14:45 16:00 - STREAM 1- Marly. Are Euro Debt Capital Markets a Sustainable Option to Fulfill Funding Requirements in the Current Financial Crisis?

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1 14:45 16:00 - STREAM 1- Marly 1 Are Euro Debt Capital Markets a Sustainable Option to Fulfill Funding Requirements in the Current Financial Crisis?

2 2 Are Euro Debt Capital Markets a Sustainable Option to Fulfil Funding Requirements in the Current Financial Crisis? Paris, July Pavillon d Armenonville

3 Introduction 3

4 The Credit Crisis Led To High Market Volatility... 4 Credit spreads significantly wider since July 2007 High volatility across asset classes Market turbulence persists a year after crisis began Uncertainties remain: inflation and weak economic prospects itraxx Crossover 5-year - Mid spread (bp) Evolution of the itraxx 5-year Crossover US earnings and economic indicators beat expectations Subprime woes push the credit Bear Stearns rescue and Increased Fed i Growing fears over a US recessions Poor US bank earnings Mixed earnings and inflation fears 0 Jan- 07 Mar- 07 May- 07 Jul- 07 Sep- 07 Nov- 07 Jan- 08 Mar- 08 May- 08 Series 6 Series 7 Series 8 Series 9 Source: Markit / Index Company

5 Fuelled by higher rates and dislocation in fundamentals 5 Rates: Decorralation between Eonia and E3m 5.1 % E3M (LHS) Eonia 3M (LHS) 5.05% Swap rates since June 2007 Swap 5Y Swap 7Y Swap 10Y 4.6 % 4.80% 4.55% 4.1 % 3.6 % Jun-07 Sep-07 Dec-07 Mar-08 Jun % 4.05% 3.80% SWAP Level % 6/25/2008 5Y Y Y Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Credit: iboxx IG Corp Index spread to benchmarks 370bp 290bp 210bp 130bp 50bp Dislocation between Cash and CDS juil-07 oct-07 janv-08 avr-08 iboxx Corp index (spds vs benchmarks) Itraxx 5yr Bmarx (RH Axis) 140bp 100bp 60bp 20bp itraxx Main Contracts 5

6 ... But The Euro Primary Market Remains Well Supported 6 Euro bond volumes have substantially decreased since Q However, strong credits have still been able to tap the market All Euro Bond Volumes -50% +10% In Q2 2008, we saw some signs of the market re-opening to broader credits EUR bn % -51% As a consequence, the past quarter witnessed higher volumes than in previous years Source: Dealogic DCM Analytics, excluding ABS and Private Placements 0 Q1 Q2 Q3 Q

7 Drop in M&A Transactions and Primary Equity Issuance 7 Announced Euro-Denominated M&A Volumes 1400 bn 1200 bn 1000 bn 800 bn 600 bn 400 bn 200 bn 0 bn Q1 Q2 H Euro-Denominated Equity Issuance Euro-Denominated Equity-linked Issuance 10 bn 50 bn 40 bn -67% 8 bn +39% 6 bn 30 bn 20 bn 10 bn 0 bn -47% Q1 Q2 H Source: Thomson Financial -77% -34% -51% 4 bn 2 bn 0 bn -44% +228% -81% Q1 Q2 H

8 Reduced volumes in the Loan Market 8 Syndicated Loan Volumes in Europe Average multi-year drawn pricing by rating 800 bn bn 600 bn -60% bn 400 bn 300 bn -42% -74% Pricing in bp bn 100 bn 10 0 bn 0 Q1 Q2 H Jan- 02 Jan- 03 Jan- 04 Jan- 05 Jan- 06 Jan- 07 AA A BBB Source: LPC

9 SSA Bond Market 9

10 Stability and Regularity Drive SSA Market 10 Supply in the SSA sector has not been affected by the crisis Supply has been stable this year and has even slightly increased (+8%) compared to 2007 Comparing 2007 to 2006, supply had decreased by 4% in 2007 in the SSA sector for the same period As at 9/06/08, in million y/y Public sector issuance through syndication Sovs, Agencies, Supras 130, ,001 10% Sovereigns 53,280 73,685 38% Agencies 52,080 44,710-14% Supranationals 5,900 8,603 46% Municipalities 19,206 16,003-17% Public sector issuance through auctions 205, ,942 8% Total Sov, Agencies, Supras Issuance 335, ,942 8% As at 9/06/07, in million y/y Public sector issuance through syndication Sovs, Agencies, Supras 129, ,066 0% Sovereigns 61,450 53,280-13% Agencies 39,621 50,680 28% Supranationals 8,269 5,900-29% Municipalities 20,189 19,206-5% Public sector issuance through auctions 224, ,539-6% Total Sov, Agencies, Supras Issuance 353, ,605-4% Source: SG Analytics

11 H SSA Sector Primary Volume Breakdown 11 Slight progress in the Sovereign sector: (+14%, auctions and syndications) A number of Sovereign issuers have completed almost 70% of their annual funding programmes despite the volatile market Slight decrease in the Agency & Supranational sector (-8%): Supranational issuers (+46%) have partly compensated for the decreasing amount of new issues from Agencies (-14%) A significant slowdown in the Municipalities market (-17%): Cyclical nature of municipality funding programmes Compliance with Maastricht rules regarding the debt ratios of countries belonging to the European Union Higher forecast regarding budget and fiscal revenues for 2008 Externalisation of assets that may generate cash flows to compensate for higher financing needs in 2009

12 Stable Funding Structure Between 2007 and 2008ytd 12 Volumes of auctions vs. syndicated deals have been stable during the crisis Inflation-linked supply has also remained steady (+2%). Surprisingly, the supply did not follow investor demand in an environment of rising inflation Overall, SSA supply has been resilient with a 10% increase of syndicated deals on last year in H1 Source: SG Analytics Syndicated/auction bond issues 100% 80% 60% 40% 20% 0% 39% 61% 63% Nominal/inflation-linked bond issues 100% 80% 60% 40% 20% 0% Includes Auctions and Syndicated issues 37% Jan-May 07 Jan-May 08 Auction Syndication 5% 7% 95% 93% Jan-May 07 Jan-May 08 Nominal Inflation-linked

13 A Turbulent SSA Secondary Market 13 Although activity remains, SSA secondary market conditions have been very turbulent, reflecting the volatility and nervous nature of the market In summary: Liquidity and trading activity is affected Global de-leveraging process is ongoing within the bank and hedge fund sectors Dislocation in the short-term money market contributes to reduced activity The aforementioned factors have led to: a widening of bid/ask spreads a widening of ASW spreads for agencies and non-core sovereigns a significant drop in the activity of trading platforms

14 Conclusion on the SSA market 14 The crisis did not hamper primary market activity The public sector even benefited from it, partly due to a flight to quality However, the stability and regularity experienced by the primary market has not been reflected in the secondary market, which has been heavily affected by the crisis The only difference between the SSA sector and the other asset classes is that the market remained broadly open for new issues despite the volatile conditions, on the back of higher pick-up levels required by investors

15 Corporate & Financial Bond Markets 15

16 Resilient Primary Corporate Bond Supply 16 H began on a strong note but H2 volumes were below expectation In Q1 2008, new issue supply was particularly affected by the crisis but in Q new issuance reached an all-time high, fuelled by Investment Grade paper issues. EUR bn Corporate Euro Bond Issuance % -36% -26% -24% No HY bonds were issued in Euros since July 2007 (from 18bn in H1-2007). Source: SG Analytics Q1 Q2 Q3 Q4 EUR billion YTD H H Total

17 Funding Opportunities For Financials Have Shifted 17 Lower supply with a structural reallocation of demand, though volumes are increasing The senior and hybrid markets have remained open to large banks The Jumbo covered bond segment has been the most resilient ABS market activity has been subdued with the majority of deals retained for ECB repo purposes Source: SG Analytics Issuance Volumes - EUR bn 100% 80% 60% 40% 20% % Financial Euro Bond Issuance -74% -41% Q1 Q2 Q3 Q % 6% 10% 9% 17% 15% 28% 26% 36% 39% 28% 40% 40% 33% -50% 59% 6% H H ABS Senior Jumbo CB Hybrid -80%

18 Secondary Market Trends 18 Corporates outperformed Financials, with subdued secondary liquidity The primary market remains the preferred route for investors to add risk The combined Central Banks efforts tightened spreads in Q2 However, renewed economic fears are pushing spreads wider again Pfandbriefe and Obligations Foncieres are the best Covered Bond performers Source: Markit / Index Company 20 x itraxx Corporates itraxx Financials 16 x 12 x 8 x 4 x 0 x Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Spreads vs. ASW (bp) 80 Obligations Foncieres 70 UK covered bonds Cédulas Jan-07 Pfandbriefe Irish ACS Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

19 Conclusion: The Euro Primary Market Is Open 19 The Euro bond market has remained open for quality signatures SSAs, IG Corporates, Large Financials and Covered Bonds 2008 primary volumes are rapidly catching up with 2007 levels Thanks to cash-rich investors and increasing confidence in the credit markets However, trust still needs to be rebuilt in some sectors Non-IG Corporates, 2nd Tier banks and ABS and uncertainty remains dominant Due to poor Corporate and Financial earning expectations, rising inflation and weak economic prospects

Fixed income market dislocations. Benoît Hubaud Global Head of Fixed Income Research

Fixed income market dislocations Benoît Hubaud Global Head of Fixed Income Research Dislocation: one word, two definitions An extreme movement which can be absolute or relative EuroStoxx 5 up +15% Five