fixed EUR 8/12/214 At Maturity NR / B / NR 48 ISS ISSDC Fixed EUR 15/5/216 Callable B3 / B / NR 693 J Lauritzen LAURIT 1.5 Fixed NOK 5/5/215 At Maturity 784 J Lauritzen LAURIT 9.97 Floating NOK 24/1/217 At Maturity 989 Meda MEDAA Floating SEK 25/6/215 At Maturity 145 Meda MEDAA 3.43 Floating SEK 5/4/216 At Maturity 175 Meda MEDAA 4.53 Floating SEK 5/4/218 At Maturity 22 Nokia NOKIA 5.5 Fixed EUR 4/2/214 At Maturity B1 / B+ / BB- 68 Nokia NOKIA 5. Fixed EUR 26/1/217 Convertible B1 / B+ / NR 777 Nokia NOKIA Prelim EUR 31/12/218 Convertible Nokia NOKIA 6.75 Fixed EUR 4/2/219 At Maturity B1 / B+ / BB- 31 Nokia NOKIA Fixed USD 15/5/219 At Maturity B1 / B+ / BB- 292 Nokia NOKIA 2.5 Prelim EUR 31/12/219 Convertible Nokia NOKIA Prelim EUR 31/12/22 Convertible Nokia NOKIA Fixed USD 15/5/239 At Maturity B1 / B+ / BB- 311 Nokia Siemens Net. NOKSIE 6.75 Fixed EUR 15/4/218 Callable B1 / B+ / NR 257 Nokia Siemens Net. NOKSIE Fixed EUR 15/4/22 Callable B1 / B+ / NR 347 North Atlantic Drilling NADLNO 6.1 Floating NOK 3/1/218 At Maturity 44 Odfjell ODFNO 6.47 Floating NOK 4/12/213 At Maturity 196 Odfjell ODFNO 7.21 Floating NOK 3/12/215 At Maturity 462 Odfjell ODFNO 7.46 Floating NOK 11/4/217 At Maturity 511 Odfjell ODFNO 8.21 Floating NOK 3/12/218 At Maturity 65 Prosafe PRSNO 5.22 Floating NOK 25/2/216 At Maturity 217 Prosafe PRSNO 5.47 Floating NOK 8/2/217 At Maturity 246 Prosafe PRSNO 4.64 Floating NOK 22/1/218 At Maturity 285 Prosafe PRSNO 5.44 Floating NOK 17/1/22 At Maturity 324 SAS SAS 1.5 Fixed SEK 16/6/214 At Maturity 316 SAS SAS 9.65 Fixed EUR 16/6/214 At Maturity 158 SAS SAS 7.5 Fixed SEK 1/4/215 Convertible 58 SAS SAS 9. Fixed SEK 15/11/217 Callable 585 SAS SAS Variable CHF 29/1/249 Perp/Call Caa3 / NR / NR Seadrill SDRLNO 4.98 Floating NOK 13/2/214 At Maturity 129 Seadrill SDRLNO 6.5 Fixed USD 5/1/215 At Maturity 319 Seadrill SDRLNO Fixed USD 15/9/217 At Maturity 379 Seadrill SDRLNO Fixed USD 27/1/217 Conv/Put 37 Seadrill SDRLNO 5.48 Floating NOK 12/3/218 At Maturity 363 Seadrill SDRLNO Fixed USD 15/9/22 At Maturity 389 Stena STENA Fixed EUR 1/2/217 At Maturity B2 / BB / NR 293 Stena STENA Fixed EUR 1/2/219 At Maturity B2 / BB / NR 356 Stena STENA Fixed EUR 15/3/22 At Maturity B2 / BB / NR 416 Prices as of 18 October 213. Credit ratings are Moodys / Standard & Poors / Fitch if no rating or NR showed then the issue is unrated by any of the agencies Source: Bloomberg October 213

99 Table 59. Instrument price list (continued) Company Ticker Coupon (%) Coupon type Coupon currency Final maturity Maturity type Issue rating Indicative ASW ASK (bps) Indicative DM ASK (bps) Stolt-Nielsen SNINO 5.49 Floating NOK 19/3/215 At Maturity 213 Stolt-Nielsen SNINO 6.48 Floating NOK 22/6/216 At Maturity 288 Stolt-Nielsen SNINO 6.49 Floating NOK 19/3/218 At Maturity 355 Stolt-Nielsen SNINO 6.72 Floating NOK 4/9/219 At Maturity 45 Stora Enso STERV Fixed EUR 23/6/214 At Maturity Ba2 / BB / BB- -7 Stora Enso STERV 5.75 Fixed SEK 1/9/215 At Maturity Ba2 / BB / NR 136 Stora Enso STERV 4.92 Floating SEK 1/9/215 At Maturity Ba2 / BB / NR 128 Stora Enso STERV 3.5 Fixed SEK 1/12/215 At Maturity Ba2 / BB /BB Stora Enso STERV 6.44 Fixed USD 15/4/216 At Maturity Ba2 / BB / BB- 261 Stora Enso STERV Floating EUR 7/1/216 At Maturity NR / BB / NR 37 Stora Enso STERV 5.18 Floating SEK 26/6/217 At Maturity Ba2 / BB / BB- 228 Stora Enso STERV 5.75 Fixed SEK 26/6/217 At Maturity Ba2 / BB / BB- 234 Stora Enso STERV Floating EUR 22/2/218 At Maturity 21 Stora Enso STERV 5. Fixed EUR 19/3/218 At Maturity Ba2 / BB / BB- 246 Stora Enso STERV.944 Floating EUR 23/5/218 At Maturity Ba2 / BB / BB- 185 Stora Enso STERV 5.5 Fixed EUR 7/3/219 At Maturity Ba2 / BB / NR 271 Stora Enso STERV 8.6 Fixed USD 4/7/219 At Maturity 49 Stora Enso STERV 7.25 Fixed USD 15/4/236 At Maturity Ba2 / BB / BB- 391 Tallink Grupp TALLNK 6.79 Floating NOK 18/1/218 At Maturity 442 Talvivaara Mining Co TALVLN 4. Fixed EUR 16/12/215 Convertible 4878 Talvivaara Mining Co TALVLN 9.75 Fixed EUR 4/4/217 Callable 3193 Teekay Offshore Part. TOO 6.48 Floating NOK 29/11/213 At Maturity -434 Teekay Offshore Part. TOO 5.72 Floating NOK 25/1/216 At Maturity 353 Teekay Offshore Part. TOO 7.46 Floating NOK 27/1/217 At Maturity 48 Teekay Offshore Part. TOO 6.47 Floating NOK 25/1/218 At Maturity 442 UPM-Kymmene UPMKYM Fixed USD 1/12/214 At Maturity Ba1 / BB / BB 54 UPM-Kymmene UPMKYM 5.5 Fixed USD 3/1/218 At Maturity Ba1 / BB / BB 259 UPM-Kymmene UPMKYM 7.45 Fixed USD 26/11/227 At Maturity Ba1 / BB / BB 393 Vestas Wind VWSDC Fixed EUR 23/3/215 At Maturity 366 Prices as of 18 October 213. Credit ratings are Moodys / Standard & Poors / Fitch if no rating or NR showed then the issue is unrated by any of the agencies Source: Bloomberg October 213

100 Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ("Danske Bank"). Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). 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101 Danske Fixed Income Credit Research: Recommendation definitions Terminology Horizon Issuer / Specific bond BUY 3 months Investment recommendations are based on Credit Trend as well as relative value compared to sector and peers. A BUY/HOLD/SELL HOLD recommendation on a specific bond means that the bond is expected to outperform/perform in line/underperform bonds within the sector or peer group over a three-month period. A SELL BUY/HOLD/SELL recommendation on a specific issuer means that the majority of the issuer s outstanding bonds have a BUY/HOLD/SELL recommendation. Credit Trend Improving 6 months Underlying credit fundamentals are expected to Stable Deteriorating improve/remain stable/deteriorate over the next six months. Credit default Swaps BUY protection SELL protection 3 months A BUY/SELL recommendation on a CDS means that the CDS level is expected to widen/tighten compared to the sector, peer group, or cash bonds for the issuing entity over a three-month period. Rating Abbreviations Abbreviation Moody's Standard & Poor's Fitch S Stable Outlook Stable Outlook Stable Outlook NO Negative Outlook Negative Outlook Negative Outlook PO Positive Outlook Positive Outlook Positive Outlook DO Developing Outlook Developing Outlook Evolving Outlook NW Review for possible downgrade CreditWatch Negative Watch Negative PW Review for possible upgrade CreditWatch Positive Watch Positive DW Review - Direction uncertain CreditWatch Developing Watch Evolving NR Not rated Not rated Not rated Relative valuation of issues - methodology We have included relative valuation charts in the company specific profiles in this Scandi High-Yield Handbook seeking to provide an indication about the potential attractiveness or unattractiveness of the specific bond issues. Taking into consideration difference in coupon types and currencies we have applied the following methodologies. Fixed rate issues: when outlying relative valuation for fixed rate issues we have adjusted non-eur coupon issues to EUR using the Bloomberg Cross Currency Spread Matrix applying the spread to final maturity. We have then measured the spread against the relative Bloomberg Euro industrial Fair Market Curve Indices to indicate whether a particular issue seem attractive or unattractive valued relative to the market. Floating rate issues: regarding relative valuation for floating rate issues (FRN) we apply Moody s MIR (Market Implied Ratings) as reference to indicate whether the individual issues seem attractive or unattractive priced relative to the market. Moody s MIR is based on the 3M US LIBOR, hence we have adjusted to 3M NIBOR and 3M CIBOR respectively for the individual issues.

102 Global Danske Research H e a d o f G l o b a l D a n s k e R e s e a r c h Thomas Thøgersen Grønkjær thgr@danskebank.dk C h i e f E c o n o m i s t at D a n s k e B a n k Steen Bocian stbo@danskebank.dk I n t e r n at i o n a l M a c r o R at e s, F X & C o m m o d i t i e s F i x e d I n c o m e R e s e a r c h C r e d i t R e s e a r c h Chief Analyst & Head of Allan von Mehren alvo@danskebank.dk Signe P. Roed-Frederiksen sroe@danskebank.dk Frank Øland Hansen franh@danskebank.dk Flemming Jegbjærg Nielsen flemm@danskebank.dk Pernille Bomholdt Nielsen perni@danskebank.dk S t r at e g y Chief Analyst & Head of Arne Lohmann Rasmussen arr@danskebank.dk Kasper Kirkegaard kaki@danskebank.dk Christin Kyrme Tuxen tux@danskebank.dk Peter Possing Andersen pa@danskebank.dk Lars Tranberg Rasmussen laras@danskebank.dk Morten Thrane Helt mohel@danskebank.dk Anders Vestergård Fischer afis@danskebank.dk Chief Analyst & Head of Thomas Thøgersen Grønkjær thgr@danskebank.dk Jens Peter Sørensen jenssr@danskebank.dk Christina E. Falch chfa@danskebank.dk Søren Skov Hansen srha@danskebank.dk Jan Weber Østergaard jast@danskebank.dk Sverre Holbek holb@danskebank.dk Anders Møller Lumholtz andjrg@danskebank.dk Chief Analyst & Head of Thomas Martin Hovard hova@danskebank.dk Henrik Arnt heand@danskebank.dk Louis Landeman Jakob Magnussen jakja@danskebank.dk Asbjørn Purup Andersen apu@danskebank.dk Mads Rosendal madro@danskebank.dk Gabriel Bergin gabe@danskebank.se Brian Børsting brbr@danskebank.dk D e n m a r k Chief Economist & Head of Steen Bocian stbo@danskebank.dk Las Olsen laso@danskebank.dk Jens Nærvig Pedersen jenpe@danskebank.dk S w e d e n Chief Analyst & Head of Michael Boström mbos@consensus.se Roger Josefsson rjos@consensus.se Michael Grahn mika@consensus.se Carl Milton carmi@consensus.se F i n l a n d Chief Analyst & Head of Pasi Petteri Kuoppamäki +358 () pasi.kuoppamaki@danskebank.com E m e r g i n g M a r k e t s Chief Analyst & Head of Lars Christensen larch@danskebank.dk Stanislava Pradova spra@danskebank.dk Kasper From Larsen kasla@danskebank.dk Åse Haagensen ha@danskebank.com Bjørn Kristian Røed bred@danskebank.com Wiveca Swarting wsw@danskebank.com Nils Henrik Aspeli nas@danskebank.com N o r way Chief Analyst & Head of Frank Jullum fju@fokus.no Marcus Söderberg marsd@consensus.se Stefan Mellin mell@consensus.se Violeta Klyviene vkly@danskebank.dk Sanna Kurronen kurr@danskebank.com Bernt Christian Brun bbru@danskebank.no Susanne Perneby +46 () supe@danskebank.se Vladimir Miklashevsky +358 () vlmi@danskebank.com