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European Corporate Credit

Trends Outlook & Default Rates

Trevor Pritchard

Managing Director

Corporate Ratings

16 October 2013

1

2

European Corporate Credit Trends Outlook

Key Corporate Risks

• Structural excess capacity –

examples - steel, refining, autos, technology, graphic paper, shipping

• Sovereign downgrades/country risk –

could capital flight in EM renew spread widening in periphery?

• Energy landscape is changing

US manufacturers benefit from cheap gas – packaging; chemicals

• Companies with access to the capital markets generally able to preserve/build liquidity. Will banks be positioned to finance the upturn for smaller companies when the upturn comes?

• Question –

can global diversification mitigate cyclical pressures on credit quality?

Debt Issuance Activity Slips After Markets Selloff in June

0%

10%

20%

30%

40%

50%

60%

0

50,000

100,000

150,000

200,000

250,000

300,000

Q106 Q107 Q108 Q109 Q110 Q111 Q112 Q113

€m

illio

n

Loan Issuance Bond Issuance IG Bonds % 4Q MA

Source: Dealogic, * Q313 data to 16 Sept 2013

EU-30 Investment Grade Corporate Issuance*

Debt Issuance Activity Slips After Markets Selloff in June

0%

10%

20%

30%

40%

50%

60%

0

25,000

50,000

75,000

100,000

125,000

150,000

Q106 Q107 Q108 Q109 Q110 Q111 Q112 Q113

€m

illio

n

Loan Issuance Bond Issuance SIG Bonds % 4Q MA

Source: Dealogic, * Q313 data to 16 Sept 2013

EU-30 Non Investment Grade

Corporate Issuance*

6

CAPEX Stalling - End Of Commodity ‘Super-cycle’...

Source: S&P Capital IQ, S&P Ratings calculations, IMF. Universe is Global Capex 2000.

10

15

20

25

30

35

40

45

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Energy Materials

Per cent Est.

Energy & Materials - Global Capex Share

Energy, 46%

Materials, 16%

Industrials, 8%

Telecom, 7%

Utilities, 13%

IT, 4%

Consumer staples, 3% Consumer discretionary, 3%

Healthcare, 0%

7

CAPEX Stalling - End Of Commodity ‘Super-cycle’

Source: S&P Capital IQ, S&P Ratings calculations, IMF. Universe is Global Capex 2000.

Contribution to CAPEX growth since 2003

8

CAPEX Stalling - End Of Commodity ‘Super-cycle’...

Source: S&P Capital IQ, S&P Ratings calculations, IMF. Universe is Global Capex 2000.

Corporate Capex Growth – Global Materials

-20

-10

+0

+10

+20

+30

+40

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Global Materials

Per cent Est.

EU Upgrades Outpace Downgrades in Q313

IG down/upgrade ratio 0.63 Q313 (1.16 Q213)

Quite low and balanced IG rating activity as sovereign ratings actions slow,

Europe flat lines economically, and eurozone tail risk reduce

-40

-30

-20

-10

0

10

20

Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313*

Upgrades Downgrades Net

EU-30 corporate

Investment Grade rating actions

Source: Standard & Poor’s, 16 Sept 2013

EU Upgrades Outpace Downgrades in Q313

Satisfactory financial performance and expectations of modest recovery

Sectors experiencing most positive ratings activity in Q2-Q313 are leisure,

healthcare, real estate and capital goods

-40

-30

-20

-10

0

10

20

Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313*

Upgrades Downgrades Net

Source: Standard & Poor’s, 16 Sept 2013

EU-30 corporate

Non Investment Grade rating actions

Metal & Miners,Transport, Telcos Suffer Net Downgrades Q2-Q3 2013

-25

-20

-15

-10

-5

0

5

10

15

20N

um

be

r

EU-30 Corporate Sector Upgrades/Downgrades Q312-Q313*

Q312-Q113 Up Q312-Q113 Down Q213-Q313 Up* Q213-Q313 Down* Q312-Q313 Net*

Source: Standard & Poor’s, * Q313 data to 16 Sept 2013

Corporate sectors with the highest # rating actions since Q3 2012

12

Corporate Default Trends

0%

10%

20%

30%

40%

50%

60%

AAA AA A BBB BB B CCC/C

1-Year Default Rate (LC) 3-Year Default Rate (LC) 10-Year Default Rate (LC)

13

Global Corporate Average Cumulative Default Rates By Rating, 1981 To 2012

Credit Ratings Are Not Absolute Measures Of Default;

They Are Forward-looking Opinions On Likelihood Of Default

Note: Default rates are for local currency ratings (LC).

Sources: Standard & Poor’s Global Fixed Income Research and Standard & Poor’s CreditPro®.

14

Global Corporate Defaults By Number Of Issuers*

0

50

100

150

200

250

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

U.S. Europe Emerging Markets Other Developed

*Count excludes defaults that were not rated one year prior to default. Other developed includes Australia, Canada, Japan and New Zealand.

Sources: Standard & Poor’s Global Fixed Income Research and Standard & Poor’s CreditPro®.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Combined Private credit estimates Public speculative-grade ratings

15

European speculative-grade default rate 2003-2014f* Trailing 12 months

*Europe = EU-27 + Iceland, Norway, and Switzerland. F--Forecast. Source: Standard & Poor's.

10 defaults exposing €8.7 billion of debt

Default rate:

• 7.5% (v 6.9% Dec 2012) including credit estimates

• 3.6% (v 3.2% Dec 2012) public sub-investment grade only

• 10.7% (v 9.9% Dec 2012) credit estimates only

Default forecast 6.5% for Sep 2014.

16

Actual defaults in corporate sector in Q2 2013 for EU-30

*Europe = EU-27 + Iceland, Norway, and Switzerland. F--Forecast. Source: Standard & Poor's.

One year default assumptions for ratings/credit estimates

(% per year) Public ratings Credit Estimates Combined

>B+ 0.6 0.7 --

B+ 2.1 2.2 --

B 4.3 4.7 --

B- 6.7 7.4 --

CCC/CC 23.4 25.1 --

Default rates

Percentage 4.1 9.1 6.5

No. of defaults 15 29 43

17

European (EU30) Sub-Investment Grade Default Projections to Sep 2014

Source: Standard & Poor’s

2

4

6

8

10

12

14

16

Basecase Default Forecast Actual Default Rate

Downside Default Forecast

18

European (EU-30) speculative-grade default rate: actual versus forecast 2009-2014*

* Data cover period from December 2009 to September 2014. EU-30 = EU-27 + Iceland, Norway and Switzerland. F- forecast. Source: Standard and Poor’s

19

Ratings Services

20

Standard & Poor’s Global Reach

• In business for 150+ years

• Provides global reach and

local knowledge with an

office network spanning

23 countries

• 1,400+ research analysts

• More than 1.1 million

ratings outstanding

• $3.5+ trillion in new debt

rated in 2011

• Provides perspective on a

company’s creditworthiness,

including its environmental,

social and governance (ESG)

performance

21

Standard & Poor’s EMEA

• EMEA operations

established in 1984

• 400+ analysts and

analytical supervisors (excluding Criteria and Quality)

• Offices include:

London, Frankfurt,

Paris, Madrid, Milan,

Stockholm, Moscow,

Dubai, Johannesburg,

Tel Aviv

22

Standard & Poor’s Ratings Leadership

S&P: More Than 1.1 Million Ratings Outstanding Globally

Global Analytical Capability by NRSROs3

NRSROs

Credit

Analysts

Credit Analyst

Supervisors Total

Standard & Poor’s Ratings Services 1,436 245 1,681

Moody’s Investors Service, Inc. 1,123 149 1,272

Fitch, Inc. 783 309 1,092

A.M. Best Company, Inc. 84 42 126

DBRS Ltd. 93 33 126

Japan Credit Rating Agency, Ltd. 27 32 59

Morningstar 26 10 36

Kroll Bond Ratings 22 6 28

Egan-Jones Rating Company 2 3 5

45.67%

S&P

1,143,300

36.88%

Moody’s

923,363

13.99%

Fitch

350,370

3.46%

Others2

86,571

Credit Ratings Outstanding Globally1

1. Nationally Recognized Statistical Rating Organization (NRSRO) filing 2013 (Exhibit 8). Note: Morningstar and Kroll — 2012 filing, 2013 N/A.

2. Others include A.M. Best Company, Inc; DBRS Ltd.; Japan Credit Rating Agency, Ltd.; Morningstar; Kroll Bond Ratings; Egan-Jones Rating Company.

3. NRSRO filing 2013 (Item 7). Note: Morningstar and Kroll — 2012 filing, 2013 N/A.

23

Analytic Coverage Highlights Source1

Corporate Issuers Ratings

47,400 Financial Institutions Ratings

60,300 Insurance Companies Ratings

7,600

Government Securities Ratings

930,500 Structured Finance Ratings

97,5002

For illustrative purposes only.

1. Coverage highlights source: 2013 Nationally Recognized Statistical Rating Organization (NRSRO) Application.

2. The SEC definition of the Exchange Act ABS (asset-backed securities) is substantially similar to the definition of the term “structured finance products.”

24

Examples Of Uses Of Credit Ratings

Bond Issues Global and domestic bond issues

Straight and convertible bonds

Project Finance

Project finance ratings for schools, hospitals

and roads

Counterparty Ratings

General creditworthiness assessments

Bank Loan Ratings

Bank loan ratings increasingly sought

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