2011 ANNUAL MEETING AND EDUCATION CONFERENCE American College of Investment Counsel New York, NY The Scream - Edvard Munch 1893 Current Market Update and Recent Developments Thursday, October 20, 2011 8:30 a.m. 9:30 a.m. Peter L. Borowitz (Moderator) Loc McNew AIG Asset Management Michael G. Thilmany HSBC Securities (USA) Inc. Madhavi Venkatesan The Hartford Financial Services Group, Inc.
Presentation to the American College of Investment Counsel October 2011 Michael Thilmany Managing Director Private Placements HSBC Securities (USA) Inc.
Debt capital markets backdrop Global capital markets continue to be characterised by volatility, but transactions printed on both sides of the Atlantic demonstrate that deals can be done for the right names given an appropriate new issue premium Peripheral sovereign funding concerns and sluggish growth indicators have resulted in periods of relative optimism interspersed by more bearish patches where execution has been challenging In coming weeks and months identifying the right window of access will be key to launching a successful deal Corporate credit remains a resilient asset class and has been more robust than financial and sovereign debt. Extremely low rates also offer unprecedented opportunities to lock in very low coupons Market trends Markets have re-opened across currencies Elevated new issue premia are required Well rated corporate credit remains a favoured asset class Markets are highly sensitive to newsflow and economic announcements. Sentiment can turn rapidly The US Dollar market has remained open throughout the last 3 months of unsettled conditions whereas supply in Euro and Sterling was significantly impacted Liability management exercises continue to achieve great success Potential forthcoming concerns Continuance of sovereign volatility (particularly regarding Greek default risk and the knock on implications) Further signs of slowing of US and European growth Credit squeeze if interbank lending levels reduce QE3 introduces further liquidity in USD Impact of Solvency II for lower rated/unrated corporates in Europe Spreads vs Swaps (bps) Yield (%) iboxx EUR Non-financials vs Swaps 180 160 140 120 100 80 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Source: Markit Corporate IG issuance volumes 2011ytd vs 2010ytd USD equiv. (bn) 450 400 350 300 250 200 150 100 50 0 2010 - YTD 2011 - YTD +18% -20% +20 % USD EUR GBP Source: Dealogic Government 10yr yields and HSBC expectations 4.20% 10yr Gilts 10yr Treasuries 10yr Bunds 3.80% 3.40% 2.60% 2.20% 1.80% 1.40% Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Source: Bloomberg / HSBC
Windows of opportunity: Europe vs US markets HSBC believes that forthcoming months will be characterised by periods of relative stability when markets will be accessible interspersed by more challenging periods when volatility and risk aversion is elevated The re-emergence of uncertainty regarding peripheral European sovereigns long term funding challenges in recent months and renewed global growth concerns highlighted the importance of identifying the right window of access in between periods of volatility. US primary debt markets by contrast have been more resilient to shocks, despite ongoing disappointing data with regard to US growth and employment particularly for domestic names VIX index (pts) VIX index (pts) European weekly issuance (EUR/GBP) vs VIX & itraxx 2010-2011ytd 50 12bn Weekly EUR/GBP issue volume VIX Index 45 Itraxx Europe Main (RHS) 40 10bn 35 8bn 30 6bn 25 20 15 10 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 USD weekly issuance vs VIX & DJ CDX 2010-2011ytd Source: Bloomberg, Dealogic, Markit 50 VIX Index 45 Weekly USD issue volume DJ CDX 5yr (RHS) $30bn 40 35 $25bn 30 $20bn 25 $15bn 20 15 10 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 960 860 760 660 560 460 360 260 160 60 150 140 130 120 110 100 90 80 70 60 itraxx Europe Cross-over (bps) DJ CDX (bps) Source: Bloomberg, Dealogic, Markit
The current rates environment Disappointing indicators of global growth rates and European sovereign debt concerns have created uncertainty in recent months, driving investors towards safe haven asset classes The result has been that government bond yields have approached all time lows This trend has been accentuated in the shorter part of the curve. In all currencies this has been reflected in a widening of the margin between 5 and 30yrs (a steepening of the credit curve) Uncertainty is likely to remain a feature of the markets and HSBC expects that rates should therefore remain low into 2012 US Treasury performance 2000-2011ytd and HSBC forecasts 8.00% 6.00% 7.00% 30yr Treasuries 10yr Treasuries 5yr Treasuries 5.00% 6.00% 5.00% 2000 2001 2002 Source: HSBC 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Bund performance 2000-2011ytd and HSBC forecasts 7.00% 6.00% 30yr Bunds 10yr Bunds 5yr Bunds 5.00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: HSBC UK Gilt performance 2000-2011ytd and HSBC forecasts 4.50% 3.50% 2.50% 1.50% 0.50% Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 7.00% 5.00% 6.00% 30yr Gilts 10yr Gilts 5yr Gilts 4.50% 5.00% 3.50% 2.50% 1.50% 0.50% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Source: HSBC 4
Which Markets Offer Certainty of Execution? European vs. US Capital Markets In the past months, the European credit markets (particularly the financial sector) have experienced a substantial decline in issuance, led by concerns over European debt obligations and global volatility, heading into the summer However, the US markets remained open, offering opportunities in both public and private arenas Euro investment grade corporate issuance (by week) USD equivalent (m) USD equivalent (m) USD (m) USD equivalent (m) 8,000 6,000 4,000 2,000 2,000 1,500 1,000 500 0 04-Jan 25-Jan 15-Feb 08-Mar 29-Mar 19-Apr 10-May 31-May 21-Jun 12-Jul 02-Aug 23-Aug 13-Sep 04-Oct Sterling investment grade corporate issuance (by week) 0 04-Jan 25-Jan 15-Feb 08-Mar 29-Mar 19-Apr 10-May 31-May 21-Jun 12-Jul 02-Aug 23-Aug 13-Sep 04-Oct US$ investment grade corporate issuance (by week) 25,000 20,000 15,000 10,000 5,000 0 04-Jan 25-Jan 15-Feb 08-Mar 29-Mar 19-Apr 10-May 31-May 21-Jun 12-Jul 02-Aug 23-Aug 13-Sep 04-Oct USPP NAIC-1 and NAIC-2 cross-border corporate issuance (by week) European markets largely shut US markets remain open 2,500 2,000 1,500 1,000 500 0 04-Jan 25-Jan 15-Feb 08-Mar 29-Mar 19-Apr 10-May 31-May 21-Jun 12-Jul 02-Aug 23-Aug 13-Sep 04-Oct Source: Dealogic, Bloomberg, HSBC 5
US Private Placement Market Supply Update The private placement market continues to be a significant source of capital for issuers Investors portfolios performed very well in the financial crisis, and insurance companies have increased their overall allocations to the private market Cross border issuers are a large portion of the market, historically accounting for c.50% of volume, but being a much larger presence in 2011 YTD The market remains strong for credits that are publically rated or implied BBB- credit quality or better Source: HSBC and Private Placement Monitor Volume ($ billions) Volume ($ billions) 2011 Supply in Context Quarterly Volume Trends $45.0 2008 2009 2010 2011 YTD $40.0 $35.0 $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 $- Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Cross Border and Domestic Issuance Volume $7.0 Domestic Cross-Border # of Issuers $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $- Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 30 25 20 15 10 5 - Issuers (#) Volume ($ billions) $6.0 NAIC-1 NAIC-2 $10.8 billion $10.2 billion $13.3 billion $11.4 billion $5.0 $4.0 $3.0 $2.0 $1.0 $- Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep YTD Volume by Jurisdiction and Industry US (30%) UK (18%) Australia (17%) Canada (6%) Germany (5%) Other (24%) Industrials (29%) Utilities (23%) Financials (15%) Consumer Staples (9%) Materials (8%) Other (15%) 6
US Private Placement Market Yields and Spreads US Treasuries have moved violently lower on the back of weakening economic data LTM A (NAIC1) Rated Public 10 Year USD Yields UST (LHS) A (LHS) Spread (RHS) 5.5% 250 LTM BBB (NAIC2) Rated Public 10 Year USD Yields UST (LHS) BBB (LHS) Spread (RHS) 5.5% 250 Spreads have moved higher because of this, however the all in cost of funding remains at historic lows Yield to Maturity (%) 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 225 200 175 150 125 100 Spread (bp) Yield to Maturity (%) 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 225 200 175 150 125 100 Spread (bp) 2.0% 75 2.0% 75 1.5% 50 Sep Nov Jan Mar May Jul Sep 1.5% 50 Sep Nov Jan Mar May Jul Sep Source: Bloomberg 7
Suggestions regarding the upcoming Model Form 2 Section 4.2 Performance; No Default: Must agree mechanics that avoid difficulties for those issuers who complete documentation but delay actual receipt of funds Section 5.16 Foreign Assets Control Regulations, Etc.: Needs to be refined further so as to agree on standard language (as was the case with the 2006 Form until passage of Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 and subsequent EU, etc legislation. An area of great difficulty for particularly overseas clients Section 7: Add Limitations on Disclosure Obligations so as to protect companies if information requests violate regulations or confidentiality agreements. Furthermore, as should also be the case in Section 19, information should be delivered electronically Section 8.5: include in Form 2, as it is standard in Form 1. Furthermore, suggest that percentage of Noteholders who accept should be negotiated on case by case basis Section 10.4: consistent with Section 5.16, above, needs to be further refined. Recommend allowing investors to be prepaid at par in event a pre-existing contract/client/etc subsequently becomes a blocked person thereby causing all Noteholders to be in violation of OFAC, etc. Instead, issuer should be given a period of 90 to 120 days after being notified to obtain legal advice as to its ability to pursue a legal opinion which states that the company is in fact compliant Section 12.3: Rescission should be agreed by Required Holders Section 17.1 (c): should allow for pro rata prepayment offers consistent with Section 8.5 8
Observations The key to successful transactions: Clear communication among investors counsel, issuer s counsel, banks and issuer. Timely and transparent Input from ALL sides is crucial. Doing this upfront will save time, money and aggravation during the marketing, circling and closing phases of the transaction Especially important for cross-border borrowers The better the offered product, the happier you and your clients will be. If actual differences between issuer (and its counsel) and investors counsel (and subsequently investors) remain, at least everyone will be well-served by sensitizing the Company This will help to further popularize our market around the world and dispel myths that otherwise discourage attractive candidates from coming to the USPP market 9
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