Richard Hunter Group Managing Director, Corporates Emerging vs. Developed Markets How Corporates have Fared, and Where are the Real Risks Hiding ICAP Credit Risk Conference Sofia, Bulgaria December 2, 2010

Agenda Emerging Markets vs. Developed Markets Corporates – How Risky? What Next?

ICAP Conference, Sofia, December Fitch View: Decoupling No, Convergence Yes >Gap between developed & emerging market corporates shrinking >Ratings for emerging market corporates have been more resilient >Corporate outlooks (were) stabilising >In weak growth environment, corporates relatively robust… >… But they don’t live in a bubble –2008: Structured Finance –2009: Financial Institutions –2010: Sovereigns –2011: ….?

ICAP Conference, Sofia, December Fitch GDP Forecasts for 2010 Revised Upwards GDP Growth in 2010 in Major Advanced Economies Source: Fitch

ICAP Conference, Sofia, December Fitch GDP Forecasts for 2010 Revised Upwards GDP Growth in 2010 in Brazil, Russia, India, China Source: Fitch

ICAP Conference, Sofia, December Fitch GDP Forecasts for 2010 Revised Upwards GDP Growth in 2010 in Convergence Countries Source: Fitch

ICAP Conference, Sofia, December Fiscal Stimulus Starts to be Withdrawn Next Year General Government Balance (% GDP) Source: Fitch

ICAP Conference, Sofia, December No Decoupling, But Shift in Credit Quality Source: IMF WEO GDP Growth, %

ICAP Conference, Sofia, December Central & Eastern Europe in Context Fitch View on GDP GrowthFitch View on Deficit/GDP Source: Fitch Sovereign Comparator CEE – Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia

ICAP Conference, Sofia, December Rating Impact Bank Individual Ratings Simple Average by Issuer Count, not Asset-Weighted Source: Fitch

ICAP Conference, Sofia, December Fitch Bank Individual Ratings, Developed MarketsEmerging Markets Unweighted Issuer Count Source: Fitch Unweighted Issuer Count Source: Fitch

ICAP Conference, Sofia, December Fitch Bank Individual Ratings, Developed MarketsEmerging Markets Unweighted Issuer Count Source: Fitch Unweighted Issuer Count Source: Fitch Major Bulgarian Banks

ICAP Conference, Sofia, December Outlooks Leading Rating Actions Net Rating Changes versus Net Outlook/Watch Changes Source: Fitch Outlook stabilisation starts, June ‘09 Rating stabilisation starts, Dec ‘09

ICAP Conference, Sofia, December Corporate Downgrade Actions, Developed MarketsEmerging Markets Europe, Middle East, Africa, Asia Source: Fitch Europe, Middle East, Africa, Asia Source: Fitch

ICAP Conference, Sofia, December Negative Outlooks – What Happened Next? Developed MarketsEmerging Markets Europe, Middle East, Africa, Asia Source: Fitch Europe, Middle East, Africa, Asia Source: Fitch

ICAP Conference, Sofia, December Negative Outlooks – What Happened Next? Cyclical SectorsNon-Cyclical Sectors Europe, Middle East, Africa, Asia Source: Fitch Europe, Middle East, Africa, Asia Source: Fitch

ICAP Conference, Sofia, December Quality of Issuance Emerging MarketsHigh Yield (Dev. Mkt. <BBB) Europe, Middle East, Africa, Asia Source: Fitch Europe, Middle East, Africa, Asia Source: Fitch

ICAP Conference, Sofia, December Directional Fitch Rating Outlooks, Corporate Issuer Default Ratings Source: Fitch Global DevelopedEmerging EMEA Global Emerging

Agenda Emerging Markets vs. Developed Markets Corporates – How Risky? What Next?

ICAP Conference, Sofia, December Fitch Forecasts 2009 to 2011 Sub-Sectors by Cumulative EBITDA Movement 2007 A – 2011 E Source: Forecasting EMEA Corporates' Recovery, December 2009

ICAP Conference, Sofia, December USDbn f2011f Revenue5,2575,8955,4155,8276,124 OCF9981,0571,0831,0591,142 Capex FCF Corporate Europe’s Future – in Aggregate Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts Clear Thinking

ICAP Conference, Sofia, December Where Next?

ICAP Conference, Sofia, December Fitch Corporate Forecasts 2009 – Not the Massive Correction Expected? Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts Clear Thinking

ICAP Conference, Sofia, December Fitch Corporate Forecasts … But Energy & Utilities predominate in top-line increases Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts Clear Thinking

ICAP Conference, Sofia, December Fitch Corporate Forecasts … Free Cash Flow Recovers to 2007 Levels… Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts Clear Thinking

ICAP Conference, Sofia, December Fitch Corporate Forecasts … But Again Energy & Utilities are Key… Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts Clear Thinking

ICAP Conference, Sofia, December Net Results: Leverage Non-Critical Rise – Less than One Turn of Cash Flow Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts Clear Thinking

ICAP Conference, Sofia, December Net Results: Leverage … Pressure Points on Consumer and Energy/Utilities… Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts Clear Thinking

ICAP Conference, Sofia, December Net Results: Interest Cover In Aggregate, Sustainable and Comfortable Levels Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts Clear Thinking

ICAP Conference, Sofia, December Net Results: Interest Cover Add Another 200bps of Funding Cost? Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts Clear Thinking

ICAP Conference, Sofia, December Where Are the Real Risks? Developed EMEA vs. Emerging EMEA Growth rates in constant USD terms Source: Fitch forecasts 5% 7% 9% Clear Thinking

ICAP Conference, Sofia, December Where Are the Real Risks? Industrials Developed EMEAEmerging EMEA Fitch forecasts as at Source: Fitch Fitch forecasts as at Source: Fitch 5% 13% 11% 17%

ICAP Conference, Sofia, December Where Are the Real Risks? Telecom/Media/Tech Developed EMEAEmerging EMEA Fitch forecasts as at Source: Fitch Fitch forecasts as at Source: Fitch 2% 2.5% 6% 5%

ICAP Conference, Sofia, December Where Are the Real Risks? Energy & Utilities Developed EMEAEmerging EMEA Fitch forecasts as at Source: Fitch Fitch forecasts as at Source: Fitch 5% 8% 6% 8%

Agenda Emerging Markets vs. Developed Markets Corporates – How Risky? What Next?

ICAP Conference, Sofia, December End of the “Risk Trade”? Investor Need for Yield Resurgent Consumption Where Did the Leverage Go? Liquidity “Bubble” forming for Corporates Capacity Gap, depressing Business Investment

ICAP Conference, Sofia, December Other Fitch Concerns? >Consumer Confidence >“Zombies!” >Commodities – Long-run Up, Short-run Down >Policymaker Shuffle >“Crowding Out” of Corporate Debt >Reliance on Banks

ICAP Conference, Sofia, December Bond Markets – Getting a Rating >CRAs place a high value on trustworthiness of responses –Opacity (public or private) is penalised by committees –A genuine “Don’t Know” is better than a bluff >Nobody likes surprises –CRAs operate with confidentiality undertakings –“Bad news is best served warm” –Don’t turn a good surprise into a bad one >Admit mistakes –People who never make mistakes never learn –Admission shows thoughtfulness and readiness to respond –Explain the problem - and your remedy Clear Thinking

ICAP Conference, Sofia, December We Live in the Future, not the Past >CRAs are more forward-looking, respond to that –Discuss forecasts with CRAs as freely as you can –Detail on your assumptions will be impressive –Don’t expect your forecasts to be adopted by the CRA –But do ask the CRA where their forecasts came out >Talk frankly about your position –Feel free to discuss your peer group - but avoid insults! –Admission of weaknesses displays candour –Rating committees will focus on your challenges >So should your discussion with the CRA Clear Thinking

ICAP Conference, Sofia, December “ClearThinking” >New research initiative >Each issuer report carries a peer study and a selection of forecast information >New, transparent criteria reports by sub-sector and region >Visit our microsite for more information > clearthinking.fitchratings.co.uk

ICAP Conference, Sofia, December New Criteria Format

ICAP Conference, Sofia, December Example – Virgin Media

ICAP Conference, Sofia, December Issuer Reports Key financial and operational metrics Historical and prospective comparisons against sector and rating medians Prospective cashflow-based ratios based on Fitch internal forecasts, to provide an indication of expected trend Context and key assumptions explained

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