The renaissance of rights issues May 2009

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1 The renaissance of rights issues May 2009 Josef Ritter/Markus Rausch

2 Disclaimer Deutsche Bank AG This presentation (the Document ) has been prepared by Deutsche Bank AG and/or a subsidiary of Deutsche Bank AG (collectively: Deutsche Bank ) exclusively for purposes of general information only. Recipients are not permitted to duplicate the information provided in this Document. The Document is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by Deutsche Bank. The Document is neither intended to serve as legal or tax advice nor should it replace it. The information in the Document reflects prevailing conditions and Deutsche Bank's views as of this date, all of which are subject to change.

3 Contents Section 1 Equity issuance environment 4 2 Rights issue mechanics in Germany 22

4 Equity issuance environment Section 1 Josef Ritter/Markus Rausch

5 Escalation of the financial crisis Crisis takes longer than anticipated and has escalated since Lehman s collapse Phase 1: Subprime problem seen as largely contained Phase 2: Knock-on effects on lev. loans Phase 3: Spill-over into money markets Phase 4: Interim recovery as Fed starts easing Phase 5: More write-downs, coordinated central bank action over year-end Phase 6: Monolines, de-leveraging & recession fears hit markets Phase 7: More official intervention after Lehman files for Chapter , ,100 Fed rate cuts Takeover of AIG & Merryll Lynch, Lehman files for Chapter IKB warning and bailout Fed approves takeover of Bear Stearns by JPM Government capital injections /07 08/07 10/07 12/07 02/08 04/08 06/08 08/08 10/08 12/08 03/09 05/09 3m EURIBOR - 3m Eonia swap rate, in bps (lhs) itraxx Crossover Series CBOE VIX Source: *itraxx Europe Crossover, 5-year, series 10/9/8/7 Bloomberg, Deutsche Bank Global Markets, Deutsche Bank Research

6 Equity markets sell off Development of market capitalisation (US$bn) 63,048 Mcap decline as % of 2008 GDP Equity loss in relation to GDP 53% 42% 35% 98% 14,265 (54)% 35,803 (58)% (US$bn) 2,119 4,217 4,627 16,282 (61)% (62)% (45)% (47)% 28,761 15,071 2,563 8, ,608 (US$bn) 4,924 3,668 2,674 Oct-07 Feb-09 NYSE Tokyo SE London SE Deutsche Boerse Rest of World Source: World Federation of Exchange members, Deutsche Bank analysis Source: International Monetary Fund US Japan Germany UK

7 Macro environment not likely to recover soon Global growth Comments Real GDP growth (%) (1.7) -4 (4.0) (3.9) (3.3) -6 Germany Europe US World F 2010F Industrial countries are expected to record little or no growth in 2010 Emerging markets are likely to experience recovery in 2010 Key factors: Monetary easing Fiscal easing Bank restructuring Boost in confidence Forecasts are subject to higher uncertainty than usual Source: Deutsche Bank Global Markets Research

8 Falling equity markets cause leverage to rise Enterprise value composition DAX Industrial 100% 50% 80% 40% 60% 30% 40% 20% 20% 10% 0% E 2010E Market cap Net debt Net debt / equity (rhs) 0% Source: Deutsche Bank Global Markets Research

9 How long will European earnings continue to decline and is there a chance to recover to the longer trend? Development of forward earnings based on current consensus estimates The constant growth rate of the trend earnings equals 6.1% month rolling earnings forecast Normalised earnings forecast Sources: IBES, Deutsche Bank Global Markets Research

10 Global GDP decline 2009 by 1.7% for 2009E means earnings should decline by 30 40% (10) (20) (30) (40) Global GDP outlook 2009 suggests an earnings to decline by 30 40% whereas bottom up estimates are still too positive 1992 US earnings growth (%) (lhs) European earnings growth (%) (lhs) World GDP growth (%) (rhs) E (1) (2) (3) Source: Thomson Financial IBES, Deutsche Bank Global Markets Research

11 Wide credit spreads reflect increased default risk Moody's 5-year CDS +bp Mar-01 May-02 Jul-03 Sep-04 Nov-05 Jan-07 Mar-08 May-09 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Source: Moody s

12 Access to liquidity is limited for leveraged corporates 1, Global bond issuance volume ($bn) 2005 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Investment grade 2005 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q2 High yield Source: Dealogic

13 Government stimulus programs support for economy, but will lead to major increase in sovereign debt Government stimulus programs ( bn) General government financial imbalance China US Germany UK EU 470 1, % 2% 0% (2)% (4)% (6)% France 0% 5% 10% 15% 20% 25% as % of 2007 GDP Total of 2,154bn in stimulus packages announced Focus on infrastructure, construction, automobile and SME and consumer in general Source: European Central Bank, Deutsche Bank 26 (8)% (10)% (12)% United States Japan Germany UK Who will buy the bonds? Total OECD Note: Surplus/(deficit) as a percentage of nominal GDP Source: OECD economic outlook

14 Equity placement activity in Europe dominated by rights issues 2009YTD Annual European equity issuance volume Issuance ( m) Share (%) rights issues 300, , , , ,000 50, % 37% 16% 16% 23% 24% 66% 69% 124bn 139bn 159bn 191bn 227bn 263bn 157bn 200bn YTD IPO Rights ABB/Block Marketed offering Convertible Other Annualised Note: Total deal value in Europe; excluding government recapitalisations Source: Dealogic

15 Rationale for rights issues change over time New wave of restructuring rights issues likely to evolve in Germany in H Acquisition & business expansion Recapitalisations Acquisition & business expansion Recapitalisations H H H H H H H H H H H H H H H H H H Rights issue issuance volume in Germany ( bn) H ,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 DAX (rhs) Source: Dealogic

16 Larger TERP discounts reflect the increased volatility European rights issues since January 2005 greater than 1bn (a) 60 AB InBev 100 Discount to TERP (%) AXA Xstrata Credit Agricole Fortis Soc Gen RBS UBS SEB CRH HSBC Gas Natural Volatility (%) Carlsberg BNP Paribas France Telecom 0 0 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 1bn 10bn Banks Other VSTOXX Index (rhs) (a) Excludes Greece and Austria Source: Dealogic, Bloomberg

17 Investors still hold high cash positions and are looking to put these to work 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% Comments Hedge funds are sitting on approx US$300bn of cash Approx US$80bn of this is expected to be put to work within the next 6 months Consistent with the rally in stock markets in March/April the cash positions dropped slightly but still remain at elevated levels 1.0% 0.5% Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 Cash position (Europe focused funds, in %) 3-mth moving average Source: EPFR, Deutsche Bank calculations

18 Changed trading patterns leading to different investor communication approach Low trading volume Reduced hedge fund activity Weekly volume (bn) DJ Stoxx 600 Index 74% 84% % 16% Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Pre Lehman Bros default Post Lehman Bros default Weekly DJ Stoxx volume Average 2007 weekly volume Hedge-fund Long-only DJ Stoxx Note: Trading split of current DAX companies via Deutsche Bank Source: Bloomberg Source: Deutsche Bank

19 Distribution of risk is a core element of deal execution The vast majority of recent equity transactions have incorporated extensive pre marketing securing the support of major shareholders is critical to the success of deals Shareholder sub-underwriting is becoming increasingly common across Europe Confidential investor briefings generally take place 2 3 days ahead of launch with demand indications required prior to launch Selected transactions where major shareholders have acted as underwriters Issuer Offer size ( m) Country Major shareholder underwriters % underwritten by shareholders Xstrata 4,700 UK Glencore 35% Gas Natural 3,500 Spain Repsol and Criteria Caixacorp 67% Snam Rete Gas 3,500 Italy Eni 55% Nordea 2,500 Sweden Government, Sampo, 36% Nordea Foundation SEB 1,397 Sweden Investor AB 24% Other institutions 27% Emporiki 850 Greece Credit Agricole 100% British Land 782 UK GIC 34% Faurecia 455 France Peugeot 71% Premiere 412 Germany NewCorp 100% Colt Telecom 201 UK Fidelity 100%

20 Anatomy of a rights issue The benefit of being a first-mover Q4 January February onwards Share price (rebased to 100) Market speculation on capital raising begins 0 Rights issue preparation Issuance begins on the back of financial results Decoupling between companies with and without access to capital Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 Hammerson British Land Land Securities Liberty Int'l Segro Brixton 09 Feb: Hammerson 608m rights issue 12 Feb: British Land 740m rights issue 19 Feb: Land Securities 776m rights issue 04 Mar: Segro 501m rights issue Decoupling Share price (% change since HMSO) (5)% (6)% (4)% (26)% (14)% (51)% Source: Bloomberg

21 Section 2 Rights issue mechanics in Germany Josef Ritter/Markus Rausch

22 Equity financing alternatives Description Non-preemptive capital increase Private placement Block trade Capital increase without subscription rights Anchor investor invests larger stake via capital increase in cash or in kind Capital increase without subscription rights Accelerated bookbuilding to limit market risk Preemptive rights Rights issue Capital increase with pre-emptive rights Existing shareholders can either subscribe to the capital increase or monetise their rights Equity-linked instruments Convertible Mandatory convertible Bond with an embedded call option on the issuer s equity providing investors with the right to convert into shares of the issuer (usually no equity credit) Bond that mandatorily converts into shares at maturity

23 Capital authorisations and direct resolution Authorised capital Authorisation approved by AGM or EGM for max five years In cash or in kind Subscription rights exclusion of max 10% of share capital ( 186 III AktG) Max 50% of share capital (25% of market capitalisation assuming a 50% nominal discount) Conditional capital Authorisation approved by AGM or EGM for max five years Convertibles and employee participation programmes Subscription rights exclusion of max 10% of share capital ( 186 III AktG) Max 50% of share capital (25% of market capitalisation assuming a 50% nominal discount) Direct resolution ( Direktbeschluss ) Capital increase approved by AGM or EGM Authorisation valid for max 6 months No limit in size

24 German corporates filling authorisations Authorised capital of DAX companies 60% 50% Authorised capital 40% 30% 20% 10% 0% Adidas Allianz BASF Bayer BMW Beiersdorf Commerzbank Daimler Dt Bank Dt Börse Dt Lufthansa Dt Post Dt Telekom E.ON Fresenius FMC Hannover Re Henkel K + S LINDE MAN Merck KGaA Metro Münchener Rück RWE Salzgitter SAP Siemens ThyssenKrupp Volkswagen Thereof non-preemptive (cash) Thereof non-preemptive (in-kind) Total authorized capital Mean (total) Mean (cash) Mean (in kind) Note: Authorised capital as % of share capital

25 Illustrative timetable for a rights issue Month 1 Month 2 Month 3 Month 4 Week Due diligence (financial and legal) Preparation prospectus/legal documentation Approval process by BaFin Approval by BaFin (Billigung) Publication prospectus/ subscription offer Subscription and rights trading period Start of trading and settlement

26 Timeline for direct resolution Month 1 Month 2 Month 3 Months 4 + X T + 5 weeks T + 10 weeks T X weeks T X weeks Invitation period for AGM/EGM Contestation period Contestation settlement period Subscription period Invitation to AGM/EGM AGM/ EGM

27 Potential placement windows driven by financials and marketing considerations Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Window 1 Window 2 Window 3 Window 4 Window 5 Q3 financials FY financials Q1 financials Q2 financials Q3 financi als Publication FY financials Publication Q1 financials Publication Q2 financials Publication Q3 financials Summer break Winter break

28 Structure and key terms of a discounted rights issue Key terms Illustrative example Subscription price Price at which the new shares are offered 5 Subscription ratio Ratio of new shares to old shares 1 for 4 Theoretical ex rights price Issuance volume + market cap pre CI 5x x100 ( TERP ) No new shares + no old shares = 9 Reference price Last closing market price prior to the 10 shares going ex-rights Nominal discount (Reference price subscription price) 10-5 Reference price 10 TERP discount (TERP subscription price) 9-5 TERP 9 = 50% = 44% Theoretical rights price (TERP subscription price) x ( 9-5) 1/4= 1 subscription ratio Assumptions: Shares outstanding pre-rights issue: 100

29 Existing investors should be indifferent towards the discount from an economic point of view Neutrality of the discount (A) Exercise rights Subscribes in cash for new shares at the subscription price Acquires the new ordinary shares subscribed for owns greater absolute number of shares maintains % ownership of the company OR (B) Sell rights Sells the rights for cash Maintains existing holding of shares reduced % ownership of the company Value of increased No of shares now owned times ex-rights price less cash subscribed for new shares = Value of original No of shares owned times ex-rights price plus cash proceeds from selling rights

30 Existing investors should be indifferent towards the discount from an economic point of view (continued) Illustrative example Shares outstanding pre rights issue: 100 Shares offered: 25 Subscription ratio: 1 for 4 Reference price: 10 Assumptions TERP: 9 Value of subscription right = 1 Shares existing shareholder pre rights issue: 4 Wealth shareholder: 4x 10 = 40 Issue price: 5 Value of old shares: 4x 9 = 36 + Value of new share: 9 (A) Exercise rights OR (B) Sell rights Value of shares: 4x 9 = 36 + Cash received for sold rights: 4x 1 = 4 - Subscription price: - 5 Wealth: 40 = Wealth: 40

31 Structural alternatives fixed price rights issue Subscription price set prior to subscription period giving more certainty about level of proceeds Week day M T W T F S S M T W T F S S M T W T F Subscription period Rights trading Underwriting Subscription offer/ fix subscription price/ underwriting Take-up by investors known, rump placement

32 Structural alternatives variable price rights issue (TransPuG) Higher execution certainty through late fixing of subscription price Week day M T W T F S S M T W T F S S M T W T F Subscription period Rights trading Underwriting Subscription offer Setting and publication of subscription price, underwriting Take-up by investors known, rump placement

33 Pros and cons for raising equity in today s market Pros Insurance policy against worst case scenario Cons Forced cash call for investors at inopportune time Expected re-rating through removal of financing risks Potentially signalling effect regarding operational and financial performance Reduced financing costs and risks Potentially not necessary in hind sight Capital increase without rights can be targeted towards anchor investor Perceived management credibility

Commerzbank Conference Call

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