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Macro Commodities Forex Rates Equity Credit Derivatives
6 January 2012
Credit strategy
Weekly
Important Notice: The circumstances in which this publication has been produced are such that it is not appropriate to characterise it as independent
investment research as referred to in MiFID and that it should be treated as a marketing communication even if it contains a research recommendation.
This publication is also not subject to any prohibition on dealing ahead of the dissemination of investment research. However, SG is required to have
policies to manage the conflicts which may arise in the production of its research, including preventing dealing ahead of investment research.
GLORY DAY
Great start, but quickly back on shaky ground: The opening’s
upbeat tone was met with a deluge of covered, senior and non-
financial supply from 'core' country domiciled borrowers.
Unfortunately, that isolation has not lasted long and we just can't put
the sovereign crisis behind us. We now face renewed headline and
event risk coming from the periphery, this time including Spanish
banks and regions, Italian banks and Greece (again). Government
bond yields and CDS levels are rising, the euro is weakening, equities
are falling with bank stocks mostly in the line of fire and the iTraxx
indices are up. Risk-on has turned to risk-off like the closing of a tap.
Cash credit has moved from bid-only (and tighter spreads) to a two-
way flow dynamic (and wider spreads) in double-quick time. There is
no need to change stance and we would stay cautious here, keeping
it simple. Stay with core country risk, some front end high yield and
avoid financials as far as possible.
Sovereign crisis to overshadow light economic calendar and
start of the earnings season: Next week will be light on the
economics front with notably the ECB and BOE announcing their
benchmark rates decision, and we’ll be gearing up for the Q4 earnings
season. We’ll only have a limited number of companies reporting but
we believe both the economic releases and the earnings season will
take a back seat to the developing situation on the sovereign front
which has seen Italian and Spanish yields under pressure yet again.
Dynamic asset allocation between equity and credit: We
propose allocation strategies between equity and credit total return
indices (TRI) based on the ISM manufacturing index. We show that the
performance of equities relative to credit is strongly related to
economic cycles. We create total return indices based on equity and
credit indices and define the allocation between equity and credit as a
simple function of the ISM index.
Spreads start tightening but bullish trend fades
Relative equity/credit performance is linked to
economic cycles
Source: SG Cross Asset Research
60bp
120bp
180bp
240bp
100bp
200bp
300bp
400bp
Jun-10Sep-10Dec-10Mar-11Jun-11Sep-11Dec-11
iTR
AX
X M
ain
Contr
acts
iBO
XX
IG
Corp
Inde
x s
pre
ad
to b
en
chm
ark
s
iBOXX Corp index (spds v s benchmarks)
Itraxx 5yr Bmarx (RH Axis)
-0.4%
-0.3%
-0.2%
-0.1%
0.0%
0.1%
0.2%
0.3%
-10
-5
0
5
10
Apr-92 Apr-96 Apr-00 Apr-04 Apr-081
2m
tra
ilin
g a
ve
rag
e e
qu
ity-c
red
it
da
ily p
erf
orm
an
ce
ISM
-50
ISM (-50) Equity -credit perf
ISM > 50, equities outperform credit
ISM < 50, equities underperform credit
Contents Sector Credit Strategists Summary 2
Today 1 week Change (%) Juan Esteban Valencia
Top Picks and Pans 3
5 years (33) 1 5637 3683
Top trades 4 Europe 178 173 3% [email protected]
Switch ideas of the week 5
High Vol. 275 273 1% Suki Mann
Macro and single name strategies 6
X-Over 755 755 0% (44) 20 7676 7063
Overview 8 Senior 292 279 5% [email protected]
Market review and outlook 9
Subordinated 525 512 3%
High yield market 19 Dow Jones 12336 12218 1% Quantitative Strategy
Sterling market update 20
S&P 500 1273 1258 1% Raphael Dando
Quant matters 21
VIX 21 23 -9% (33) 1 42137 8979
Next week: preview 23
Last week’s changes in opinion and recommendation 25
Societe Generale (‚SG‛) does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that SG may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a
single factor in making their investment decision. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE
ANALYST(S) CERTIFICATION(S), IMPORTANT DISCLOSURES AND DISCLAIMERS
F163049
Credit Strategy Weekly
6 January 2012
2
Summary
Comment Trades/news
Macro view Sovereign crisis remains the main concern: The strong
start to the year faded as concerns over the sovereign crisis
resurfaced. The economic releases aren’t as negative as
initially thought, and equities are ending higher with credit
spreads gaining some ground over the course of the week.
But the real battle remains on the sovereign front. Italian and
Spanish government bond yields have been rising again and
this is dampening any upbeat tone in the markets as both
have large funding needs in the first months of the year.
There is more to come in the weeks ahead and although the
Q4 earnings season is starting next week and gathering
speed in the weeks ahead, we believe they will be only a
sideshow to the developing sovereign situation.
Cash Good start, weakness creeping in: The cash market was
better bid across all sectors in the opening session with a
feel good factor the market had not seen for some time.
Unfortunately, we close the week with a better two-way
dynamic and spread weakness creeping back into the
market. There have been plentiful levels of supply – senior,
covered and corporates; it’s been taken down well, but the
sovereign crisis has promoted higher government bond
yields, higher CDS/iTraxx levels and weaker equities.
Against that, cracks appeared in the cash market after that
excellent start. So we’ve had bit of a false dawn. We can
expect any pick-up in liquidity to fade from here and flows
might start to lighten up as well. Keep it safe, stay close to
‘core’ (Germany, Northern Europe and UK corporates),
avoid peripheral risk in all forms as far as possible.
Stay with core country risk
Prefer short term paper from HY and crossover names
Synthetics
market
iTraxx indices follow equities lead: The iTraxx indices
started 2012 in better shape than what we saw towards
the end of 2011. The synthetic baskets have seen some
improvement, particularly the financial contracts, but
overall there is little conviction and they seem vulnerable
to any negative development. In fact the iTraxx indices are
currently following the equity markets closely, as has been
the case in recent months. We expect the iTraxx indices to
remain hostage to the sovereign crisis in the coming
weeks and months, saddling the performance of the
European baskets vs the CDX IG index in the US.
Sell CDX IG vs iTraxx Main
Sell iTraxx Sen fins vs Sub fins
Sell Main vs X-Over
New issue
markets
Deluged, but music likely to stop: An excellent week for
issuance. One day with more than €10bn of financials and
non-financials combined (the first in two years), over €10bn
from financials for the week alone and well-over €10bn from
the covered bond sector. It doesn’t get much better and it
likely won’t either. Sovereign crisis newsflow is worsening and
peripheral sovereign yields are rising. iTraxx indices are rising
and single name CDS levels are too. As that sentiment
worsens, we’ll more than likely see less supply. But it was
good while it lasted. For sure, any small opening of the
window and issuers will jump to get deals printed. The
demand is there for the right name (from a core country risk
perspective) and they’ll need to pay up to get deals done,
which doesn’t seem to be too much of a problem given the
overall low level of funding.
New issue benchmarks
Bond Ratings Amt (€m) Spread at
launch
RENAUL 15 Baa2/BBB 700 B+525.3bp
BMW 15 A2/A- 1250 B+174.4bp
BMW 19 A2/A- 1250 B+192.3bp
PEUGOT 14 Baa1/BBB 650 B+604.2bp
Source: SG Cross Asset Research
F163049
Credit Strategy Weekly
6 January 2012
3 3
Top Picks and Pans
Cash CDS Buy Sell Buy protection Sell protection
Auto Fiat Industrial 2015, 2018 Buy PSA vs Sell Renault Sell Continental vs Michelin
Continental 2015, 2017 Sell Fiat Indl vs Fiat SpA
Valeo 2018
Bank ALVGR 4.625% perp Munich Re. 6.75% 23-13 Sell AXASA Sen vs Buy
AVLN Sen
& Insurance AXASA 5.777% perp, 6.211% perp Swiss Re. 5.252% perp Sell HANRUE Sub vs Buy
Sen
CCAMA 3.75% perp Sell AVLN Sub vs Buy Sen
AVLN 5.7% perp UT2 Sell ZURNVX Sub vs Buy
Sen
HANRUE 5% perp Sell MUNRE Sub vs Buy
Sen
KNFP 4.375% 2018, 4.5% 2019 Sell ALVGR Sub vs Buy Sen
BPCEGP 12.5% perp/2019 BPCEGP 2.625% 12/2012 Buy DB vs HSBC Sell Credit Agricole outright
ACAFP 5.971% 2018, 3.9% 2021 BACR 4.75% 49 Buy Monte Sell ACAFP vs KNFP
ISPIM 9.5% perp/2016, 5.375% 12/2013,
3.75% 2020/2015 Buy Caixabank
BCPPL 0 02/13, 02/12 Buy Bankia
HSBC 6.25% Mar-18
Consumers Pernod 2015, 2016, 2017 Carrefour 5.375% 2015,
4.375% 2016 Diageo
Imperial Tobacco, Pernod
Ricard
BAT 2020, 2021, Ahold £ 2017 Casino 4.481% 2018,
4.379% 2017 Metro Ahold, Metro
Rentokil 2014, Sodexo 2015 Tesco 5.875% 2018 Morrison
Morrison £ 2017, M&S £ 2019 Unilever 2015 Sainsbury, Kingfisher
Metro 4.25% 2017
Industrials Holcim £ 2017s Bayer 4.625 2014 Buy Anglo American vs
HiVol Sell UPM vs Buy Stora Enso
Heidelberg 2017 Lafarge 2020s Buy Stora vs Sell Xstrata
Alstom 3.625 2018
Saint-Gobain 2018s
TMT Telecom Italia 4.75% 2014 Vivendi 4.25% 12 2016 &
4.875% 12 2019 Buy WPP vs HiVol Buy Nokia vs X-over
SES Global 4.875% 07 2014 Nokia EUR2019
Portugal Telecom 3.75% 2012 Ericsson 5% 06 2013 Sell Wind vs Xover
Telefonica 3.406% 03 2015 Bertelsmann 3.625% 2015
Wind 2018
Utilities EDP 4.75% / 4.625% / 5.875% 2016
EDP €8.625% 2024 Elia 4.75% 2014 Sell RWE vs Main
GDF £6.125% 2021, Iberdrola £7.375% 2024 Veolia $ 6.75% 6/38
€ 6.75% 2019 Sell E.ON vs Main
Gas Natural 5.625% 2017, 4.5% 2020, Enel
£6.25% 2019 Sell EnBW vs Main
National Grid 4.125% 2013, 6.5% 2014 Sell Vattenfall vs Main
UUW 4.25% 2020, £5.75% 2022
EnBW 6.875% 2018, 4.125% 2015
E.ON 5.25% 2015, 5.5% 2016, 5.75% 2020
RWE 5% 2015, 6.5% 2021
Vattenfall 5.25% 2016, 6.25% 2021
EDISON 3.875% 2017 Elia 5.325% 2016
Source: SG Cross Asset Research
F163049
Credit Strategy Weekly
6 January 2012
4
Top trades
SG credit analysts’ top trades
Analyst Group Trade Date Trade Current spread
1st leg
Current spread
2nd leg
Principal
Target Comment
Autos 19-Oct Buy PSA vs Sell Renault 652bp 528bp 634bp
The lower-than-expected quarterly sales and pricing pressure
at PSA will challenge group guidance for 2011. As a result, our
autos analyst recommends Buying protection on PSA and
Selling protection on Renault. The target ratio on a 3-month
horizon is 1.2x with a stop loss at 3.0x.
Autos 04-Oct Sell Fiat Industrial vs Fiat SpA 835bp 1105bp 884bp
Although their CDS trade at similar levels, in our auto analyst’s
view, Fiat Industrial’s fundamentals are stronger than Fiat SpA’s,
and the former merits an IG rating. We therefore recommend
Selling protection on Fiat Industrial and Buying protection on
Fiat SpA. The target ratio on a 3-month horizon is 0.8x with a
stop loss at 1.2x.
TMT 11-Jul Buy Nokia vs X-Over 375bp 748bp 598bp
Nokia’s CDS has not been affected by the disappointment
over the NokiaSiemens Networks (NSN) disposal process or
the significant deterioration of the economic outlook in the
past month, which is a major factor for a company and sector
that remain highly cyclical. We believe Nokia trades too tight
vs the X-Over, and believe the Nokia/X-Over ratio should rise
from the current 0.59x to 0.8x.
Consumers 07-Nov Sell Imperial Tobacco vs Main 135bp 176bp 126bp
Considering the group’s stable sales and profits, and
improving credit profile, we see no fundamental reason for the
recent underperformance of Imperial 5y CDS vs the iTraxx
Main. The spread between the two reached 69bp on
11 September, and was 31bp on 7 November. We target a
spread of 50bp, and therefore open a Sell Imperial 5yr CDS at
143bp vs Buy Main index at 174bp.
Consumers 05-Dec Sell Pernod Ricard vs Diageo 168bp 98bp 108bp
Similar to Imperial Tobacco vs BAT, the Pernod Ricard CDS
suffers from the group’s leveraged profile, we expect that the
strong cash generating profile of the group, as well as its low
volatility on profits, will make it outperform its better-rated
peer in CDS. Target is a 10-15bp tightening in the current CDS
spread.
Industrial 19-Oct Buy Anglo American vs Sell HiVol 215bp 273bp 300bp
The news from early October that Codelco, the Chilean copper
company, plans to exercise its option to buy a 49% stake in
Anglo American Sur in January 2012, in addition to the bad Q3
results, is likely to drive Anglo's spreads. Our industrials
analyst therefore initiated a 3-month Buy AALLN 5yr CDS vs
HiVol trade recommendation at a spread ratio of 0.9 with a
target of 1.1, translating to a 60bp spread widening.
Banks 03-Oct Buy Barclays senior vs HSBC Sub 216bp 215bp 216bp
Our banks analyst recommends Buying protection on Barclays
senior CDS and Selling protection on HSBC subordinated CDS,
for a sub/senior cross as a means to hedge against ICB
implications. He recommends taking profits at 1.00x and placing
a stop loss at 1.35x.
Banks 08-Dec Sell Santander vs Buy BBVA
Subordinated 600bp 705bp -
Given a relatively larger property exposure and somewhat
lower flexibility to deal with EBA mandated capital targets, we
expect BBVA to underperform Santander, so we recommend
buying 5-year subordinated CDS protection on BBVA and
selling 5-year subordinated CDS protection on Santander.
Utilities 16-Sep Sell Vattenfall vs Buy Main 86bp 176bp 85bp As the sovereign crisis remains a key spread driver, we focus
on rebalancing our market recommendations towards German
utilities. We expect them to benefit from their relatively
stronger economics as they could be seen as safe havens in
the EU area. Also, we enter these utilities at the low point of
their credit profiles, following the negative impact of the U-turn
in Germany’s energy policy. We now expect a recovery of their
credit metrics by 2012, primarily on the back of their financial
discipline. Investing in German utilities also allows greater
alignment with the iBoxx index.
Utilities 16-Sep Sell E.ON vs Main 129bp 176bp 110bp
Source: SG Cross Asset Research
F163049
Credit Strategy Weekly
6 January 2012
The worksheet below shows a selection of our current sector switch ideas we would like to highlight. We also cover these ideas in our recent Liquidity Focus report.
+: Positive performance
-: Negative performance
Switch ideas of the week
LEG 1 LEG 2
Sector Product Indicator Reco Ticker Reco Ticker Entry Date
Target Type
Target point
Entry Point
Current/ Exit Point
FINANCIAL BOND ASW SPREAD SELL
XS0187043079 Han. Re 5.75% 02/24 BUY
XS0187162325 Allianz 5.5% 01/49 04/01/2012 Spread 400.0 397.8 423.1 +
FINANCIAL BOND ASW SPREAD SELL
XS0608392550 Munich Re 6% 05/41 BUY
XS0304987042 Mun. Re 5.767% 06/49 04/01/2012 Spread 250.0 348.7 356.3 -
FINANCIAL BOND ASW SPREAD SELL
XS0159527505 Allianz 6.5% 01/25 BUY
XS0206511130 Aviva 4.7291% 11/49 04/01/2012 Spread 550.0 801.5 810.7 -
CONSUMER CDS SPREAD SELL IMP. TOBACCO 5Y BUY iTraxx MAIN 5Y 07/11/2011 Spread 50.0 26.8 53.1 +
CONSUMER CDS SPREAD SELL SODEXO 5Y BUY COMPASS 5Y 07/12/2011 Spread 10.0 18.7 14.8 + Source: SG Cross Asset Research
F163049
Credit Strategy Weekly
6 January 2012
6
Macro and single name strategies
Macro view strategy
Sell CDX IG vs iTraxx Main: Since the second quarter of 2011 the CDX IG has
consistently outperformed the iTraxx Main as the latter has been saddled by the ongoing
sovereign crisis. With little chance of the crisis abating in a substantial way any time soon and
the economic slowdown in the eurozone looming, we expect the CDX IG index to continue
outperforming the iTraxx Main through the first months of 2012 at least. The ratio between the
two indices has been rising since Q2 as the sovereign crisis flared up, and we believe it can rise
towards the 1.8x level from 1.45x currently. We place stops at 1.3x.
iTraxx Main and CDX IG Main/CDX ratio
Source: Bloomberg SG Cross Quant Asset Research Source: Bloomberg SG Cross Quant Asset Research
Sell iTraxx Main vs iTraxx X-Over: This is one of our core calls for 2012. The X-Over
index performed extremely well in the past few years given its lack of financial components
and the high yield it offers in the current low yield environment. But the economic slowdown
and potential recession should have a much more pernicious effect on high yield companies
than IG corporates, so the X-Over should underperform the Main. The ratio between the two
indices has stabilised around the 4.3x level, we expect the ratio to rise towards 6x and we
place stops at 3.9x.
iTraxx Main and X-Over X-Over/Main ratio
Source: Bloomberg SG Cross Quant Asset Research Source: Bloomberg SG Cross Quant Asset Research
60
80
100
120
140
160
180
200
220
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
iTR
AX
X X
-Ove
r C
ontr
acts
Main IG 5yr
0.80x
1.00x
1.20x
1.40x
1.60x
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
Europe/US
60
80
100
120
140
160
180
200
220
240
300
400
500
600
700
800
900
1000
1100
1200
Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12
Main
F
inancia
l C
ontr
acts
iTR
AX
X X
-Ove
r C
ontr
acts
Xover Main
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
XOver/Bmark
F163049
Credit Strategy Weekly
6 January 2012
7 7
Sell €10m iTraxx Senior financials vs €10m Sub financials: The ratio between the
two financial baskets remained stuck around 1.6x to 1.8x throughout most of 2011, but as both
indices have come under pressure, this has translated into an ever increasing spread differential.
We believe that since there is little chance of seeing a comprehensive solution to the sovereign
crisis in the short term, the spread between the two financial indices will continue to increase
and we target 270bp with a stop loss at 200bp.
iTraxx Senior and Sub financials Sub/Senior ratio
Source: Bloomberg SG Cross Quant Asset Research Source: Bloomberg SG Cross Quant Asset Research
0
100
200
300
400
500
600
700
0
50
100
150
200
250
300
350
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
Sen Fin'l 5yr Sub Fin'l 5yr (rhs)
40
80
120
160
200
240
280
1.2x
1.4x
1.6x
1.8x
2.0x
2.2x
2.4x
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
Sub/Senior ratio Sub - Senior (rhs)
F163049
Credit Strategy Weekly
6 January 2012
8
Overview
Welcome to 2012. We started the New Year on a positive note as if the woes and risks of the
sovereign crisis were confined to 2011. Equity markets across the globe started with an
upbeat tone, peripheral government yields improved a little and single name sovereign CDS
levels fell, while cash credit caught a good bid. There’s also been a deluge of supply,
especially in financials and covered bonds. Alas we end the week on less firm footing as
sovereign yields move up sharply, headline and event risk increases and cash credit becomes
a little more circumspect.
On close inspection, the same themes that derailed the second half of 2011 will dominate at
least the first half of 2012. That is, the sovereign crisis is far from over and we have yet to see
how deep and long the economic slowdown lasts, particularly in Europe. Italy and Spain have
large amounts to raise in the coming months and despite the former’s change in government
and the austerity measures announced, the 10-year bond yield continues to hover around the
7% level. And the new government in Spain indicated that the deficit may be higher than 8%
in 2011 vs a previous estimate of 6% which isn’t very reassuring. Towards the end of the
week, these ongoing concerns caused the bullish trend in the markets to stall.
The bigger problem is that it seems the answer to the crisis is no longer in the hands of
politicians who have had 20 months to come up with a credible plan but have failed to do so.
It is apparent that they are incapable of understanding the crisis, much less finding solutions
as they grapple with taxpayer frustration and their own electoral cycles. This increasingly
leaves the burden on the shoulders of the ECB, but for now the central bank’s hands remain
tied. Nevertheless, at least it is doing what it can to alleviate the tensions for the banking
sector. The LTRO towards the end of last year was taken handsomely by European banks and
this has eased much of the funding needs in the short term. We believe senior issuance will
still be excessively low given the wide levels of spreads but this will no longer be such a
concern. However the LTRO’s result doesn’t necessarily mean banks will buy sovereign debt
or increase credit to the economy.
So how will credit fare in the coming 12 months? To us, among the major asset classes, credit
remains the one that offers the most attractive risk/reward profile, particularly IG as default
risk will remain negligible throughout the year. However, credit is not exempt from
redenomination risk. Worries of a partial or total euro break up which were laughable a year
ago are not negligible any longer and thus, we recommend investing in core non-financials,
avoiding peripherals, increasing exposure to short-term paper including high yield bonds and
adding through new issues with good premiums. If we ever get over the sovereign crisis and
credible and sustainable solutions arise, then we'll look to change the allocation to a more
traditional cyclical vs non-cyclicals depending on where we are in the economic cycle at that
time. But that's still not the case for now.
F163049
Credit Strategy Weekly
6 January 2012
9 9
Market review and outlook
Market review
A new year but the same old troubles: The New Year started with some impetus with
equities rising initially and credit spreads improving. We also had strong issuance by banks
and corporates, and on the sovereign side France had an overall positive auction raising
almost €8bn while the EFSF raised a further €3bn at MS+40bp (yield of 1.77%), and the
economy is throwing some mixed numbers, which in the current context is not too bad.
However, not everything is rosy and the problems that have been haunting Italy and Spain
continue. The sovereign crisis is far from over, and the markets remain vulnerable to any
deterioration on the sovereign front. We are still looking for a comprehensive solution to the
crisis, and although there has been some progress, it is by no means over.
French and German 10-year government bonds diverge again
Source: iBoxx, SG Cross Asset Research
Primary markets open with style: We had a very strong opening to the year including
almost €10bn of supply from the corporate sector (fins + non-fins) on a single day (on
Wednesday) which marks the best daily total we’ve seen since 07 Jan 2010. It wasn't a dash
for cash by the corporate sector in order to take advantage of - and satisfy - strong investor
demand. Instead, we're seeing a steady addition of risk surprisingly across most of the corporate
credit spectrum, and additionally we’ve seen very strong volumes in the covered bond space.
However it is true that the issuance we had so far is coming from ‘core’ European borrowers, so
fairly defensive in light of how the sovereign debt crisis might unravel. And the new deals are
coming with the necessary new issue premium to get them away despite being at a time of the
year when there is much pent-up demand anyway. As a result it is all boosting confidence in the
asset class, but it has left non-core corporates wondering what is in store for them this year. We
even had the EFSF, which struggled to issue a long 10-year €3bn in last November (MS+104bp),
issue a €3bn 3-year deal at MS+40bp. The following table shows how the newer issues from the
EFSF have been priced at considerably wider levels than the first ones.
EFSF benchmark issues
Date Issue Maturity Amount (€m) Price at issue
25-Jan-11 EFSF 2.75% Jul-16 3000 MS+6bp
15-Jun-11 EFSF 3.375% Jul-21 3000 MS+17bp
22-Jun-11 EFSF 2.75% Dec-16 3000 MS+6bp
07-Nov-11 EFSF 3.5% Feb-22 5000 MS+104bp
05-Jan-12 EFSF 1.625% Feb-15 5000 MS+40bp
Source: SG Cross Asset Research
0bp
50bp
100bp
150bp
200bp
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Bund OAT
F163049
Credit Strategy Weekly
6 January 2012
10
Investment grade
We had a very strong opening in IG with as many as four deals from three issuers. The deals
came from ‚core‛ corporates and autos were the most active issuers as is usually the case.
The first off the blocks this year was BMW with a dual tranche as the company raised €1.25bn
with a 3-year bond at MS+83bp and a further €1.25bn with a 7-year bond at MS+125bp. The
new issue premium was around 20bp for both deals. This was followed by RCI Banque which
raised €1bn with a 3-year bond. The company raised €700m at MS+430bp or NI of around
60bp. This was quickly followed by Banque PSA which raised €650m with a 2.5-year bond at
MS+479.7bp.
New issue benchmarks
Date Issuer Coupon Maturity Amount €m Pricing Yield at issuance
04-Jan RCI Banque 5.625 13-Mar-15 700 B+525.3bp 5.7%
04-Jan BMW 2.125 13-Jan-15 1250 B+174.4bp 2.2%
04-Jan BMW 3.25 14-Jan-19 1250 B+192.3bp 3.3%
05-Jan Banque PSA 6 16-Jul-14 650 B+604.2bp 6.1%
Source: SG Cross Asset Research
The amount totalled €3.85bn, marking a decent opening for the year. As we can see, January
tends to be strong before volumes drop in February, partly due to the earnings season and the
blackout periods.
Investment grade non-financial corporate supply
EUR (m) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
January 23,385 22,688 24,850 11,532 9,750 11,225 9,802 7,825 48,500 12,600 12,600 3,850
February 12,004 9,780 19,640 4,562 4,520 11,135 11,235 5,120 33,550 6,888 5,850
March 23,607 17,365 3,930 9,130 8,645 10,435 17,275 10,275 33,100 23,100 9,050
April 18,909 15,971 15,565 6,291 4,115 6,145 8,125 17,840 17,550 8,700 3,635
May 21,682 22,197 16,221 14,486 6,875 17,600 17,055 19,455 35,900 1,258 14,700
June 21,211 12,038 24,026 10,617 19,865 11,580 17,600 14,165 19,125 8,675 4,220
July 23,280 4,825 13,037 13,013 2,300 5,100 3,300 6,190 12,115 5,259 6,400
August 4,265 2,168 1,325 722 1,500 5,450 2,000 10,925 3,475 500 0
September 6,543 9,849 18,443 13,755 6,550 13,567 12,825 7,100 26,200 17,170 6,700
October 17,126 3,119 12,715 6,332 4,500 12,880 13,315 3,650 9,550 13,057 12,550
November 21,488 9,126 10,987 7,109 15,925 18,880 6,320 23,050 9,800 11,750 7,950
December 6,661 7,258 4,538 3,350 2,665 2,140 4,400 7,875 2,625 1,000 6,450
Total 200,161 136,384 165,277 100,899 87,210 126,137 123,252 133,470 251,490 109,957 90,105 3,850
Source: SG Cross Asset Research
Financials
In the second half of 2011 we had only €11.8bn of senior unsecured bank debt, and almost
matched that in just the first week of the new year. Many of the bonds have a short term
maturity, but we also had some longer dated bonds in the mix. Admittedly, the issues came
from solid core banks, but other banks have used covered bonds also this week, and the
combination is easing funding concerns, particularly following the strong pick up of cash in
last year’s LTRO exercise from the ECB.
F163049
Credit Strategy Weekly
6 January 2012
11 11
New senior issuance
Date Ticker Coupon Maturity Amount €m Pricing
04-Jan RABOBK 4 11-Jan-22 1750 B+221.9
04-Jan NBHSS 4 11-Jul-19 1250 B+257.6
04-Jan NBHSS 2.253 10-Jan-14 1000 €3m+95
04-Jan ABNANV 2.803 10-Jan-14 1250 €3m+150
04-Jan ABNANV 4.75 11-Jan-19 1000 B+342.1
05-Jan RABOBK 2.003 13-Jan-14 2750 €3m+70
05-Jan BFCM 1.453 12-Jul-13 125 €3m+150
05-Jan SEB 3.875 12-Apr-17 750 B+313.4
Source: SG Cross Asset Research
Senior financial supply 2003-2012
EUR (bn) 2004 2005 2006 2007 2008 2009 2010 2011 2012
January 38.1 54.7 48.2 90.5 17.8 11.3/33.3 34.15/9.3 26.3/0.13 9.875/0
February 29.6 27.6 43.2 42.5 15.8 4.1/24.25 14.6/4.55 19.8/3.55
March 26.9 31.2 49.2 42.4 15.8 8.25/22.7 20.7/6.5 17.75/1.6
April 23.6 20.3 18.8 23.2 41.7 23.0/25.0 6/1.25 20.13/0
May 25.6 22.7 31.8 47.5 38.8 18.8/11.3 0.65/0 20.1/1.8
June 29.7 42.4 22.7 32.7 28.7 14.2/4.6 10.3/1.35 5.95/0
July 30.8 10.9 15 12.7 12.3 12.6/9.3 18.73/0 1.3/0
August 7.4 14.4 11 6.9 21.8 10.6/0.5 4.5/0 0/0
September 46.3 19 41.2 11 7.3 13.0/3.8 21.65/0.65 2.5/0
October 17.6 17.3 47 16.2 0 / 6 10.5/4.9 15.3/0.75 6.8/0
November 25.9 23.5 34 3.7 0 / 17.5 18.2/2.4 6.6/3.99 1.11/0
December 9 12.1 6.9 0 4.6 / 15.7 7.5/1.6 0.49/0 0/0
Total 310.5 296.1 369.0 329.3 204.6 / 39.2 151.8/143.4 153.7/28.3 121.8/7.08 9.875/0
Source: SG Cross Asset Research
iTraxx indices start the year on the right foot but fail to improve: The iTraxx
indices improved during the year-end holiday period and opened 2012 in better shape than they
were in the first half of December. However, they failed to improve much from opening levels, even
giving up some ground. The Main index was as low as 167.75/169.25bp at one point as equities
gained early in the week, but later the benchmark index lost some of the ground gained and settled
around the 174bp level for most of the time. Towards the end of the week however, the impetus
seen at the start faded away completely and spreads started to widen again. We are closing with
the iTraxx Main at 178/1795bp (+5bp from last Friday's close), the HiVol at 275/285bp (+2bp), the
X-Over at 755/759bp (unchanged), the Senior financials at 292/296bp (+13bp) and the
Subordinated financials at 525/535bp (+13bp).
iTraxx improve in late December… … but rally stops in early January
Source: Bloomberg, SG Cross Asset Research
0
60
120
180
240
300
360
0
250
500
750
1000
1250
1500
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Main
& S
enio
r F
inancia
l C
ontr
acts
iTR
AX
X X
-Ove
r C
ontr
acts
Xover Main Sen Fin'l 5yr
50
100
150
200
250
300
350
400
450
500
550
600
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
iTR
AX
X X
Contr
acts
Hivol Sub Fin'l 5yr (rhs)
F163049
Credit Strategy Weekly
6 January 2012
12
Currently, the iTraxx Main index is taking its cue from the equity markets, following the DJ
Stoxx 50 closely as we can see in the left hand chart below. However, the relationship with the
equity world is not always stable and last year we could see stocks outperforming the iTraxx
indices through most of Q1 and part of Q2. Furthermore, the benchmark index had a very high
correlation with the Vix index but as we can see in the right hand chart below, the two have
decoupled sharply since October last year. Nevertheless, currently, to a large extent, get the
equity move right and you’re bound to get the iTraxx Main move right too.
iTraxx Main and DJ Stoxx 50 iTraxx Main and Vix
Source: SG Cross Asset Research
All the iTraxx indices gained some ground versus where they were in the first half of December, but
none as much as the financial baskets, particularly the senior financial index (at some point 16%
tighter than back then). This is not surprising given recent developments like the LTROs. Recent
issuance of both covered and senior unsecured bonds have eased funding concerns for the banks
and they have also reduced their exposure to sovereign risk. However, spreads remain at
extremely elevated levels and we do not believe that banks are out of the woods yet. They still
remain very dependent on the fortunes of the peripheral governments and on the sovereign crisis
as a whole. Without a comprehensive and sustainable solution to the crisis, we believe financials
will remain under constant risk of underperforming and we saw evidence of this towards the end of
the week as the Senior and Sub financial baskets widened at a faster pace than the Main.
iTraxx baskets indexed to 1 in Jan 2011
Source: SG Cross Asset Research
1800
2000
2200
2400
2600
2800
3000
320050
70
90
110
130
150
170
190
210
230
250
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
S&
P500 in
reve
rse ord
er
Rollin
g M
ain
contr
acts
Rolling Main DJ Stoxx 50
10
15
20
25
30
35
40
45
50
80
100
120
140
160
180
200
220
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
Rollin
g M
ain
contr
acts
Rolling Main Vix
0.6x
1.0x
1.4x
1.8x
2.2x
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
Bmark HiVol X-Ov er Sen Fins Sub Fins
F163049
Credit Strategy Weekly
6 January 2012
13 13
Volatility drops despite nervousness: The 1-month realised volatility dropped
through the week but it is much higher than where it started last year as we can see in the
following table. Also, the dispersion among the baskets is quite large with the X-Over
exhibiting the lowest volatility at under 40%, while the Senior financials remains the most
volatile of all with realised volatility of just under 60%. The higher volatility of the financial
baskets stems from the larger swings given their proximity to the sovereign crisis and this is
unlikely to change any time soon.
1-month realised volatility
03-Jan-11 02-Jan-12 30-Dec-11 05-Jan-12 Week change YTD change
Main 18.00% 44.74% 48.87% 42.47% -6.40% -2.27%
HiVol 19.74% 55.91% 59.99% 42.76% -17.23% -13.15%
X-Over 19.18% 38.28% 41.00% 36.69% -4.31% -1.59%
Senior Fins 37.57% 65.77% 73.34% 59.10% -14.24% -6.67%
Sub Fins 51.54% 57.21% 64.17% 51.76% -12.41% -5.45%
Source: SG Cross Asset Research
Cash market sees two way flows: The cash market had a busy start to the year with
lots of bids in the first sessions but as the week progressed we saw a two-way flow dynamic
emerge, instead of a bid-only mode and spreads improved through the course of the week.
However, the iBoxx Corporates index jumped 100bp as the index underwent some changes at
the turn of the year. Most bonds (70%) were priced off French government benchmarks, but
as of January they are now all priced off German government bonds. Although the price and
yields of the bonds didn’t change, the spread to benchmarks are now some 100bp wider,
reflecting the differential between bunds and OATs (roughly around 100bp depending on
maturity). So the index moved from 265bp of spreads to benchmarks on 31 December to
360bp on 2 January.
iBoxx index widens on rules change
Source: iBoxx, SG Cross Asset Research
As we can see in the following charts, the spreads of all financials, non-financials and overall
corporates jumped in January but the actual yield of the different indices remained undisturbed. In
fact, the yield on the Corporates index dropped by 9bp from last year’s close to 4.65% with the
financials yield down by almost 20bp to 5.78% and non-financials flat at 3.77%.
50
100
150
200
250
300
350
400
450
500
Jul-07 Nov -07 Mar-08 Jul-08 Nov -08 Mar-09 Jul-09 Nov -09 Mar-10 Jul-10 Nov -10 Mar-11 Jul-11 Nov -11
Sp
rea
d t
o B
en
ch
ma
rk
iBoxx Corporates
F163049
Credit Strategy Weekly
6 January 2012
14
Spread to benchmarks jump on new benchmarks Yields remain unchanged
Source: SG Cross Asset Research
Industry sectors gain in the first week of the year: Most industry sectors have
gained since the beginning of the year (we take data as of 2 January to avoid the turn of the
year distortion mentioned above), particularly the subordinated sectors. Financials performed
well given the recent developments (LTROs, strong issuance levels) while non-financials
lagged behind, particularly the Auto sector which is not surprising given the issuance levels
we saw this week. We expect spreads will continue to tighten at a slow speed as concerns
over the sovereign crisis dampen the initial bullish sentiment.
Cash spreads since the beginning of the year
Source: iBoxx, SG Cross Asset Research
Peripheral yields remain at elevated levels: Peripheral yields are starting the year at the
same high levels they ended 2011. GGBs remain extremely strained as the PSI process remains
unclear with the 10-year yielding around 31%. The PGB 10-year yield was largely unchanged at
around 12.5% and the IRISH bond improved mildly and is now below the 8% level. In the
meantime, Italian and Spanish bonds started the year well, but started drifting wider and the 10-
year BTPS is back to the 7% level. In Spain, the new government announced the 2011 deficit may
well be above 8% vs a target of 6% but this may be an exercise to blame the previous government
for more austerity measures. In any case, the situation of Italy and Spain remains difficult and will
continue to be the main drivers of the sovereign crisis for now.
0bp
200bp
400bp
600bp
800bp
Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
iBoxx Corporates Financials Non-Financials
3%
4%
5%
6%
7%
8%
9%
10%
Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
Corporates Financials
-9%
-6%
-3%
0%
3%
-30bp
-20bp
-10bp
0bp
10bp
1w 1w %
F163049
Credit Strategy Weekly
6 January 2012
15 15
Peripherals barely move Italian, Spanish yields head higher
Source: Bloomberg SG Cross Quant Asset Research
Italian curve improves: Although the 10-year BTP yield remains close to the 7% level, the
term structure of Italian government bonds has seen a substantial improvement in the short term.
Back in late November last year, the short end saw yields rise aggressively to a point where the
2/10y curve inverted for a short period of time. The curve remained flat for a while but it improved
through December and it is now showing a short end, well below the late November levels.
Italian curve improves from late November levels
Source: iBoxx, SG Cross Asset Research
Safe haven government bond yields remain low: The safe haven bunds opened the
year at still low levels and the curve registered very small movements throughout the week. The 10-
year yield dropped by a small amount and is now around the 1.85% level. In the US, the 10-year
treasury yield rose slowly through the week but remains around the 2% level. In both cases we can
see that there is hardly any appetite for moving away from the safer investments as there is still
much uncertainty over the sovereign crisis and the evolution of the economic recovery.
3%
6%
9%
12%
15%
Oct-07 Oct-08 Oct-09 Oct-10 Oct-11
Portugal 10y Ireland 10y Spain 10y Italy 10y
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Spain 10y Italy 10y
0%
1%
2%
3%
4%
5%
6%
7%
8%
10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42
Italy 25-Nov
F163049
Credit Strategy Weekly
6 January 2012
16
EU sovereign bonds US Treasury curve
Source: Bloomberg SG Cross Quant Asset Research
Sovereign CDS unable to improve: The sovereign CDS spread of most European
sovereigns increased throughout the week with Spain coming under the most pressure. The
Spanish 5-year CDS widened by around 50bp to 444/454bp. Other peripherals widened by smaller
amounts and Greece hardly moved although it remained at an extreme 68.5/71.5 cash points
upfront. Core countries also saw spreads widening with France rising to 231/237bp (+16bp on the
week) and Germany at 110/114bp (+10bp).
Sovereign risks in cash rise Sovereign CDS under pressure
01-Jan-09 31-Dec-10 30-Dec-11 06-Jan-12
Germany 46 58 104 112
France 54 101 222 236
Belgium 80 218 316 341
Spain 101 350 393 450
UK 107 72 98 103
Italy 157 238 503 533
Portugal 96 500 1093 1102.5
Greece 232 1074 3750 3726
Ireland 181 615 726 707
Source: Bloomberg SG Cross Quant Asset Research
The disappointing performance of the sovereign CDS put pressure on the SovX index which
widened almost 30bp to 380/386bp during the week, close to the widest levels recorded yet.
The sovereign basket underperformed the iTraxx indices and the spread differential between
them increased yet again setting new highs vs the Main in the process.
-12
-9
-6
-3
0
3
6
9
12
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
0 5 10 15 20 25 30
Basis
poin
ts
Yie
ld (
%)
Years to Maturity
Yield differential (rhs) 05-Jan-12 30-Dec-11 21-Dec-11
-12
-9
-6
-3
0
3
6
9
12
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
0 5 10 15 20 25 30
Yie
ld (
%)
Years to Maturity
Yield differential (rhs) 05-Jan-12 30-Dec-11 06-Dec-11
0bp
100bp
200bp
300bp
400bp
500bp
600bp
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Bund BTPS Bund SPGB Bund OAT
F163049
Credit Strategy Weekly
6 January 2012
17 17
SovX, Main and Senior financials Differentials head higher
Source: Bloomberg, SG Cross Asset Research
Money markets remain strained: The money market tensions in Europe remain strained
despite the LTROs which eased the pressure on the funding needs of banks. The 3-month OIS
spread has dropped only by a limited amount and it is currently at 94bp, off the recent highs of
100bp. In the US, the spread differential is much lower at 50bp but it has been on a slowly rising,
almost linear trend, since late July last year showing the strains are not just a European problem.
Euro money market tensions US money market tensions
Source: Bloomberg SG Cross Quant Asset Research
Equity markets’ unsure start: The equity markets on both sides of the Atlantic started the
year on the right foot but the bullish sentiment didn’t last too long and equities gave up some of the
ground gained. Concerns over the sovereign crisis pushed European bourses lower, particularly
those Italy and Spain. In contrast, the Dax was much more resilient and is closing the week ahead
of all others for now. In the meantime, in the US equities were generally volatile and are closing the
first week on positive territory. At the same time, the Vix index remained stable in the low 20s after
dropping through December from the 30% level.
50bp
100bp
150bp
200bp
250bp
300bp
350bp
400bp
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
SovX Main Senior
-40bp
0bp
40bp
80bp
120bp
160bp
200bp
240bp
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
SovX - Main SovX - Senior
0bp
25bp
50bp
75bp
100bp
125bp
150bp
175bp
200bp
May-07 May-08 May-09 May-10 May-11
Euribor - Eonia
0bp
50bp
100bp
150bp
200bp
250bp
300bp
350bp
May-07 May-08 May-09 May-10 May-11
US Libor - Swaps
F163049
Credit Strategy Weekly
6 January 2012
18
Equities bullish but volatile… …but Vix index remains low
Source: Bloomberg, SG Cross Asset Research
Economic data points to mild slowdown for now: The data in the eurozone was
generally better than expected, particularly with the PMI services for December which were
slightly ahead of the first flash. However, other data wasn’t as good and the unemployment
rate remains very high. In the US, the ISM indices also saw some improvement over the
previous month’s results and the ADP employment figure showed an impressive result which
was later confirmed by the non-farm payrolls number and the drop in the unemployment rate.
Economic releases – 2 January to 6 January
Eco release Period Survey Actual Previous Comment
Europe
PMI manufacturing Dec F 46.9 46.9 46.9
The euro-area output contraction was confirmed by the second reading.
A reading below 50 indicates a contraction of the area (below 40 is a
recession period).
PMI composite Dec F 47.9 48.3 47.9 The composite index rose on the back of the services component
PMI non-manufacturing Dec F 48.3 48.8 48.3
CPI estimate Dec 2.8% 2.8% 3% Euro-area inflation in December falls to 2.8%
Industrial new orders Oct 3.3% 1.6% 1.6%
Consumer Confidence Dec F -21.2 -21.1 -21.2
Retail sales Nov -0.4% -0.8% 0.4%
Unemployment rate Nov 10.3% 10.3% 10.3%
UK
PMIs Dec 47.3 49.6 47.6 UK Manufacturing shrank less than forecasts in December.
US
ISM manufacturing Dec 53.5 53.9 52.7 Manufacturing is improving in the US entering 2012
ISM non manuf. composite Dec 53 52.6 52
ADP Dec 178K 325K 206K
Companies added more workers than what the market was expecting in
December. This is the highest reading in records going back to 2001.
However, the data is purged in December which can lead to strange
results in January.
Initial jobless claims Dec 31 375K 372K 381K
Nonfarm payrolls Dec 150K 200k 120K
Unemployment rate Dec 8.7% 8,5% 8.6%
Source: SG Cross Asset Research
600
800
1000
1200
1400
1600
1800
1500
2000
2500
3000
3500
4000
4500
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
DJ Stoxx 50 S&P (rhs)
15%
20%
25%
30%
35%
40%
45%
50%
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
VIX
F163049
Credit Strategy Weekly
6 January 2012
19 19
High yield market
The high yield market began 2012 strongly in line with the larger IG market. Initially there were
only buyers although most bids were for the safer paper. Later on, activity slowed as bids
became scarce. As the week progressed, we started to see a two way flow, and towards the
end, bond prices were dropping somewhat. The iBoxx high yield index also widened by
around 90bp at the turn of the year, but this has a lesser optical effect than in the case of the
IG index. Furthermore, spreads tightened through the week and are closing some 40bp tighter
than where they were on Tuesday.
iBoxx High Yield Corporates and iBoxx IG Corporates indices
Source: SG Cross Asset Research
Issuance remains awol for now: We haven’t had any issues in the high yield sector
since early November when Norcell came to the market. However, the activity we’ve seen this
week shows there will be windows of opportunity opening through the year and we believe
issuers will take those opportunities to raise funds in the capital markets. As a reminder, we
have a forecast of around €20bn for 2012.
High yield supply 2004-2011
EUR (m) 2004 2005 2006 2007 2008 2009 2010 2011
January 535 2,422 3,673 4,445 0 275 5,190 2,775
February 990 1,385 1,568 2,724 0 0 200 1,957
March 1,080 1,960 1,965 1,352 0 400 4,953 9,013
April 3,863 1,303 5,124 4,552 0 400 6,264 4,143
May 2,146 260 2,875 4,878 0 1,212 810 5,770
June 1,910 985 160 6,595 0 650 2,395 2,345
July 661 1,270 385 998 0 3,375 3,871 3,125
August 0 500 1,553 0 0 0 640 0
September 1,215 1,880 1,265 0 0 3,629 5,650 700
October 1,110 300 4,592 0 0 7,000 7,117 100
November 1,110 965 3,225 0 0 6,680 4,187 637
December 530 1,300 2,765 0 0 2,915 600 0
Total 15,150 14,530 29,150 25,544 0 26,536 41,876 30,565
Source: SG Cross Asset Research
100bp
200bp
300bp
400bp
500bp
600bp
400bp
800bp
1200bp
1600bp
2000bp
2400bp
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
iBoxx High y ield iBoxx Corp. (rhs)
F163049
Credit Strategy Weekly
6 January 2012
20
Sterling market update
Unlike the euro index, there were naturally no changes to the GBP iBoxx Corporates index.
The index pushed a bit tighter after the end of December rebalancing, and it has gained
around 20bp from where it was one month ago now standing at 324bp over gilts, mainly on
the back of buying interests we have seen in the first session of the year. However, we saw
some sellers of senior bank paper against the covered Barclays bond as well as Dong and
Daimler new issues in IG this week.
GBP iBoxx gains ground Financials widen the most
01-Jan High/Low 1m
view Fins 311bp 525bp 516bp 544/253bp
Non-fin 141bp 218bp 216bp 227/0bp
As 210bp 342bp 285bp 359/245bp
BBBs 282bp 444bp 471bp 474/245b
A to 128bp 183bp 177bp 196/120bp
Telco 168 p 264bp 257bp 280/149bp
Industrials 196bp 281bp 279bp 286/176bp
Retail 113bp 167bp 166bp 174/103bp
Util 132bp 228bp 218bp 236/123bp
unchanged, wider, tighter
Source: iBoxx, SG Cross Asset Research
We had a good start to the year on the issuance side with Daimler tapping the market with
£100m and an issue from Dong Energy which printed a £750m deal at 205bp over gilts. Those
two deals open the year with a £850m total which compares to the £900m total we saw in
January last year.
IG corporate supply
GBP (m) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
January 1,200 1,725 1,375 1,070 1,668 0 2,410 1,700 800 4,743 1,050 900
February 800 1,205 1,275 1,800 400 1,015 1,575 1,550 1,250 6,225 405 3,250
March 1,125 1,235 1,935 1,500 4,200 350 2,675 2,650 1,000 4,250 1,815 2,050
April 236 1,885 2,550 1,185 800 350 0 1,250 2,050 6,550 680 0
May 916 1,875 4,650 2,050 948 500 1,950 1,950 1,525 6,475 0 4,140
June 1,075 1,600 1,775 1,275 1,865 1,650 250 2,672 535 4,050 875 1,300
July 350 1,875 600 400 366 1,400 1,450 0 800 1,400 1,890 470
August 150 150 250 250 500 0 300 1,319 800 0 0 0
September 155 725 1,360 1,300 1,700 1,850 3,400 93 1,975 4,600 3,950 1,350
October 1,377 1,957 500 2,000 175 2,695 1,900 3,500 825 1,200 3,000
November 743 2,560 2,622 775 100 1,355 4,525 350 1,925 4,150 2,625 2,125
December 955 2,050 625 1,500 1,030 350 2,225 200 1,400 1,160 500 1,600
Total 9,081 18,842 19,517 15,105 13,752 11,515 22,660 17,234 14,885 44,803 13,790 20,186
Source: SG Cross Asset Research
0
100
200
300
400
500
600
700
800
900
1000
May 07 Nov 07 May 08 Nov 08 May 09 Nov 09 May 10 Nov 10 May 11 Nov 11
iBoxx Corp Financials Non-financials
F163049
Credit Strategy Weekly
6 January 2012
21 21
Quant matters
Dynamic asset allocation between equity and credit based
on macroeconomic indicators
We propose allocation strategies between equity and credit total return indices (TRI) based on
the ISM manufacturing index. We show that the performance of equities relative to credit is
strongly related to economic cycles and we choose the ISM manufacturing index to represent
these cycles. Equities outperform credit in expansion periods (ISM > 50) while credit performs
better in contraction periods (ISM < 50). We create total return indices based on equity and
credit indices and define the allocation between equity and credit as a simple function of the
ISM index. The portfolio will be more equity driven when the ISM is high and more credit
driven when the ISM is low. The current allocation is more equity weighted (80% equity, 20%
credit) as the average ISM over the past 12 months (55.6) has been significantly above 50.
We design four systematic strategies in Europe and in the US based on this allocation process:
EuroStoxx50/iTraxx Main TRI, EuroStoxx50/iTraxx X-Over TRI, S&P500/CDX IG TRI and
S&P500/CDX HY TRI and apply risk management methods to control the volatility of the strategy.
We backtest the four systematic strategies over the past 20 years. All equity/credit allocation
strategies outperform both equity and credit indices on a long-term horizon and show better
persistence of the performance over time. Default rates have been very low over the past two years
but the last quarter has shown a net increase of credit events. Using CDS auctions referred on the
Credit Fixings website (Markit group), there have been eight auctions in the last quarter, two of
them are in the last series of the CDX High Yield index: Dynegy Holdings and PMI Group.
All details are available in the full article: Dynamic asset allocation between equity and credit
based on macroeconomic indicators.
The relative performance of equity to credit is linked to
economic cycles
Performance of EuroStoxx / iTraxx TRI allocation strategy
compared to equity and credit indices
Source: SG Cross Quant Asset Research Source: SG Cross Quant Asset Research
iTraxx and CDX equity tranches are getting close to
maturity with still attractive yields
5y 0-3% iTraxx Main and CDX IG S9 tranches are now close to mature. The 5y CDX IG S9
series will mature in December 2012 while the 5y iTraxx Main S9 series maturity is in June
2013. The CDX IG 0-3% tranche width is now 2.3% after four defaults: Federal National
Mortgage Association, Federal Home Loan Mortgage, Washington Mutual and CIT Group).
There has been no default in the iTraxx S9 series.
-0.4%
-0.3%
-0.2%
-0.1%
0.0%
0.1%
0.2%
0.3%
-10
-5
0
5
10
12
m t
rail
ing
ave
rag
e e
qui
ty-c
red
it
da
ily
pe
rfo
rma
nce
ISM
-50
ISM (-50) Equity-credit perf
ISM > 50, equities outperform credit
ISM < 50, equities underperform credit
0
2
4
6
8
10
Pe
rfo
rma
nc
e
Equity/Credit portfolio
Strategy with vol target
Equity TRI
Credit TRI
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As the short term index spreads remain wide (5y S9 iTraxx Main: 170bp, CDX IG: 129bp)
equity tranche prices remain very attractive despite the time decay effect: 44% for the Main
and 38% for the CDX IG (upfront + 500bp running). This translates into strong yields to
maturity in a no default scenario: 58% for the Main, 73% for the CDX. If we assume one hard
default before the maturity in each index with no recovery (very conservative assumption),
yields remain attractive: 31% for the Main, 26% for the CDX. The break-even in term of
number of hard defaults with no recovery in the indices is two defaults for the CDX and three
defaults for the Main. According to our recent piece: Forecasting default rates from market
and economic data this corresponds to the most pessimistic scenario on global default rates.
5y equity tranches remain attractive despite closing maturity Yield to maturity a function of the number of defaults
Source: SG Cross Quant Asset Research Source: SG Cross Quant Asset Research
0%
10%
20%
30%
40%
50%
60%
70%
Pri
ce (
UF
+ 5
00bp r
unnin
g)
Jun-13 0-3% Main
Dec-12 0-3% CDX
-60%
-40%
-20%
0%
20%
40%
60%
80%
0 1 2 3 4 5
Yie
ld to m
atu
rity
Number of hard default
0-3% Main
0-3% CDX
Global default rate forecast
Source: SG Cross Asset Research
0%
1%
2%
3%
4%
5%
6%
7%
Oct-83 Oct-85 Oct-87 Oct-89 Oct-91 Oct-93 Oct-95 Oct-97 Oct-99 Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13
Defa
ult
rate
Base line Pessimistic Very pessimistic Optimistic
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Next week: preview
Earnings season starts next week: Officially the Q4 earnings season begins in the US
on Monday with Alcoa reporting numbers and JPMorgan Chase later in the week, and, in
Europe, Suedzucker and Banco Espanol de Credit kick off proceedings on Thursday.
However, only a few other names will report next week, as the earnings season really begins
to see more results in the second half of the month. In Europe most of the activity will take
place in February. We expect results overall to be weaker than in the previous season, given
the slowdown in the economy, particularly in Europe.
Q4 earnings season in Europe
Source: SG Cross Asset Research
Primary markets to keep turning: The primary markets should not see a major
slowdown unless the sovereign crisis flares up again. Historically, January has been a strong
month and we look for more of the same as investors have cash to put to work, and if the
environment remains calm, issuers may well take advantage of the low yields to raise funds.
However, we believe most deals will come from ‚core‛ corporates with a very small chance of
seeing any ‚peripherals‛ issue for now.
Secondary markets to keep improving: In the absence of a negative development on the
sovereign front, the cash market should see mild tightening on the back of the better tone and
decent primary markets’ activity. Funding concerns are easing following the ECB’s LTROs and the
strong issuance we’ve seen so far (both senior unsecured and covered bonds) so we would expect
financials to gain back some of the ground lost in H211 at a faster pace than non-financials. The
synthetic markets, however, should remain slightly volatile as we believe they’ll continue to trade in
line with equity markets.
Economic calendar ahead: Next week will see a light economic calendar from both sides of
the Atlantic. In the US, we’ll see retail figures for December as well as the initial reading for the U. of
Michigan confidence index while in the Europe we’ll have industrial production figures for the
eurozone and the UK as well as the rates announcements by the ECB and the BOE, both largely
expected to keep their rates unchanged at 1% and 0.5% respectively.
-
20
40
60
80
100
120
9-Jan 16-Jan 23-Jan 30-Jan 6-Feb 13-Feb 20-Feb 27-Feb 5-Mar 12-Mar 19-Mar 26-Mar 2-Apr
Com
pan
ies
report
ing
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Selected economic releases
Event Country Period Date
Event Country Period Date
Industrial production Eurozone Nov 12-Jan Advanced retail sales US Dec 12-Jan
ECB rates announcement Eurozone 12-Jan Retail sales less autos US Dec 12-Jan
U. of Michigan confidence US Jan P 13-Jan
Industrial production UK Nov 12-Jan
Manufacturing production UK Nov 12-Jan
BOE rates announcement UK 12-Jan
Source: Bloomberg SG Cross Quant Asset Research
Industrial production
Next week we’ll see industrial production figures for the eurozone for November which follow
the results this week in France and Germany. Overall the market is expecting to see a -0.2%
contraction on the month, or just a 0.3% expansion y/y.
Industrial production Retail sales
Source: SG Cross Asset Research
Retail sales
We’ll also have the retail sales results for December in the US and the market is expecting the
advanced retail figures to show an increase of 0.2%, while the retail sales less autos figure is
expected to rise by 0.3%.
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Eurozone industrial production m/m Eurozone industrial production y/y
-4%
-2%
0%
2%
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Advanced retail sales Retail Sales Less Autos
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Last week’s changes in opinion and recommendation
Changes of bond recommendations
Source: SG Cross Asset Research
Changes of cds recommendations
Date Company Analyst From To News title
03/01/2012 EDP Herve Gay - Sell China Three Gorge as main shareholder boosts EDP credit
profile. Go long.
03/01/2012 Edison Herve Gay Sell Neutral Preliminary agreement on EDF’s control over Edison. Buy
bonds. Go Neutral CDS.
Source: SG Cross Asset Research
Date Bonds Company Analyst From To News title
4-Jan-12 France Telecom 4.625% 01/12 France Telecom Juliano Hiroshi Torii Sell - Key TMT developments in December – tech, telecoms,
DT and OTE
4-Jan-12 Publicis 4.125% Jan 12 Publicis Juliano Hiroshi Torii Sell - Key TMT developments in December – tech, telecoms,
DT and OTE
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CROSS ASSET RESEARCH – CREDIT ANALYSIS GROUP Global Head of Research Head of Sector Research Head of Credit Research Deputy Head of Credit Research
Patrick Legland
Fabrice Theveneau
Tim Barker
Hervé Gay
(33) 1 42 13 97 79 (33) 1 58 98 08 77 (44) 20 7676 7168 (33) 1 42 13 87 50
[email protected] [email protected] [email protected] [email protected]
Financials (Banks)
Hank Calenti, CFA
Stéphane Le Priol
Jean Luc Lepreux
(44) 20 7676 7262 (33) 1 42 13 92 93 (33) 1 42 14 88 17 [email protected] [email protected] [email protected]
Financials (Insurance)
Rötger Franz
(44) 20 7676 7167 [email protected]
Auto & Transportation
Pierre Bergeron
(33) 1 42 13 89 15 [email protected]
Consumers & Services
Marc Blanc
Torstein Jorstad
(33) 1 42 13 43 87 (44) 20 7676 7030 [email protected] [email protected]
Industrials
Roberto Pozzi
Barbora Matouskova
Bob Buhr
(44) 20 7676 7152 (44) 20 7676 7023 (44) 20 7676 6454 [email protected] [email protected] [email protected]
Telecom & Media
Juliano Hiroshi Torii, CFA
Alejandro Núñez
(44) 20 7676 7158 (44) 20 7676 7136 [email protected] [email protected]
Utilities
Hervé Gay
(33) 1 42 13 87 50 [email protected]
CROSS ASSET RESEARCH – CREDIT STRATEGY GROUP Global Head of Research
Patrick Legland
(33) 1 42 13 97 79
Strategy
Suki Mann (Head)
Juan Esteban Valencia
(44) 20 7676 7063 (33) 1 56 37 36 83 [email protected] [email protected]
ABS
Jean-David Cirotteau
(33) 1 42 13 72 52 [email protected]
CROSS ASSET RESEARCH – QUANTITATIVE ANALYSIS GROUP Global Head of Research
Patrick Legland
(33) 1 42 13 97 79 [email protected]
Julien Turc (Head)
Sandrine Ungari
Lorenzo Ravagli
(33) 1 42 13 40 90 (33) 1 42 13 43 02 (33) 1 42 13 73 76 [email protected] [email protected] [email protected]
Changyin Huang
Raphael Dando
Thomas Kovarcik
(44) 20 7676 7516 (33) 1 42 13 89 79 (33) 1 42 13 94 75 [email protected] [email protected] [email protected]
Dobromir Tzotchev
(44) 20 7676 7241 [email protected]
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APPENDIX
ANALYST CERTIFICATION
The following named research analyst(s) hereby certifies or certify that (i) the views expressed in the research report
accurately reflect his or her personal views about any and all of the subject securities or issuers and (ii) no part of his or
her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in
this report: Juan Esteban Valencia, Suki Mann, Raphael Dando
EXPLANATION OF CREDIT RATINGS
SG credit research may contain both a credit opinion of the company and market recommendations on individual bonds
issued by the company and/or its Credit Default Swap.
Credit Opinion:
Positive: Indicates expectations of a general improvement of the issuer's credit quality over the next six to twelve
months, with credit quality expected to be materially stronger by the end of the designated time horizon.
Stable: Indicates expectations of a generally stable trend in the issuer's credit quality over the next six to twelve months,
with credit quality expected to be essentially unchanged by the end of the designated time horizon.
Negative: Indicates expectations of a general deterioration of the issuer's credit quality over the next six to twelve
months, with the credit quality expected to be materially weaker by the end of the designated time horizon.
Individual Bond recommendations:
Buy: Indicates likely to outperform its iBoxx subsector by 5% or more
Hold: Indicates likely to be within 5% of the performance of its iBoxx subsector
Sell: Indicates likely to underperform its iBoxx subsector by 5% or more
Individual CDS recommendations:
SG Credit research evaluates its expectation of how the 5 year CDS is going to perform vis-à-vis its sector.
Sell: CDS spreads should outperform its iTraxx sector performance
Neutral: CDS spreads should perform in line with its iTraxx sector performance
Buy: CDS spreads should underperform its iTraxx sector performance
CONFLICTS OF INTEREST
This research contains the views, opinions and recommendations of Société Générale (SG) credit research analysts and/or
strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or
relative value, it may differ from the fundamental credit opinions and recommendations contained in credit sector or
company research reports and from the views and opinions of other departments of SG and its affiliates. Credit research
analysts and/or strategists routinely consult with SG sales and trading desk personnel regarding market information
including, but not limited to, pricing, spread levels and trading activity of a specific fixed income security or financial
instrument, sector or other asset class. Trading desks may trade, or have traded, as principal on the basis of the research
analyst(s) views and reports. In addition, research analysts receive compensation based, in part, on the quality and
accuracy of their analysis, client feedback, trading desk and firm revenues and competitive factors. As a general matter,
SG and/or its affiliates normally make a market and trade as principal in fixed income securities discussed in research
reports.
IMPORTANT DISCLOSURES
Aviva SG acted as joint bookrunner in AVIVA's bond issue (6.625% 03/06/41 GBP).
Bankia SG acted as as co-lead manager in Bankia's IPO
Barclays SG acted as bookrunner in Barclays's covered bond issue.
BBVA SG acted as Joint Bookrunner in BBVA's rights issue.
BMW SG is acting as joint bookrunner in BMW's bond issue (3yr+7yr).
Caixabank SG acted as joint lead manager in La Caixa's bond.
Carrefour SG is acting as exclusive financial advisor to Carrefour in Guyenne et Gascogne's acquisition.
Casino SG acted as joint bookrunner in Casino's bond issue.
Daimler SG acted as co manager in Daimler Finance North America LLC' senior high grade bond issue.
DONG SG acted as joint deal manager and joint bookrunner in Dong Energy's tender offer (7.75%
01/06/3010 EUR).
EDF SG has acted as financial advisor to Iren in the restructuring of the shareholding of Edison and
Edipower.
EDF SG acted as co-sponsor of EDF EN's squeeze out.
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EDF SG acted as co-financial advisor and co-sponsor to EDF in its public offer for EDF Energies Nouvelles
EnBW SG acted as joint bookrunner in ENBW's hybrid bond issue (7.375% 02/04/72 EUR).
Enel SG acted as joint bookrunner in Enel's bond issue.
Fiat Industrial SG acted as joint lead manager in Fiat Industrial's covered bond. (One 4 year tranche and one 7 year
tranche)
Fiat SpA SG acted as joint-bookrunner in the FIAT's senior bond issue
HSBC SG acted as joint manager in HSBC's High Grade Covered bond.
HSBC SG acted as co-manager in HSBC's bond issue.
Imperial Tobacco SG acted as joint bookurrner in Imperial Tobacco's bond issue.
National Grid SG acted as joint bookrunner of KEYSPAN 's bond issue. (Subsidiary of National Grid)
National Grid SG acted as joint deal manager in National Grid's Tender offer.
Pernod Ricard SG is asting as passive joint bookrunner in Pernod-Ricard's bond issue (5yr, 10.5yr, 30yr).
Pernod Ricard SGSP is managing a liquidity contract on behalf of Pernod-Ricard.
RCI Banque SG acted as joint bookrunner of RCI Banque's bond issue (4% 02/12/13 EUR).
RCI Banque SG acted as joint bookrunner of RCI Banque's bond issue.
Renault SG is acting as joint bookrunner of RCI Banque's bond issue. (4% 02/12/13 EUR).
Saint-Gobain SG acted as joint bookrunner in Saint-Gobain's bond issue.(Maturity 4yr:30-Sept-15 & 8yr:30-Sept-
19).
Santander SG acted as joint bookrunner in Santander's covered bond issue (4.625% 21/06/16 EUR).
SES SG acted as joint bookrunner of SES's senior bond issue.
Sodexo SG acted as financial advisor to Accor in the disposal of Lenôtre to Sodexo.
Sodexo SG acted as joint bookrunner in Sodexo's USPP.
Total SG is acting as joint-bookrunner in Total Infrastructures Gaz France's bond issue.
Valeo SG acted as Joint Dealer Manager and Joint Bookrunner in Valeo's tender offer (4.875% 11/05/18
EUR).
Vivendi SG acted as passive bookrunner in Vivendi's bond issue (3.875% 30/11/15 EUR & 4.875% 30/11/18
EUR).
Vivendi SG acted as joint bookrunner in Vivendi's bond issue. (4 years with maturity 13/07/2015 and 10 years
with maturity 13/07/2021)
Vivendi SG acted as financial advisor to Vivendi for the acquisition of a 44 % percent stake in SFR from
Vodafone.
Vivendi SG was mandated as joint lead manager and joint bookrunner in Canal + France's postponed IPO.
Xstrata SG acted as co-bookrunner in Glencore's IPO.
Aéroports de Paris SG acted as joint bookrunner in Aéroports de Paris' bond issue. (Maturity:15 February 2022 -10.4yr)
Aéroports de Paris SG acted as joint bookrunner in Aéroports de Paris' bond issue. (10 Years)
Banque Federative
du Credit Mutuel
(BFCM)
SG acted joint lead manager in BFCM's bond issue (tap) (24/01/13 EUR).
Banque Federative
du Credit Mutuel
(BFCM)
SG acted as joint lead manager in BFCM's senior bond issue (24/01/13 EUR).
Deutsche Telekom SG acted as co manager in Deutsche Telekom bond issue.
Dong SG acted as joint deal manager and joint bookrunner in Dong Energy's tender offer (7.75%
01/06/3010 EUR).
Fiat SG acted as joint-bookrunner in the FIAT's senior bond issue
France Télécom SG acted as as sole Structuring advisor and Joint Dealer Manager in France Telecom's tender offer.
Gas Natural SDG SG acted as Joint Bookrunner in Gas Natural's bond issue (5.625% 09/02/17 EUR).
GDF Suez SG acted as structuring advisor, joint dealer manager of the tender offer and joint bookrunner of GDF
Suez's bond issue (3.125% 21/01/20 EUR).
GDF Suez SG acted as financial advisor to GDF Suez for its disposal of G6 Rete Gas
Groupe SEB SG acted as joint bookrunner in SEB's inaugural bond issue.
Peugeot Citroen
PSA
SG is acting as joint bookrunner in Banque PSA Finance's bond issue.
Peugeot Citroen
PSA
SG acted as joint bookrunner in PSA Peugeot Citroen's bond issue.
Telecom Italia Spa SG acted as joint bookrunner in Telecom Italia's bond issue (4.75% 25/05/18 EUR).
Telecom Italia Spa SG is acting as advisor to Telecom Italia to evaluate various strategic options
Telefonica SA SG acted as joint bookrunner in Telefonica's bond issue (4.967% 03/02/16 EUR).
Telefonica SA SG acted as co-manager in Telefonica Emisiones SAU's bond issue.
Veolia
Environnement
SG acted as financial advisor to CDC for the merger of Transdev with Veolia Transport.
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29 29
Director: A senior employee, executive officer or director of SG and/ or its affiliates is a director and/or officer of Alstom,
Publicis Groupe, Saint-Gobain, Veolia Environnement.
SG and its affiliates beneficially own 1% or more of any class of common equity of Rentokil Initial, Telefonica SA.
SG or its affiliates act as market maker or liquidity provider in the equities securities of Ahold, Allianz SE, Alstom, BBVA,
BMW, Bayer AG, Carrefour, Casino, Daimler, Deutsche Telekom, E.ON, EDF, Enel, Ericsson, Fiat SpA, Fiat SpA, France
Télécom, GDF Suez, Gas Natural SDG, HeidelbergCement, Holcim, Iberdrola, Lafarge, METRO AG, Mediaset, Michelin,
Munich RE, Nokia, Pernod Ricard, Peugeot Citroen PSA, Publicis Groupe, RWE, Renault, Saint-Gobain, Santander,
Sodexo, Telecom Italia Spa, Telefonica SA, Total, Unilever NV, Veolia Environnement, Vivendi.
SG or its affiliates expect to receive or intend to seek compensation for investment banking services in the next 3 months
from Allianz SE, Alstom, Aviva, BBVA, BMW, Bertelsmann, British American Tobacco, Carrefour, Casino, Daimler,
Deutsche Telekom, Diageo, E.ON, EDF, EnBW, Enel, Fiat SpA, Fiat SpA, France Télécom, GDF Suez, Gas Natural SDG,
Groupe Seb, HeidelbergCement, Iberdrola, Lafarge, METRO AG, Mediaset, Pernod Ricard, Peugeot Citroen PSA, Publicis
Groupe, RWE, Renault, Santander, Sodexo, Telecom Italia Spa, Telefonica SA, Tesco, Total, Valeo, Veolia Environnement,
Vivendi.
SG or its affiliates had an investment banking client relationship during the past 12 months with Alcoa, Alstom, Aviva,
Aéroports de Paris, BBVA, Bankia, Barclays, Carrefour, DONG, DONG, Deutsche Telekom, EDF, Edison SpA, Enel, Fiat
Industrial, Fiat SpA, Fiat SpA, France Télécom, GDF Suez, Gas Natural SDG, Groupe Seb, HSBC, Imperial Tobacco,
Lafarge, METRO AG, Michelin, National Grid, Pernod Ricard, Peugeot Citroen PSA, Publicis Groupe, RCI Banque, Renault,
SES, Saint-Gobain, Santander, Sodexo, Telecom Italia Spa, Telefonica SA, Total, Valeo, Veolia Environnement, Vivendi.
SG or its affiliates have received compensation for investment banking services in the past 12 months from Aviva,
Aéroports de Paris, BBVA, BMW, Bankia, Banque Federative du Credit Mutuel (BFCM), Barclays, Caixabank, Carrefour,
Casino, DONG, DONG, Daimler, Deutsche Telekom, EDF, EnBW, Enel, Fiat Industrial, Fiat SpA, Fiat SpA, France Télécom,
GDF Suez, Gas Natural SDG, Groupe Seb, HSBC, Imperial Tobacco, National Grid, Pernod Ricard, Peugeot Citroen PSA,
Publicis Groupe, RCI Banque, Renault, SES, Saint-Gobain, Santander, Sodexo, Telecom Italia Spa, Telefonica SA, Total,
Valeo, Veolia Environnement, Vivendi.
SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of Aviva, Aéroports de
Paris, BBVA, BMW, Bankia, Banque Federative du Credit Mutuel (BFCM), Barclays, Caixabank, Casino, DONG, DONG,
Daimler, Deutsche Telekom, EDF, EnBW, Enel, Fiat Industrial, Fiat SpA, Fiat SpA, France Télécom, GDF Suez, Gas Natural
SDG, Groupe Seb, HSBC, Imperial Tobacco, National Grid, Peugeot Citroen PSA, RCI Banque, Renault, SES, Saint-
Gobain, Santander, Sodexo, Telecom Italia Spa, Telefonica SA, Total, Valeo, Vivendi.
SGAS had a non-investment banking non-securities services client relationship during the past 12 months with Alcoa,
Allianz SE, Aviva, Aéroports de Paris, BBVA, BMW, Barclays, CIT Group, Daimler, Deutsche Telekom, EDF, Fiat Industrial,
Fiat SpA, Fiat SpA, France Télécom, GDF Suez, HSBC, Holcim, Lafarge, Michelin, National Grid, Peugeot Citroen PSA,
RCI Banque, Renault, SES, Santander, Sodexo, Swiss RE, Telecom Italia Spa, Telefonica SA, Total, Unilever NV,
Vattenfall, Veolia Environnement, Wind, Xstrata.
SGAS had a non-investment banking securities-related services client relationship during the past 12 months with Alcoa,
Allianz SE, Alstom, Anglo American, Aviva, Barclays, CIT Group, Deutsche Telekom, E.ON, Enel, Fiat Industrial, France
Télécom, HSBC, Imperial Tobacco, METRO AG, National Grid, Nokia, Portugal Telecom, Santander, Swiss RE, Telecom
Italia Spa, Telefonica SA, Tesco, Total, Unilever NV, Veolia Environnement, Wind, Xstrata.
SGAS received compensation for products and services other than investment banking services in the past 12 months
from Alcoa, Allianz SE, Alstom, Anglo American, Aviva, Aéroports de Paris, BBVA, BMW, Barclays, CIT Group, Daimler,
Deutsche Telekom, E.ON, EDF, Enel, Fiat Industrial, Fiat SpA, Fiat SpA, France Télécom, GDF Suez, HSBC, Holcim,
Imperial Tobacco, Lafarge, METRO AG, Michelin, National Grid, Nokia, Peugeot Citroen PSA, Portugal Telecom, RCI
Banque, Renault, SES, Santander, Sodexo, Swiss RE, Telecom Italia Spa, Telefonica SA, Tesco, Total, Unilever NV,
Vattenfall, Veolia Environnement, Wind, Xstrata.
SGCIB received compensation for products and services other than investment banking services in the past 12 months
from Ahold, Allianz SE, Alstom, April Group, Aviva, Aéroports de Paris, BMW, Barclays, Bayer AG, Bertelsmann, British
American Tobacco, Carrefour, Casino, Continental, DONG, DONG, Daimler, Deutsche Telekom, E.ON, EDF, EnBW, Enel,
Energias de Portugal, Ericsson, Fiat Industrial, Fiat SpA, Fiat SpA, France Télécom, GDF Suez, Gas Natural SDG, Groupe
Seb, HSBC, HeidelbergCement, Holcim, Iberdrola, Imperial Tobacco, Kingfisher, Lafarge, METRO AG, Michelin, National
Grid, Nokia, Pernod Ricard, Peugeot Citroen PSA, Publicis Groupe, RWE, Renault, SES, Saint-Gobain, Santander, Sodexo,
Swiss RE, Telecom Italia Spa, Telefonica SA, Total, Unilever NV, Valeo, Vattenfall, Veolia Environnement, Vivendi, Xstrata.
FOR DISCLOSURES PERTAINING TO COMPENDIUM REPORTS OR RECOMMENDATIONS OR ESTIMATES MADE ON
SECURITIES OTHER THAN THE PRIMARY SUBJECT OF THIS RESEARCH REPORT, PLEASE VISIT OUR GLOBAL
RESEARCH DISCLOSURE WEBSITE AT http://www.sgresearch.com/compliance.rha or call +1 (212).278.6000 in the U.S.
F163049
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IMPORTANT DISCLAIMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any
securities and has been obtained from, or is based upon, sources believed to be reliable but is not guaranteed as to accuracy or completeness.
SG does, from time to time, deal, trade in, profit from, hold, act as market-makers or advisers, brokers or bankers in relation to the securities, or
derivatives thereof, of persons, firms or entities mentioned in this document and may be represented on the board of such persons, firms or
entities. SG does, from time to time, act as a principal trader in debt securities that may be referred to in this report and may hold debt securities
positions. Employees of SG, or individuals connected to them, may from time to time have a position in or hold any of the investments or related
investments mentioned in this document. SG is under no obligation to disclose or take account of this document when advising or dealing with or
on behalf of customers. The views of SG reflected in this document may change without notice. In addition, SG may issue other reports that are
inconsistent with, and reach different conclusions from; the information presented in this report and is under no obligation to ensure that such
other reports are brought to the attention of any recipient of this report. To the maximum extent possible at law, SG does not accept any liability
whatsoever arising from the use of the material or information contained herein. This research document is not intended for use by or targeted to
retail customers. Should a retail customer obtain a copy of this report he/she should not base his/her investment decisions solely on the basis of
this document and must seek independent financial advice.
The financial instrument discussed in this report may not be suitable for all investors and investors must make their own informed decisions and
seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein. The value
of securities and financial instruments is subject to currency exchange rate fluctuation that may have a positive or negative effect on the price of
such securities or financial instruments, and investors in securities such as ADRs effectively assume this risk. SG does not provide any tax advice.
Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be
realized. Investments in general and derivatives in particular, involve numerous risks, including, among others, market, counterparty default and
liquidity risk. Trading in options involves additional risks and is not suitable for all investors. An option may become worthless by its expiration
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