The value in Credit Markets Victor Shohet Deutsche Bank The value in Credit Markets Victor Shohet 2009 Outlook

US debt to GDP back to 1929 – A big pyramid scheme? Up to 31/12/08 Source: Deutsche Bank, Federal Reserve, The Statistical History of the United States, From Colonial Times to the Present. By Ben Wattenberg

Debt to GDP – International comparisons Japan UK Source: Deutsche Bank, Japanese Ministry of Finance, Office of National Statistics

Global 35-54yr Dependency Ratios Source: Deutsche Bank, UN Population Division.

Japanese 35-54yr Dependency Ratio vs Japanese 35-54yr Dependency Ratio vs. the Nikkei (left) and US 35-54yr Dependency Ratio vs. S&P 500 P/E Ratio (right) Source: Deutsche Bank, Irrational Exuberance (second edition) Robert Shiller, S&P, UN Population Division

35-54yr Dependency Ratios for Different Global Regions Source: Deutsche Bank, UN Population Division.

Real S&P price since 1900 – US equities now back to 1995/96 levels and close to the long-term trend Up to 20/04/09 Source: Deutsche Bank, Bloomberg, Irrational Exuberance (second edition) (Robert Shiller)

US profits and nominal GDP – US financials, a trillion dollar mean reversion? To 31/12/08 Source: Bureau of Economic Analysis

Spreads now at levels last seen during the Great Depression but yields still someway of the highs Up to 20/04/09 Source: Deutsche Bank, Bloomberg, Moody’s

5yr cumulative default rates: implied vs. actual Spread Implied Default Rate Actual Default Rate (since 1970) Average 5yr Spread Average Recovery Zero Recovery Worst Average iBoxx Euro Corporate 445 33% 20% 2.4% 0.9% Non-Financial 280 22% 13% N/A Financial 713 49% 31% AA 255 12% 1.8% 0.2% A 442 19% 2.6% 0.6% BBB 640 44% 28% 5.8% iBoxx Dollar 550 39% 24% 400 30% 18% 718 46% 360 17% 531 37% 23% 743 47% iBoxx Sterling 771 50% 348 26% 16% 1,084 64% 43% 616 27% 45% 29% 995 60% 40% High Yield USD HY 1,264 59% 31.0% 19.3% EUR HY 2,027 79% 63% iTraxx CDS Main 154 7% Crossover 857 48% 34% CDX CDS 187 15% 9% HY 1,262 62% 20/04/09 Source: Deutsche Bank. (Average recovery levels: IG 44%, HY 38%)

Spreads required to compensate for default based on 5yr cumulative default rates by cohort (1 of 2) 46.9% Recovery Rate 40.4% Recovery Rate AAA AA A BBB IG BB B CCC-C SG 1990 7 2 264 676 446 1991 3 134 567 815 325 1992 1 32 417 649 195 1993 6 57 272 818 153 1994 8 64 228 330 138 1995 15 4 90 232 573 180 1996 5 105 246 845 211 1997 29 10 158 365 1,255 304 1998 37 14 184 529 1,192 414 1999 36 16 144 590 1,230 474 2000 9 35 82 547 1,467 466 2001 33 78 493 1,550 434 2002 25 81 256 1,265 305 2003 39 135 825 185 2004 45 114 486 Current Euro 282 480 589 442 1,356 1,958 4,962 1,743 Current Dollar 156 344 504 679 521 761 1,195 2,529 1,275 Current Sterling 182 429 681 960 670 2007 Tight Euro 17 28 49 62 48 154 261 468 218 2007 Tight Dollar 54 77 109 163 229 408 245 2007 Tight Sterling 52 60 89 85 Up to 20/04/09 USD HY to 17/04/09 Source: Deutsche Bank.

Spreads required to compensate for default based on 5yr cumulative default rates by cohort (2 of 2) 46.9% Recovery Rate 40.4% Recovery Rate AAA AA A BBB IG BB B CCC-C SG 1970 5 16 10 99 376 197 1971 8 12 9 50 52 77 1972 4 17 38 101 67 1973 23 11 42 53 61 1974 20 103 65 1975 135 69 1976 56 1977 7 3 208 66 1978 58 317 97 1979 6 241 1980 106 424 164 1981 39 15 150 433 186 1982 13 29 250 389 299 1983 28 44 183 416 286 1984 18 19 246 406 304 1985 32 251 490 328 1986 14 21 68 281 549 370 1987 57 627 1988 46 324 643 443 1989 340 707 Source: Deutsche Bank.

Dispersion of spread performance Market Value Weighted Asset Swap Spread Single Bond Performance Tier Sector 03-Dec-08 Current Change Largest Widening Largest Tightening Average All Corporates 347 366 19 2,464 -588 88 All Non-Fin 294 238 -56 354 -55 Senior Basic Materials 340 301 -39 -404 -67 Consumer Goods 305 254 -51 110 -204 -48 Consumer Services 363 273 -90 170 -271 -80 Health Care 185 146 31 -137 -41 Industrials 334 282 -251 -43 Oil & Gas 400 293 -107 75 -156 Technology 337 287 -29 -83 -50 Telecommunications 299 207 -92 97 -265 Utilities 192 173 -20 -242 -17 Sub 642 703 61 159 18 74 651 785 134 655 719 64 73 59 66 513 587 112 36 All Financials 393 492 99 -519 222 Financials 277 289 12 1,575 39 LT2 399 695 296 1,793 -151 360 UT2 711 914 203 1,609 310 T1 991 1,476 484 523 712 1,043 331 1,739 -78 398 Up to 20/04/09 Note: All calculations based on index asset swap spread levels. Source: Deutsche Bank

CDS to Bond Basis – The opportunity on a pro-forma portfolio of Investment Grade bonds

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