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

1. 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

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

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

4. 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

5. 35-54yr Dependency Ratios for Different Global Regions
Source: Deutsche Bank, UN Population Division.

6. 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)

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

8. 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

9. 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%)

10. 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.

11. 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.

12. 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

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

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