CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS

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1 Fixed Income Research LDI Focus Research Analysts Thushka Maharaj Vice President thushka.maharaj@credit-suisse.com This is a new report following Drivers of the EUR Long End, focused on long-end investment strategy in the UK and EUR. The aim is to highlight topical events that impact the long end and associated tactical interest rate strategies. Pension consultation unlikely to change structural demand for long end Macro Strategy: We review the questions under the DWP consultation on pension reform. In our view, a smoothing of the discount rate may reduce demand for long dated UK assets on the margin. But this consultation does not change fundamental behaviour of pension funds we expect opportunistic receiving interest as the 3y rate rises above 3.5%. We also discuss Mark Carney s TSC statement and the latest Inflation Report. With monetary policy likely to look through high inflation readings over the medium term, we expect the 5y sector to outperform on the curve. Trade Recommendation: We recommend buying 48bp OTM receiver versus selling a 5bp OTM payer on GBP 1y3y for zero cost to position for opportunistic receiving interest once spot 3y swaps approaches 3.5%. Upcoming long-end syndication: The last UKTi syndication for this fiscal year is scheduled for the end of February. The DMO will syndicate the UKTi.25% 52s; we expect 3.8-4bn to be placed in this operation. Exhibit 1: Upcoming supply in the UK with long end $, and supply Operation Date Country Bond Issuance 21-Feb-213 UK 1¾% Treasury Gilt bn 21-Feb-213 US 3Y Tips $9 bn* 25-Feb-213** UK ¼% Index-linked Gilt 252** 3.8 bn* 5-Mar-213 UK 1¼% Treasury Gilt bn* 8-Mar-213 JP 3Y JGB.7 tn* 13-Mar-213 UK 3¾% Treasury Gilt bn* 14-Mar-213 US 3Y Bond $16 bn* 21-Mar-213 UK ⅛% Index-linked Treasury Gilt bn* Source: *forecast, ** syndication; National Treasuries Note Credit Suisse ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER IMPORTANT DISCLOSURES, PLEASE REFER TO CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Summary of UK views Exhibit 2: Summary of core views Currency Market View Trade Recommendations Outright Short gilts as credit easing preferred over quantitative easing Short gilts versus bunds and Treasuries Curve Overall curve steepening view Expect opportunistic receiving of the long end above 3.5-4% Pay GBP 5s1s Pay 5y5y GBP Curvature Vol Expect 1s to underperform on the curve 1y vol to richen versus 5s and 3s Constrained sell-off on 3y rates Pay 5s1s3s fly Tactical risk reversal on 1y3y 6m5y receiver spread Money Markets Libor/SONIA basis tighteners due to credit easing/fls Front end of curve to remain flat Receive GBP 5y on the curve (receiver spreads) ASW Swap spreads to remain tight in long end Long 5y ASW versus 1y GBP-EUR GBP 1y to underperform EUR GBP 2y2y vol to richen versus EUR Buy mid-curve GBP vol on 2y2y vs EUR GBP-USD GBP 1y to underperform USD Pay GBP 5y5y vs USD LDI Focus 2

3 Mar-3 Sep-3 Mar-4 Sep-4 Mar-5 Sep-5 Mar-6 Sep-6 Mar-7 Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 Sep February 213 Macro Strategy DWP pension fund consultation implications for the GBP long end The Department of Work and Pensions launched its consultation on defined benefit private pensions on 25 January. The main concern cited for the government was that pension deficits are being exacerbated by distorted low yields. As of the end of January, the PPF 78 index shows a deficit of 211bn. The aggregate funding ratio improved from 8% in mid 212 to 84% in January (Exhibit 3) but still remains far off the long-term average. Rising pension deficits are forcing employers to make additional contributions to schemes, hence, forgoing future investment opportunities. The key question in the consultation is whether a change in the valuation of liabilities will encourage corporate sponsors to reinvest excess cash in areas that can stimulate growth and investment. Exhibit 3: PPF 78 aggregate funding ratio is at 85% - well below the historical average 125 Aggregate Funding ratio 3y yields (rhs) Source: PPF 78, Credit Suisse Current Discount Rate Under current pension fund regulations (Occupation pension schemes 25), it is up to the trustees or managers of a scheme to decide which method to use in calculating a scheme s technical provisions. According to these regulations: The rates of interest used to discount future payments of benefits must be chosen prudently, taking into account either or both of: (i) the yield on assets held by the scheme to fund future benefits and the anticipated future investment returns, and (ii) the market redemption yields on government or other high-quality bonds. In fact, the current regulations also state that the economic and actuarial assumptions must be chosen prudently, taking account, if applicable, of an appropriate margin for adverse deviation. LDI Focus 3

4 Consultation objective The consultation is considering: 1) Explicit allowance of smoothing of assets and liabilities in funding valuations such as using average asset prices and discount rates; and 2) A new statutory objective for the Pension Regulator to consider deficit recovery plans and their long-term affordability. The consultation specifically states that while there has been interest to introduce smoothing, there has been no broad agreement on the implementation. The consultation therefore asks views on: 1) The explicit use of smoothing and the degree to which smoothing should be applied in valuing pension schemes; 2) The appropriate methods of smoothing (duration of smoothing window); and 3) How best to apply a consistent approach across assets and liabilities. The other aspect of the consultation is the question of whether certain changes should be mandatory or optional. Exhibit 4 summarises the main questions regarding the smoothing model. Exhibit 4: Potential factors in a model for smoothing Description Period considered Mandatory/ optional Remain with smoothing model for >1 valuation cycle? Smoothing of assets and liabilities Option 1 2 years Yes/No Yes/No Yes/No Option 2 3 years Yes/No Yes/No Yes/No Option 3 5 years Yes/No Yes/No Yes/No Source: DWP, Credit Suisse The consultation is broader and more flexible than we expected as it asks the pension fund industry whether smoothing is required or not, and if so, how should it be applied. As acknowledged in the consultation call for evidence, the current funding system already has much built-in flexibility. We see this consultation as one way to formalise these flexibilities, which will allow pension trustees to plan for a future rise in yields more systematically. It was also clear from the consultation that if smoothing is applied to deficit calculations, this would only impact the economic deficit plans rather than the actual accounting treatment under IAS/FRS accounting standards. Timeline The call for evidence on: 1) the new Pension Regulator objective closes on 21 February; 2) the smoothing procedure closes on 7 March. If the government does decide to implement a smoothing model, it would require legislation and hence will be subject to parliamentary approval. In reality, that means a response to the consultation in April-May, followed by any passage of legislation in the second half of the year. As such, it is not certain when these changes would take effect unlikely to be much before the end of the year. LDI Focus 4

5 Market implications Our big picture take-away from the consultation is that it is a way to formalise existing flexibilities in valuing pension fund assets and liabilities. While on the margin this may impact liability-driven demand for long-end assets, we do not see this as fundamentally changing the need for these investors to invest in long duration, highly-rated fixed income assets. So while we expect yields to sell off as the marginal investment in long bonds is reduced at these rich levels, we do not see the pension regulation/consultation as the sole reason why long-end rates need to rise. Below we discuss using cheap implied swaption vol on 1y3y to express our view that 3y rates can rise, but there is a level at which opportunistic receiving by both the real money and the LDI communities is triggered. Thus, our expectation is for a constrained sell-off on GBP 3y tails. Trade Recommendation Sell 1y3y 5bp OTM payer (K=3.9%) to buy 48bp OTM receiver (K=2.92%) for zero cost (1y3y at 3.4%; spot 3y at 3.25%) View: We maintain our bearish structural view on long end. But we acknowledge that 3.5% GBP 3y is likely to attract opportunistic LDI receiving interest. For investors who expect LDI interest to increase as yields sell off, we recommend selling OTM payers (ATMF + 5bp) versus buying a 48bp OTM receiver on 1y3y for zero cost (indicative mids). Rationale: We maintain our overall bearish view on the gilt market and over a 1-2y horizon, we expect 3y rates to be higher than current levels. But we also realise that demand by real money and LDI investors may return opportunistically as rates rise on 3y. Payer skew on 3y tails has richened as the long end has sold off. Given the level of 3y rates, payer skew looks rich versus receiver skew (Exhibit 5). GBP 15y15y rates are close to the 21 highs. Historically, that level was a resistance level and the 15y15y rate bounced lower after hitting 4.3% (Exhibit 7). At expiry, investors make a profit if the 3y spot rate rallies past 2.92% (35bp below the current spot rate) and start to lose if the spot 3y rate rises above 4% (65bp from current spot) as shown in Exhibit 1. The main risk in this scenario is an unlimited loss in the event that 3y rates sell off more than 65bp from the spot 3y rate. Alternative expressions: Alternatively, investors can sell an ATM payer and buy a 5bp OTM payer and a 25bp OTM receiver for close to zero cost. At expiry, investors start to make a profit if the 3y spot rate rallies past 3.15% (1bp from spot) and start to lose if the spot 3y rate rises above 3.4% (15bp from spot). Losses are capped in this scenario. Risk reversal on the GBP 15y15y rate where the client buys an OTM receiver and sells OTM payer. Payer Ladder on 1y3y (ATMF/ATMF+25bp/ATMF+5bp) to monetise rich payer skew on 3y tails. Risks Risks are linked to 3y rates moving materially higher from current levels. The uncertainty surrounding DWP pension consultation may keep long-end investors wary of receiving 3y rates. LDI Focus 5

6 Exhibit 5: Payer skew on 3y tails has richened as the curve steepened OTM bp wide spread Exhibit 6: 1y3y vol skew: over the last two months payer skew has richened Dec 8 3 Dec 9 3 Dec 1 31 Dec 11 3 Dec 12 payer-receiver 1Y3y GBP 3y spot rhs Exhibit 7: Long-dated forward rates are reaching the recent highs Exhibit 8: GBP 1y5y/15y5y spreads have widened aggressively Dec-8 3-Dec-9 3-Dec-1 31-Dec-11 3-Dec-12 GBP 15y15y Fwd Yield 3-Dec-4 1-Jul-7 3-Dec-9 3-Jun-12 GBP 15y15y Fwd Yield GBP 1y5y/15y5y rhs Exhibit 9: Implied vol on 1y3y has fallen over the last year Exhibit 1: P&L profile at expiry (5K Dv1). Investors start to lose if spot 3y rises above 3.9% 2,5, Locus 3 Dec 8 3 Dec 9 3 Dec 1 31 Dec 11 3 Dec 12 GBP 1y3y ann bp vol -2,5, Rate Shift (Bps) Instantaneous Profile Aged 1Y Aged 6M LDI Focus 6

7 Carney s Testimony: neutral on QE and NGDP targeting Summary View: Carney s address at the Treasury Committee and the latest Inflation Report support our view that further QE buying of gilts is less likely in the medium term. We maintain our bearish outlook for gilts due to waning central bank support and rising inflation risks. We prefer expressing this view via 5s1s steepeners. The main highlights from Carney s testimony were: 1) Inflation target and time horizon to return inflation to target: Carney stated that the bar for changing the inflation target is high. He also clearly highlighted the need for a flexible inflation framework and within this, the ability to vary the horizon over which inflation is brought back to target. We think this implies that a change to the 2% inflation target is less likely while an extension of the policy relevant horizon from the current two-to-three years to three-to-five years is more likely. 2) Forward rate guidance: We think this is the most likely communication tool the MPC will use. In our view, by changing the policy relevant horizon, the MPC will effectively be providing forward guidance. 3) NGDP or Price level targeting: Carney mentioned price level targeting as an option under extraordinary circumstances and when inflation has undershot the long-run target. This is clearly not the case in the UK, which makes a move to such policy less likely. On NGDP targeting, Carney emphasised that central banks cannot determine the path of real variables accurately in the long run, which could make an NGDP level target hard to measure. Also, nominal GDP statistics are subject to revisions, which could be large, making such a policy harder to implement. He does say that debate on this topic should be open and that the framework for policy should be reviewed periodically. 4) Quantitative Easing: Carney had a very balanced view on QE he recognised the benefits of the first round QE when market conditions were very illiquid. But he has also cautioned on the potential costs of having very stimulative policy for a prolonged time. His comment that the potential costs of QE and uncertainty about the effect of QE on bank lending behaviour are solid reasons for supplementing QE with FLS supports our view that QE extension is unlikely unless renewed tail risks (in Europe) emerge. In terms of buying other assets (bank bonds, MBS, etc.), he was less clear and showed a preference for the existing FLS scheme. He does not rule that out, however, and says that further unconventional measures will be evaluated regularly if necessary when he takes over the Governorship. 5) Funding for Lending Scheme: Carney was very positive on the FLS and as stated above, he sees the FLS as a substitute for more QE currently a view we share (see our 213 Outlook). He is very much in line with the consensus on the MPC based on the fact that it is too early to evaluate the full impact of the FLS, but the early signs are encouraging. Market Implications: In summary, Carney s commentary reinforces our view of 5s1s steepeners. In the front end, he is likely to advocate lower-for-longer for even longer through widening the inflation forecasting horizon. In the long end, gilts are exposed as QE support is waning and stability in Europe also implies less safe haven premium in gilts. LDI Focus 7

8 March coupons and redemptions: positive for front end On 7 March, there will be 34bn in redemptions and 11.3bn in coupons coming to the gilt market. After accounting for the BoE gilt holdings, 6.1bn in coupons will be paid to the private market. This will be the first set of coupon payments to be paid after the BoE announcement of coupon transfers to the Treasury. The BoE also announced that its holdings of 6.6bn (cash) of the redeemed gilt will be reinvested in the outstanding stock in order to keep the current rate of gilt purchases constant at 375bn. The details of how this redemption will be reinvested are due to be published at the 7 March MPC meeting. We expect the maturing paper to be reinvested in the current buyback baskets, i.e., equally in shorts, mediums and longs. Exhibit 11 shows the breakdown of coupon payments that are to be paid into the market (ex-div date: 28 Feb). In aggregate, 5% of the cash coupons are for bonds in shorts and 35% from medium bonds. Given our assumption that these gilt coupons will be re-invested in the same sectors in which they reside, we expect coupon flows to benefit the front end of the curve. Exhibit 11: March coupons total 11.4bn with 6bn coming to market; the BoE to reinvest the other 6bn Maturity Coupon Total Coupon (, mn) Amt held by DMO (, mn) Nominal amount bought by BoE (, mn) Freefloat (, mn) Market coupon (, mn) 7/3/ ,393 6,152 23, /9/ ,885 1,569 4, /3/ ,238 8,279 25, /9/ ,14 6,38 12,817 21, /9/ ,184 15,232 14, /9/ ,455 11,42 18, /9/ ,983 28, /3/ ,369 15,533 13, DV1 of % of DV1 per market sector coupon (mn per bp) Sector Percentage of coupon coupon per sector 7/3/ ,212 16,755 16, , /9/ ,47 16, /3/ ,54 12,78 15, /9/ ,41 19, /9/ ,196 2, /3/ ,15 23,175 12, /9/ ,57 2, /3/ ,642 15,38 9, , /9/ ,45 15, /3/ ,46 5,677 11, /9/ ,96 12, LDI Focus 8

9 Nominal and Inflation Monitors 1s3s curves Exhibit 12: Nominal 1s3s curve: in cash and swap Conventional 1s3s - cash and swap Exhibit 13: Conventional 1s3s versus real curve 1s3s - conventional vs real Dec-4 1-Jul-7 3-Dec-9 3-Jun-12 UKT conventional 1s3s GBP conventional 1s3s Dec-8 3-Dec-9 3-Dec-1 31-Dec-11 3-Dec-12 UKT conventional 1s3s Real yield 1s3s CM rhs Exhibit 14: Conventional 1s3s versus B/E curve 1s3s - conventional curve vs breakeven curve Exhibit 15: 1s3s cash B/E curve vs RPI swaps 1s3s - breakeven curve cash vs RPI swap Dec-1 31-Dec-11 3-Dec-12 UKT conventional 1s3s 1s3s BE cash curve - CM 3-Dec-8 3-Dec-9 3-Dec-1 31-Dec-11 3-Dec-12 RPI inflation swap 1s3s CM 1s3s BE cash curve - CM 5 Exhibit 16: 15y15y nominal versus RPI real rate 15y15y - nominal GBP vs RPI real swap rate Exhibit 17: 15y15y nominal versus inflation swap 15y15y - nominal GBP vs RPI inflation swap Dec-1 31-Dec-11 3-Dec-12 Swap UKRPI 15Y Fwd 15Y real rate GBP 15y15y Fwd Yield 3-Dec-8 3-Dec-9 3-Dec-1 31-Dec-11 3-Dec-12 Swap UKRPI 15Y Fwd 15Y inflation rate GBP 15y15y Fwd Yield LDI Focus 9

10 Exhibit 18: Current Real ZC curve versus 1m and 3m ago Real Zeros calculated from 1y real rate curve Exhibit 19: RPI ZC inflation swap curve versus 1m and 3m ago Exhibit 2: Outstanding UKTIs and IOTA spreads Inflation Linkers Price *Yield Z-Spread Comparator Nominal Nominal Price Yield Nominal Z-Spread IOTA spreads B/E rates UKTI 2.5 8/16/ UKT 4.5 3/7/ UKTI 2.5 7/26/ UKT 4. 9/7/ UKTI /22/ UKT 5. 3/7/ UKTI 2.5 4/16/ UKT /7/ UKTI /22/ UKT 4. 3/7/ UKTI.125 3/22/ UKT 5. 3/7/ UKTI 2.5 7/17/ UKT 5. 3/7/ UKTI /22/ UKT /7/ UKTI.125 3/22/ UKT /7/ UKTI /22/ UKT /7/ UKTI /22/ UKT /7/ UKTI.75 3/22/ UKT 4.5 9/7/ UKTI 2. 1/26/ UKT /7/ UKTI /22/ UKT /7/ UKTI.625 3/22/ UKT /7/ UKTI /22/ UKT /7/ UKTI.125 3/22/ UKT /7/ UKTI.75 11/22/ UKT /7/ UKTI.5 3/22/ UKT /7/ UKTI.25 3/22/ UKT /22/ UKTI /22/ UKT /7/ UKTI.375 3/22/ UKT 4. 1/22/ Locus LDI Focus 1

11 Cash Breakevens versus Inflation Swaps Exhibit 21: 5y, 1y cash B/E versus inflation swap Exhibit 22: 2y, 3y cash B/E versus inflation swap 5y and 1y - breakeven cash vs RPI swap 2y and 3y - breakeven cash vs RPI swap Dec-8 3-Dec-9 3-Dec-1 31-Dec-11 3-Dec-12 5y BE cash - RPI swap 1y BE cash - RPI swap 3-Dec-8 3-Dec-9 3-Dec-1 31-Dec-11 3-Dec-12 2y BE cash - RPI swap 3y BE cash - RPI swap Exhibit 23: Z-spreads on UKTi linkers UKTi long end Zspds Exhibit 24: IOTA spreads (linker Zspread nominal) Nominal comparator Z-spread used UKTi long end IOTA (inflation Zpd-nominal Zspd) ASW z spread IOTA spread LDI Focus 11

12 UK RPI inflation swaps versus Europe and USD Exhibit 25: UK RPI 5y5y inflation swap vs USD, EUR UK RPI vs EUR 5y5y Exhibit 26: UK RPI 5y inflation swap vs USD, EUR UK RPI vs EUR 5y Jul Dec-11 3-Jun-12 3-Dec-12 UK RPI - US 5y5y UK RPI - EUR 5y5y Jul Dec-11 3-Jun-12 3-Dec-12 UK RPI - US 5y UK RPI - EUR 5y Exhibit 27: UK RPI 1y inflation swap vs USD, EUR UK RPI vs EUR 1y Exhibit 28: UK RPI 3y inflation swap vs USD, EUR UK RPI vs EUR 3y Jul Dec-11 3-Jun-12 3-Dec-12 UK RPI - US 1y UK RPI - EUR 1y Jul Dec-11 3-Jun-12 3-Dec-12 UK RPI - US 3y UK RPI - EUR 3y Exhibit 29: 1y inflation forward curve in, $, Exhibit 3: 1y real forward curve in, $, Locus LDI Focus 12

13 1y 1y1y 2y1y 3y1y 4y1y 5y1y 6y1y 7y1y 8y1y 9y1y 1y2y 1y5y 15y5y 2y5y 15y15y 2y2y Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb February 213 Basis Swaps and ASW Spreads Exhibit 31: French, US linker 1y ASW vs 6m Libor Exhibit 32: French, US linker 3y ASW vs 6m Libor 2 1yr UK, France and US Proceeds ASW vs. 6mL 25 3yr UK, France and US Proceeds ASW vs. 6mL Jul Dec-11 3-Jun-12 3-Dec-12 IL22s proceeds vs 6mL 1yr OATi vs 6mL 1yr TIPs vs 6mL 1-Jul Dec-11 3-Jun-12 3-Dec-12 3yr Linkers vs 6mL 3yr OATi vs 6mL 3yr TIPs vs 6mL Locus Exhibit 33: Forward curve on 6m Libor/Sonia basis Forward 6M Libor-SONIA basis curve 13-Feb-13 2-Jan-13 Exhibit 34: 15y15y 6m Libor/Sonia basis y15y 6m Libor/Sonia basis , the BLOOMBERG PROFESSIONAL service, the BLOOMBERG PROFESSIONAL service LDI Focus 13

14 Annual BP Vol Annual BP Vol 18 February 213 2y3y Nominal Vol and Skew Exhibit 35: Vol smile on 2y into 3y Nominal Rate Exhibit 36: 2y3y bp skew versus level of 3y rate 2y3y bp vol skew Dec-8 3-Dec-9 3-Dec-1 31-Dec-11 3-Dec-12 payer-receiver 2y3y GBP 3y spot Exhibit 37: 1y3y/1y3y vol ratio GBP 1y3y/1y1y vol ratio versus 1s3s curve.95 Exhibit 38: 1y3y versus 5y3y vol ratio GBP 1y3y versus 5y3y vol Jul Dec-11 3-Jun-12 3-Dec-12 GBP 1y3y/1y1y GBP 1s3s 3-Dec-8 3-Dec-9 3-Dec-1 31-Dec-11 3-Dec-12 GBP 1y3y ann bp vol GBP 5y3y ann bp vol Exhibit 39: Vol term structure on 1y tails Exhibit 4: Vol term structure on 3y tails GBP, 1-Year Tails GBP, 3-Year Tails M 3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 1Y Expiration Live Prev Day Close 1 Weeks Ago 1 Months Ago 3 Months Ago 1M 3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 1Y Expiration Live Prev Day Close 1 Weeks Ago 1 Months Ago 3 Months Ago LDI Focus 14

15 bn 18 February 213 Supply Exhibit 41: UK supply, coupons and redemptions Feb-22-Feb 25-Feb-1-Mar 4-Mar-8-Mar 11-Mar-15-Mar Exhibit 42: UK weekly net issuance (, bns) Issuance Coupon Redemptions Net Supply 18-Feb-22-Feb Feb-1-Mar Mar-8-Mar Mar-15-Mar Total Issuance Coupon Redemption Net Supply, UK Treasury, UK Treasury Exhibit 43: Planned syndications Conventional Index-linked Total Expected YTD Remainder Source: DMO, Credit Suisse Exhibit 44: Cash-flow analysis UK Supply bn Redemptions bn Coupons bn Total Week Date Day Cntry Amt Cntry Amt y+ Cpn Inflow Supply Supply bp) 8 18-Feb Mon Feb Tue Feb Wed Feb Thu UK Feb Fri Feb Mon UK* 3.8* Feb Tue Feb Wed Feb Thu Mar Fri Mar Mon Mar Tue UK Mar Wed Mar Thu - UK (6.48) 1 8-Mar Fri Mar Mon Mar Tue Mar Wed UK Mar Thu Mar Fri TOTAL , UK Treasury, * syndication Total Cash Net Net DV1 ( mn per LDI Focus 15

16 INTEREST RATE STRATEGY Eric Miller, Managing Director Global Head of Fixed Income and Economic Research US RATES EUROPEAN RATES US DERIVATIVES Carl Lantz, Managing Director US Head Helen Haworth, CFA, Director European Head helen.haworth@credit-suisse.com George Oomman, Managing Director Derivatives Head george.oomman@credit-suisse.com Ira Jersey, Director ira.jersey@credit-suisse.com Michael Chang, Director michael.chang.2@credit-suisse.com Scott Sherman, Vice President scott.sherman@credit-suisse.com Carlos Pro, Associate carlos.pro@credit-suisse.com William Marshall, Analyst william.marshall@credit-suisse.com Sabine Winkler, Director sabine.winkler.2@credit-suisse.com Panos Giannopoulos, Director panos.giannopoulos@credit-suisse.com Thushka Maharaj, Vice President thushka.maharaj@credit-suisse.com Florian Weber, Associate florian.weber@credit-suisse.com Marion Pelata, Associate Adam Dent, Associate adam.dent@credit-suisse.com TECHNICAL ANALYSIS David Sneddon, Managing Director david.sneddon@credit-suisse.com Christopher Hine, Director christopher.hine@credit-suisse.com Pamela McCloskey, Vice President pamela.mccloskey@credit-suisse.com Cilline Bain, Vice President cilline.bain@credit-suisse.com David Robertson, Analyst david.robertson@credit-suisse.com TOKYO Tomohiro Miyasaka, Director Japan Head tomohiro.miyasaka@credit-suisse.com

17 Disclosure Appendix Analyst Certification I, Thushka Maharaj, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Important Disclosures Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: Credit Suisse s policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market that may have a material impact on the research views or opinions stated herein. The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions. Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report. At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report. As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report. For important disclosure information on securities recommended in this report, please visit the website at or call For the history of any relative value trade ideas suggested by the Fixed Income research department as well as fundamental recommendations provided by the Emerging Markets Sovereign Strategy Group over the previous 12 months, please view the document at Credit Suisse clients with access to the Locus website may refer to For the history of recommendations provided by Technical Analysis, please visit the website at Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Emerging Markets Bond Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate. Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate. Corporate Bond Fundamental Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector. Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and are undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. These bonds may possess price risk in a volatile environment. Market Perform: Indicates a bond that is expected to return average performance in its sector. Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may be stable credits that, we believe, are overvalued or rich relative to the sector. Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector. Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated: Credit Suisse Global Credit Research or Global Leveraged Finance Research covers the issuer but currently does not offer an investment view on the subject issue. Not Covered: Neither Credit Suisse Global Credit Research nor Global Leveraged Finance Research covers the issuer or offers an investment view on the issuer or any securities related to it. Any communication from Research on securities or companies that Credit Suisse does not cover is factual or a reasonable, non-material deduction based on an analysis of publicly available information. Corporate Bond Risk Category Definitions In addition to the recommendation, each issue may have a risk category indicating that it is an appropriate holding for an "average" high yield investor, designated as Market, or that it has a higher or lower risk profile, designated as Speculative and Conservative, respectively. Credit Suisse Credit Rating Definitions Credit Suisse may assign rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company's creditworthiness and are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB, B) is dependent on our assessment of an issuer's ability to meet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low with High being the strongest sub-category rating: High AAA, Mid AAA, Low AAA obligor's capacity to meet its financial commitments is extremely strong; High AA, Mid AA, Low AA obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A obligor's capacity to meet its financial commitments is strong; High BBB, Mid BBB, Low BBB obligor's capacity to meet its financial commitments is adequate, but adverse economic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB obligations have speculative characteristics and are subject to substantial credit risk; High B, Mid B, Low B obligor's capacity to meet its financial commitments is very weak and highly vulnerable to adverse economic, operating, and financial circumstances; High CCC, Mid CCC, Low CCC obligor's capacity to meet its financial commitments is extremely weak and is dependent on favorable economic, operating, and financial circumstances. Credit Suisse's rating opinions do not necessarily correlate with those of the rating agencies.

18 Structured Securities, Derivatives, and Options Disclaimer Structured securities, derivatives, and options (including OTC derivatives and options) are complex instruments that are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data will be supplied upon request. Any trade information is preliminary and not intended as an official transaction confirmation. OTC derivative transactions are not highly liquid investments; before entering into any such transaction you should ensure that you fully understand its potential risks and rewards and independently determine that it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such tax, accounting, legal or other advisors as you deem necessary to assist you in making these determinations. In discussions of OTC options and other strategies, the results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether OTC options or option-related products, as well as the products or strategies discussed herein, are suitable to their needs. CS does not offer tax or accounting advice or act as a financial advisor or fiduciary (unless it has agreed specifically in writing to do so). Because of the importance of tax considerations to many option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated options transactions. Use the following link to read the Options Clearing Corporation's disclosure document: Transaction costs may be significant in option strategies calling for multiple purchases and sales of options, such as spreads and straddles. Commissions and transaction costs may be a factor in actual returns realized by the investor and should be taken into consideration.

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