US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook

November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

We remain cautiously optimistic that there will be

no insurmountable regulatory hurdles that
disrupt the flow of liquidity to ABS issuers and
consumers

Playing the ABS market in

2013: One game at a time

We maintain our bullish outlook on ABS into

2013 given exceptionally strong technicals and
solid fundamentals

External headwinds such as regulation, the US

fiscal cliff, European sovereign risks, and
geopolitical conflicts persist. However, QE3driven technicals against the backdrop of slow
economic growth (despite the drags) should
ultimately push ABS spreads tighter

We recommend investors to add ABS on

weakness throughout 1H13. Headline or supplyinduced technical blips will most likely turn out
to be temporary

We project 2013 ABS supply of $205-215bn,

compared to $187bn YTD 2012. Increased issuance
is expected in the credit card and auto sectors

We estimate a tiny net increase of $5bn in

outstanding ABS, the first increase after five
consecutive years of contractions

With the economy still on track in this long and

painfully slow recovery, consumer health remains
sound. This should translate into stable loss and
delinquency trends for ABS credit performance.
ABS structures and seller/servicers should
perform well within expectations

The charge-off rate on our bankcard ABS master

trust index should stay in the 3-3.5% range next
year, near historical lows

Auto ABS speeds will likely continue to inch up

on higher auto sales, while student loan ABS
speeds remain slow due to limited refinancing
opportunity and high unemployment

Negative rating volatility should continue to

decline in 2013 for ABS with stable credit
performance and generally more stable outlooks
for ABS sellers/servicers and counterparties,
except for FFELP ABS ratings due to the
negative outlook on the AAA US sovereign rating

Many regulatory rules remain unclear and/or

unfinished as the ABS market heads into 2013.

We believe ABS spreads can set new post-2007

tights in 2013, but it will likely be a shaky start
with the fiscal cliff looming right around the start
of the year

ABS will continue to provide a safe haven to

investors concerned about the fiscal cliff and in
need of higher-yielding Treasury surrogates

We expect 3-year AAA bankcard ABS spreads to

reach swaps +5bp by mid-2013 and swaps flat by
year-end 2013

Our top choice in AAA ABS is short front-pay

private credit student loans; for more yield, we
recommend going down in credit to subordinate
subprime auto ABS

2013 ABS outlook: The endurance game

Looking ahead to 2013, we expect the ABS market to
continue to endure the regime of low yields, supply
shortage, and lackluster economic growth, combined
with the persistent headwinds of US and European
sovereign risks and other geopolitical fires. We remain
bullish on ABS spreads due to positive technicals and
credit fundamentals. In terms of technicals, QE3
continues to be the tide that lifts all boats, as Fed
purchases of agency MBS and low interest rates will
continue to leave investors hungry for credit products and
starved for yield. We expect ABS issuance activity in
2013 to increase by 10% y/y to $205-215bn. The
established ABS investor base has demonstrated a
stronger appetite for more paper in recent years, and
liquidity has completely recovered from the subprime
RMBS meltdown; at the same time, ABS (and aggregate
securitized products) supply, even with the projected
growth, is far from where it was in the heyday. We
expect investors to continue having difficulty sourcing
bonds.
On credit fundamentals, three years after the official end
of the recession, we are still on the anticipated long road
of recovery. We knew that it would be a long climb out
of a deep trough on every front, including housing,
consumer deleveraging, and the labor market. 2012 saw

US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook
November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

moves in the right direction, and 2013 should bring more

positive, but once again small, steps forward. In 2012,
home prices bottomed, consumers showed signs of
increased demand for credit (e.g., on auto loans, credit
cards, and student loans), and payrolls continued to make
steady gains. Growth in consumer credit and the ABS
market will reflect growth in the broad US economy,
which will remain painfully slow for most of 2013. JP
Morgan economists forecast real y/y GDP growth of
2.2% in 2012 and 1.7% in 2013. The unemployment rate
will remain well above 7.5% for the foreseeable future
into 2014. ABS credit performance has been quite
healthy amid this tepid recovery, supported by improved
underwriting, servicing, and structural enhancements.
We expect this positive performance to continue in the
year ahead given that slow growth is still growth. We
also believe that the credit quality of ABS pools should
remain stable, as sponsors remain relatively conservative
in credit underwriting and ABS structuring. In addition,
ABS sponsors remain in good financial health. Bank
ratings in particular should be more stable in the year
ahead. In 2013, the primary risks in the ABS market will
stem from exogenous factors rather than from credit
performance.
The downside risks to the ABS market in 2013 remain
external as they have been over the past two years. The
ABS market remains under constant regulatory scrutiny
and unintended consequences may arise. However, we
remain optimistic and do not foresee any insurmountable
hurdles in the year ahead. We believe regulators will
continue to work with ABS market participants to ensure
the uninterrupted flow of liquidity and credit to
consumers.
In addition, the same headwinds, namely the US fiscal
cliff, the European sovereign debt crisis, and geopolitical
(Mideast) conflicts continue to buffet the financial
markets. The ABS market, along with the rest of the
financial markets, will likely be tested early in the year
by the fiscal showdown in Washington, DC. However,
the impact on the ABS market has become more muted
with each run of negative headlines. We expect this to be
the case in 2013 as well. As long as the US economy
does not plummet off the fiscal cliff (which is JP
Morgans base-case scenario, where our economists call
for real GDP growth next year despite anticipated fiscal
drags), ABS market fundamentals remain on solid
ground. In addition, we would say that current ABS
structures and credit enhancements would stand up to a

Exhibit 1: 2013 ABS spread targets: tighter

bp
Current

2012

All-time Tight

11/19/12 Wide Tight Spread

Date

Target
1H13 2H13

AAA
Credit Card

3-year, Swaps

10

14

-7

Sep-06

Prime Auto Loan

3-year, Swaps

18

30

10

-2

Sep-06

Subprime Auto Loan 2-year, Swaps

26

70

26

26*

Nov-12

25

20

FFELP

3-year, LIBOR

20

55

20

-1

Sep-06

20

15

Private Credit

3-year, LIBOR

125

235 125

Jan-07 110

85

US$ UK RMBS

3-year, LIBOR

50

160

50

Nov-06

45

35

Subordinates, BBB
Credit Card

3-year, Swaps

65

130

65

23

Feb-07

55

45

Prime Auto Loan

3-year, Swaps

165

200 140

42

Jun-12 120

95

Subprime Auto Loan 3-year, Swaps

180
350 180 180* Nov-12 160 135
*Subprime auto loan ABS spread history goes to 2010 only and do not cover pre-crisis
history
Source: J.P. Morgan

mild recession with minimal, if any, wear, but ABS

spreads, along with investor confidence, may well
weaken significantly under that low-probability stress
scenario.
Finally, given the strong technical dynamic and stable
fundamentals, we believe ABS spreads can set new post2007 tights in the year ahead (Exhibit 1). We project
AAA benchmark bankcard ABS spreads to lead the way
for the ABS market and reach swaps flat in 2H13. Credit
curves should also flatten further once the market moves
past the fiscal cliff and economic growth picks up. In
addition, although absolute ABS spread levels have
narrowed notably this year, relative to all-time tights
(including before the 2007 financial crisis), there is
plenty of room for further tightening. Compared to 2007
and earlier structures, the newer crop of ABS has
undergone major enhancements to structure, credit
quality, underwriting, and servicing. Conditions will
likely be more shaky and volatile in 1H13, with the fiscal
cliff looming, but the tightening trends should solidify
thereafter. We would add on weakness throughout 1H13
during technicals blips and headlines that will very likely
turn out to be temporary.

US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook
November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

Exhibit 2: Tiny increase in y/y net ABS supply for 2013

Exhibit 4: ABS issuance volume to grow in 2013

y/y change in amount outstanding ($bn)

$bn

Projected

60
45
30
15
0
-15
-30
-45
-60
-75
-90

2009 2010 2011 2012 YTD

15

-5 -10

Credit Cards
Bank/Charge
Retail

2008
Auto

2009

2010

Student Loan

2011 Nov 12
Card

Other

Proj
2013

47

14

37.3

45

32

11

29.8

37

15

7.4

56

54

58

81.2

95

38

32

28

45.1

53

Subprime Loan

13

16.8

21

Lease

12

12.6

15

Fleet

5.6

Motorcycle/Truck

1.2

19

19

15

22.5

25
19

Autos
Prime Loan

2007

2013

Student Loans

Source: J.P. Morgan forecasts, Bloomberg

FFELP

10

13

13

18.3

Exhibit 3: ABS amount outstanding still significantly

lower than the peaks

Private Credit

9.0

4.2

11.1

12

$bn

Equipment
Global RMBS

400
350
300
250
200
150
100
50
0

Other
Floorplan
Miscellaneous
Total ABS

26

8.8

11

15

15

26.1

25

12.7

10

13.4

15

140

106

136

187.0

205

% 144A

41% 47% 42%

34%

% Floating-rate

45% 36% 45%

30%

Note: 2012 YTD as of November 16

Source: JP Morgan estimates/forecasts, IFR, Bloomberg

2006

2007
Auto

2008

2009

Student Loan

2010
Card

2011 Nov 12
Other

Source: Bloomberg

ABS supply/demand forecasts: The

hunger games
Net supply to venture into positive territory
After a cumulative decline of approximately $250bn in
outstandings over five consecutive years of contractions,
including a decrease of roughly $15bn in 2012, we
expect the ABS market in 2013 to finally edge into
positive net supply (i.e., new issuance minus maturities),
driven by growing supply from the auto and credit card
sectors (Exhibit 2). We project gains in the auto and
credit card ABS sectors, +$15bn and +$5-10bn,
respectively, to be partially offset by continued declines
in student loan and other asset classes, -$5bn and -$10bn,
respectively. Despite the likely small increases, volumes
in auto and credit card ABS are far off their peaks: auto

paper stands at $137bn compared to $197bn in 2006 and

credit card ABS at $160bn compared to $325bn in 2007
(Exhibit 3). We believe demand will remain higher than
the supply available in 2013 in ABS and across the
securitized product market, particularly due to QE3.
That, combined with low rates, will keep investors
hungry for credit products, particularly those that offer
incremental spread pickup.
New issuance continues to grow
Our gross ABS supply forecast for 2013 is $205-215bn,
with growth coming from the auto and credit card sectors
(Exhibit 4). We expect auto ABS supply to reach $95100bn in 2013 versus $81bn YTD. This is consistent
with auto sales projected to increase to over 15mn saar
next year, along with greater consumer demand for auto
loans. In addition, auto lenders have more actively
sought funding in the securitization market. For
example, the number of subprime auto ABS shelves has
roughly doubled this year versus a couple of years ago.
On the prime side, we have also seen more issuers as

US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook
November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

well as more lease ABS programs. Separately, we have

seen a couple of bank issuers of prime auto ABS sell the
residuals for favorable off-balance sheet accounting
treatment. We expect the banks to continue pursuing this
strategy as long as ABS market conditions are favorable
and relatively insulated from negative external
headwinds.
In the credit card sector, our 2013 forecast calls for $4550bn in supply. We estimated close to $40bn in runoff
next year, which results in our net supply projection of
+$5-10bn. In comparison, YTD credit card ABS supply
totaled $37bn versus roughly $65bn in runoff this year.
We expect that cross-border activity in credit card ABS
to remain robust in 2013, with Canadian USD issuers
stepping up to offset lower UK issuer participation.
Securitization also remains an attractive funding option
for domestic banks looking for low-cost term funding.
We still think it makes sense for more issuers to
reactivate some dormant master trusts, even if its just to
maintain some presence in the securitization market
rather than for capital reasons. Finally, with ABS
spreads tightening, more subordinate issuance is possible.
All these factors should help revive credit card ABS
supply.
Supply in the student loan sector should stay relatively
flat next year versus this; we expect $25bn in 2013
versus $23bn YTD. There is a pipeline of FFELP
receivables from lenders balance sheets and conduit
funding programs to the ABS market, as well as
restructuring opportunities (albeit 2013 may well be the
end of the line). We expect FFELP student loan ABS
supply in 2013 to be flat to slightly down from this year.
We think the risk of a US sovereign rating downgrade by
another rating agency (in addition to S&P) will result in
only minor hiccups for FFELP ABS issuance, as spreads
have rallied notably and deals have been done with split
ratings on senior tranches. On the private credit side, we
expect very slow growth in underlying loan originations
and thereby securitization volume, due to the crowding
out of the private market by the governments FDLP
program.
In the global RMBS sector, we expect a sharp decline in
cross-border USD issuance from UK banks due to the
availability of a cheaper alternative from the Bank of
England and HM Treasury-sponsored Funding for
Lending Scheme (FLS). We project $3bn in sector
supply next year versus close to $9bn this year. In 2013,

the primary motivation for issuing in this sector is going

to be the desire to maintain a presence in the US ABS
market, rather than funding need or cost.
Floorplan ABS supply could decline slightly next year
after posting $12.7bn this year. Refinancing needs will
decrease in 2013 with roughly $6bn, half of this years
runoff. The equipment ABS sector should continue to
see growth in 2013 to $12bn, after recording just over
$10bn in supply this year and $7bn in 2011. There is a
healthy list of diverse issuers in the large- and smallticket segments to support issuance activity. In addition,
business spending should improve with economic
growth.
Investor base to remain healthy
Liquidity in the ABS market has been excellent, with a
mature and established investor base. With the shortage
in credits, the ABS asset classes have now been well
explored by the influx of new investors, as well as
accounts branching out to different asset classes.
Looking ahead to 2013, the investor base for ABS has
limited growth potential, but the level of interest remains
higher than the supply available. We believe the supply
shortage could be particularly acute if there is any flight
to quality associated with the looming fiscal cliff.
Concerns over US sovereign risk will further underscore
the benefits of benchmark AAA ABS as cash surrogates.
Top-tier AAA ABS offering spread pickup to Treasuries
could potentially attract even a few more corporate crossover buyers in the year ahead.
The overall sentiment in ABS investors 2013 outlook on
supply and spreads is positive. Our investor survey,
conducted over the week of November 12, drew a wide
range of respondents (45% of asset managers, 20% bank
portfolios, 15% insurance companies, and the rest spread
over hedge funds, pension funds, and non-US investors).
One-third of respondents expect issuance to increase by
5%, while another third project a 10% increase. In
addition, 13% of investors surveyed reported a bullish
15% increase versus 11% of investors expecting ABS
issuance to remain flat. Only 4.5% of investors expect
ABS issuance to decrease. We also asked investors to
project benchmark ABS spreads at the end of 1H13: 45%
think spreads will range 5-10bp and 32% think spreads
will range 0-5bp. Approximately, 6% of investors
project benchmark ABS to trade through swaps. Onethird of those who expect supply to increase by 10%
project benchmark spreads to widen out to 10-15bp.

US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook
November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

However, those that think supply will increase by an

even larger 15% expect spreads to either remain rangebound or tighten. This suggests that investors expect
higher supply to be readily absorbed by the market.

ABS credit performance outlook: A

clean game
We expect credit performance of consumer ABS pools to
remain healthy in 2013. JP Morgan economists expect
the US consumer and the private sector to be resilient in
the face of a sizable fiscal drag (particularly in 1H13).
Our economists expect the national unemployment rate
to continue trending downwards from 8.0% in 1Q13 to
7.8% in 4Q13 and real GPD growth to increase from
1.0% in 1Q13 to 3.0% is 4Q13. While the labor market
is still soft as measured by the high unemployment rate,
other metrics such as low labor costs, recent gains in
payrolls, low initial jobless claims, and improving
consumer confidence show that there is room for
improvement in the year ahead. In addition, signs of a
recovery in housing are emerging. Our non-agency
RMBS strategists expect home prices to rise 3.5% y/y in
2013 on a nationwide basis (Case-Shiller). The auto
sales recovery has been quite robust, averaging 14.4mn
saar this year, and JP Morgan projects it to climb steadily
to 15.2mn saar by 4Q13. Finally, we expect ABS pools
to remain clean in the year ahead, given that ABS
sponsors are still wary of the domestic fiscal cliff and
European sovereign headwinds. Therefore, ABS
sponsors are unlikely to be pursuing aggressive
origination strategies that may turn off investors and
rating agencies. In our opinion, delinquencies and losses
on consumer ABS pools will likely remain low at current
levels in the year ahead.
Credit card
After a stellar performance by the credit card sector this
year, we expect charge-offs on our bankcard ABS master
trust performance index to stay in the 3.0-3.5% range in
2013, near all-time record lows. 30+ delinquencies and
charge-offs on our index stood at 2.42% and 3.36%,
respectively, for October 2012, having fallen from 4.38%
and 2.94%, respectively, in January 2012 (Exhibit 5). At
the same time, the 3-month average excess spread at
11.72% and the monthly payment rates at 22.62% for
October are at/near historical highs. Bankruptcy filings
are also expected to remain roughly flat next year versus

Exhibit 5: Bankcard ABS master trust performance

index versus initial jobless claims (monthly): Losses
and delinquencies remain at/near record lows
650
13%
600
11%
550
9%
500
7%
450
400
5%
350
3%
300
1%
250
Jan-00
Jan-03
Jan-06
Jan-09
Jan-12

Charge-offs
3-month Average Excess Spread
30+ Delinquencies
Initial Jobless Claims (right)

Source: JP Morgan, Bloomberg, Moodys, ABS 10-Ds

Exhibit 6: Prime auto loan ABS cumulative losses well

within expectations
By vintage (% of original balance)

1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
1

13

19

25

Deal age (months)

2010
2011

2009

2012

Source: J.P. Morgan, Intex

Exhibit 7: Subprime auto loan ABS cumulative losses

ramping up slower for new vintages
By vintage (% of original balance)

14%
12%
10%
8%
6%
4%
2%
0%
1

13

19

25

Deal age (months)

2009

2010

2011

2012

2007

Source: J.P. Morgan, Intex

US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook
November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

Exhibit 8: Auto ABS prepayment speeds increase with

higher auto sales

this year, another positive factor for credit card

performance.
Auto
In the auto sector, we expect losses on outstanding
vintages to continue on a pace that is well within
expectations (Exhibit 6 and Exhibit 7). On an aggregate
basis, the 2010 and 2011 prime auto vintages have seen
excellent performance with cumulative losses tracking
0.7% area. The 2012 vintage looks to be slightly worse,
close to 1%, albeit the transactions are still relatively
unseasoned. On the subprime side, cumulative losses on
recent vintages will likely be around the 10% range. Of
course, the dispersion among subprime auto ABS pool
performance is much wider, with the pools of deep
subprime obligors consistently experiencing 20+%
cumulative losses and the higher credit pools under 10%.
Furthermore, losses and delinquencies are running quite
low relative to the building credit enhancement on auto
ABS transactions.
While we have seen marginal slippage in auto loan pool
quality in the 2012 pool, we do not anticipate a
significant negative impact on performance. We expect
the steady upgrade of subordinate ABS tranches to
continue. Finally, auto ABS prepayment speeds should
continue to incrementally increase for the newest vintage,
as auto sales continue a recovery back to 15mn saar
(Exhibit 8). Aggregate prime and subprime auto loan
ABS speeds are currently running in the 1.2% and 1.4%
ABS areas, respectively. Historically, with 16mn saar,
the 2005 vintage prime and subprime pools stabilized at
about 1.4% and 1.6% ABS, respectively.
Student loan
On FFELP student loan ABS, we expect prepayment
speeds to normalize at the 2-4% levels from the
temporary highs reached this year due to the presidents
special consolidation program. According to Sallie
Maes ABS reports, prepayment rates on its nonconsolidation trusts increased substantially to 7-10% in
2Q12 from 2-4% in 4Q11 (Exhibit 9). Aside from such
special opportunities from the government, refinancing
options and incentives in the student loan space will be
extremely limited in the year ahead. In addition, the job
market is unlikely to be strong enough to support
significant improvement in ability or willingness of
borrowers to pay back student loan debt.

2.2
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
Oct-02

22
18
14
10

Oct-04

Oct-06

Oct-08

6
Oct-12

Oct-10

Subprime Auto ABS Speeds (% ABS, left)

Prime Auto ABS speeds (% ABS, left)
Auto Sales (unit mn saar, right)
Source: JP Morgan, Bloomberg, Intex

Exhibit 9: FFELP speeds should normalize as the impact of

the presidents special consolidation program in 1H12 fades
SLMA non-consolidation pools

12%
10%
8%
6%
4%
2%
0%
Mar-08

Mar-09
2002
2006
2010

Mar-10
2004
2007

Mar-11

Mar-12
2005
2008

Source: Sallie Mae

Exhibit 10: Private credit student loan ABS performance

stabilizing with unemployment rates
SLMA total delinquencies and defaults (as % of loans in repayment) versus
unemployment rate (%)

10%

9%

9%

7%

8%

5%

7%
6%

3%
1%
Jan-07

5%
4%
Jan-08

Jan-09

Jan-10

Annualized Defaults (left)

Unemployment rate (right)

Jan-11

Jan-12

90+ Delinquencies (left)

Source: Sallie Mae, Bloomberg

6

US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook
November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

For the private credit student loan ABS, we expect

performance to remain stable into next year. Given the
challenges facing job seekers, there is limited room for
improvement. For the SLM A pools, delinquency and
default rates stand at 3.81% and 3.73%, respectively,
compared to 3.76% and 4.30% one year ago (Exhibit 10).
Credit conditions will drive prepayment rates, which
should stay low due to the lack of alternative financing
options.
Cross border
We expect USD ABS backed by foreign collateral
domiciled in the UK, Australia, and Canada to maintain
the strong performance we saw in 2013. The crossborder programs continue to offer diversification and
high credit quality, with incremental spread pickup for
US ABS investors. In Canada, JP Morgan economists
expect full-year 2013 GDP growth of 2% versus 2.1% for
2012. This would leave the unemployment rate in
Canada relatively flat until 2H13 at 7.1% versus 7.4%
currently. For the UK, unemployment is forecasted to
end at 8.6% in 2013 versus 7.93% in September 2012.
However, GDP growth in 2013 is expected to be stronger
at 1.8% versus flat in 2012. Home prices are expected to
be essentially flat in the UK next year. The economy is
expected to stay stronger in Australia than in the US, the
UK, and Canada despite a projected slowdown to 2.5%
growth in 2013 versus 3.5% this year. Unemployment is
expected to remain low: 5.4% in 4Q13 versus 5.5% at the
end of 2012.

Rating migration: The surveillance

game
Overall in the ABS market, we expect negative rating
volatility to continue to decline in 2013 as it did in 2012,
aside from specific headline credit events. With more
ABS sponsor ratings turning to a stable outlook,
seller/servicer-related risks to ABS ratings and
performance should continue to decline in 2013. In
2012, Moodys upgraded 85 bonds and downgraded 75,
while S&P downgraded 519 bonds and upgraded 131
bonds. The S&P downgrades were heavily concentrated
in the FFELP space, close to 70% of all instances of ABS
rating downgrades (or over 350 downgrades). This was
mainly due to S&Ps downgrade of the US sovereign
rating to AA+ from AAA in August 2011, as well as
downgrades in the banking industry (swap
counterparties). In addition, downgrades were mainly in

seasoned tranches issued before 2008. Upgrades across

the rating agencies were once again concentrated in the
auto ABS sector. We summarize actions taken by
Moodys and S&P over the past two years and further
break these down by asset class and vintage (Exhibit 11).
We expect subordinate auto ABS to continue to see
upgrades from the rating agencies in 2013, as each new
vintage performance has improved and credit
enhancement remains more than sufficient. Moodys
upgraded 43 bonds from 2011 vintage auto loans and 8
from the 2010 vintage. Similarly, S&P upgraded 18
tranches from 2011 and 16 from 2010. In many cases,
rating agencies reduced their expected cumulative losses
as they upgraded bonds. We would expect this trend to
continue next year as well. Origination standards in auto
loan ABS have stayed strong.
Over the last two years, private credit student loans have
borne the brunt of rating agency downgrades, but the
pace has slowed and should slow further as performance
stabilizes in 2013. In 2011, Moodys downgraded 81
private credit student loan tranches. In 2012, S&P joined
in the action and downgraded 57 tranches. National
Collegiate senior bonds have now been downgraded to
CC. Senior 2003 and 2004 Sallie Mae bonds have been
downgraded to the AA or BBB range. We note,
however, that these downgrades have been mostly
focused on seasoned pre-2008 transactions. Over the last
two years, neither S&P nor Moodys have downgraded
any private credit bonds issued after 2008, which reflects
the better collateral and stronger structures present in
new-issue bonds.
On the FFELP side, more rating headlines are possible
with the threat of the fiscal cliff looming over the US
sovereign rating. If Moodys or Fitch were to downgrade
their AAA US sovereign ratings, the corresponding AAA
FFELP ABS ratings would be in jeopardy. On the
positive side, we expect the ABS markets reaction to
negative FFELP rating volatility to be more muted than
when S&P first took action. While S&Ps downgrades
temporarily widened AAA FFELP ABS spreads by
approximately 5bp, these spreads have since recovered
and tightened further (3-year AAA FFELP ABS are
currently at 20bp).

US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook
November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

Exhibit 11: Moodys and S&P rating actions: Less negative rating volatility likely in 2013, but FFELP linked to
US sovereign rating
Number of instances. Rating actions through November 16, 2012.
Moody 's

S&P

Year of Rating Action

2011

Vintage
Asset Class
Pre 2007 Total

2012

Dow n

Up

203

84

Auto Loan

20

Credit Card

Equipment

FFELP

53

Other

79

57

70

2007 Total

23

62

Priv ate Credit

Auto Loan

42
2

Equipment

FFELP

Other

13

11

28

2008 Total

Dow n

2011
Up

67

Dow n
52

Dow n

54

16

Up
426

65

18

12

282

10

92

37

49

91

13

67

52

34

13

33

27

1
2

4
3

26

4
2

74
6

51

18

16

Credit Card

9
8

1
1

Other

2009 Total

17

Auto Loan

10

Equipment

7
2

Auto Loan
FFELP

2012
Up

Credit Card

Priv ate Credit

Year of Rating Action

43

16

Priv ate Credit

6
6

12

14

12
6
2

FFELP

12

Other
2010 Total
Auto Loan

30

20

30

Credit Card

2
28

29

16

16

Equipment

FFELP

Other

2011 Total

53

Auto Loan

24
8
20

26

43

Equipment

FFELP

18

18
20

Other

2012 Total

Other

Grand Total

227

Source: JP Morgan, Moodys, S&P, Bloomberg

221

75

138

178

101

519

157
8

US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook
November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

Regulatory: The waiting game

Although Dodd-Frank passed in 2010, ABS market
participants are still waiting for final rules on most of the
key regulations, a waiting game that will likely continue
into 2013. As currently outlined, we do not believe that
any single component of Dodd-Frank poses an
insurmountable challenge for ABS issuers or investors.
However, once implemented, Dodd-Frank as a whole
will result in higher regulatory compliance costs,
stringent reporting requirements, and more bank capital
requirements. Reg AB II, risk retention, and the Volcker
rule are three of the most important components of
Dodd-Frank impacting ABS that are yet to be finalized.
The risk retention rule, which calls for issuers to retain
5% of the credit risk of the assets, should not keep issuers
from coming to the ABS market. ABS issuers, for the
most part, already have sufficient skin in the game
through retained first-loss pieces, subordinate tranches,
representative receivable pools, and/or seller interest. It
is also likely that FFELP ABS may get a carve-out due to
the government guarantee on the underlying collateral.
Some sections of the risk retention ruling that are
problematic for MBS issuers, such as premium capture
cash reserve account (PCCRA), may be re-proposed next
year before a final rule is issued.
Reg AB II will result in the most substantive changes for
ABS issuers. As last, proposed by the SEC in August
2011, Reg AB II calls for CEO certification of the
prospectus, distribution of a cash flow model, detailed
disclosure of loan-level data, and more stringent
disclosures by 144A issuers. Currently, ABS issuers do
not provide loan-level data that satisfy Reg AB II
requirements. (Historically, only MBS issuers made loan
tapes available.) Implementing systems to satisfy
reporting requirements will result in higher costs. These
costs will disproportionately increase for smaller, nonbenchmark issuers utilizing the 144A market, who, under
the proposed Reg AB II, would have to meet similar
standards as SEC-registered transactions. We understand
that the cash flow model requirement has been
temporarily shelved by the SEC after its review of
industry comments. The ABS market will simply have to
wait for the final Reg AB II ruling to see exactly what
will be required. The specifics on the loan-level
reporting will be very important for issuers in every ABS
asset class. The timing of that important release is
uncertain, with the best guess being early next year. It is

also uncertain how much time ABS issuers will have to

implement the required changes, with at least one year
preferred by the ABS market. The grace period for
implementation would be critical to ensure a smooth
transition period and to prevent any interruption in
issuers access to funding.
The Volcker rule, which limits proprietary trading and
prevents banks from owning or sponsoring hedge funds,
may have unintended consequences for the ABS market.
As written, the rule exempts securitization vehicles from
its framework if they only contain loans, which may be
too narrow for certain ABS asset classes. It places
restrictions on relationships between banks and hedge
funds/private equity funds, which, as defined, could also
include some ABS vehicles. Since ABS seems to be
accidentally captured in the regulation, we would expect
the final regulation to include a broad enough carve-out
such that securitization can continue unimpaired.
Lastly, the final risk-based capital rules will be
implemented for bank trading desks on January 1, 2013,
and those for bank balance sheets will go into effect in
2Q13. The final Simplified SFA (SSFA) calculation that
was released this year may result in higher capital for
various ABS sectors, if adopted. With credit
enhancement levels outweighing asset performance (i.e.,
losses), the SSFA capital requirement formula imposes
harsher capital requirements on high-quality ABS (with
low subordination). The impact of applying SSFA could
be the harshest for ABS with low levels of credit support,
which would generally be high-quality collateral (e.g.,
prime auto loans). We expect most large banks to be
able to adopt a reasonable approach for ABS holdings,
and the capital requirement should not be an obstacle for
ABS purchases.

Trading themes: Find a pickup game

We expect technicals to continue to drive ABS spreads in
2013, given that credit fundamentals are not expected to
change materially as the economy remains on the path of
a very slow recovery. While fiscal drags will
significantly reduce GDP growth in 1H13, the impact on
the ABS market should be limited to investor sentiment,
rather than ABS credit performance. We expect ABS
spreads to remain relatively stable amid potential bouts
of supply-induced or headline-induced market volatility.
Adjusted for spread volatility, we have seen good value
in ABS versus other credits in recent years. In order to
account for volatility, we calculate a proxy Sharpe

US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook
November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

ratio taking the most recent nominal spreads across asset

classes and dividing them by trailing spread volatility
(Exhibit 12). Spread volatility is calculated as one
standard deviation of quarterly changes in spread over a
two-year period. We use a long time horizon for our
volatility calculations since our ABS spread updates are
weekly and tend to be stickier than other asset classes.
Judging by its Sharpe ratio, 3-year AAA card ABS is the
most attractive asset class. Although they currently offer
only 18bp of spreadsfar lower than corporates, CMBS,
or agency MBStheir spread volatility is only 3bp.
Subordinates and AAAs in other ABS sectors, such as
autos and private credit student loans, also have low
volatility (and high Sharpe ratios) compared to other
asset classes. The FFELP ABS sector has seen relatively
more volatility mainly due to negative rating actions
connected to US sovereign and bank counterparty
downgrades. More broadly, our analysis suggests that
ABS has served as a safe asset class with low volatility.
We expect this trend to remain intact in 2013.

Exhibit 12: ABS sectors historically offer better volatilityadjusted spreads than comparable credits

ABS will continue to provide a safe haven to investors

concerned about the fiscal cliff and in need of higheryielding Treasury surrogates. The technicals, supported
by QE3, point to overall tightening trends next year with
investors hungry for credit and yield.

Source: JP Morgan

AAA credit card and auto loan ABS serve as

effective Treasury surrogates but go with nonbenchmark names for spread pickup
Within the credit card sector, retail names such as
COMNI and WFNMT still offer 30bp and 50bp
pickup, respectively, on the top bankcard ABS names.
In addition, cross-border issuers from the UK could
offer as much as 40bp pickup on top US bank
sponsors, while Canadian issuers offer about 20bp
incremental spread. In the auto sector, the USD
Australian auto ABS from Macquarie Bank continue
to offer a substantial spread pickup due to a
predominantly smaller group of investors that can
purchase ABS backed by non-US domiciled
receivables.
We like short front-pay AAA private credit
student loan ABS
SLMA 2012-E A-1 (1.7 year AAA) came at LIBOR
+75bp in mid-October. The sector continues to see
the cheapest levels for such short duration AAA
bonds. The front-pay bonds are particularly robust
with substantial credit support and an immediately

Spread (bp). Vol = 1 standard deviation of quarterly changes in ABS spreads

Spread
AAA Credit Card ABS 3-year
Agency MBS Nominal Spread

Vol Spread/Vol

18

6.7
5.2

124

24

Private SLABS 7-year AAA

BBB Credit Card 3-year

215

44

4.8

70

19

3.7

BBB Subprime Auto ABS 3 -year

Private SLABS 3-year AAA

180

56

3.2

125

40

3.1

18

2.9

216

80

2.7

26

10

2.5

60

25

2.4

Prime Auto ABS 3-year AAA

BBB Financials 3-5-year
Subprime Auto ABS 2-year AAA
AAA Financials 3-5-year
AAA Non-Financial Corportes 3-5 -year
AAA Corpprates 3-5-year

28

13

2.2

38

18

2.2

AAA FFELP ABS 3-year

20

2.1

CMBS 2005 A4

61

31

2.0

Agency debt 3-year

10

10

1.0

Exhibit 13 Subordinate subprime auto ABS cheap to

comparably rated corporates
bp

500
400
300
200
100
0
Jan-10

Jul-10

Jan-11

Jul-11

Bankcard ABS
JULI Financials

Jan-12

Jul-12

Subprime Auto Loan ABS

JULI Automotive

Source: JP Morgan

Exhibit 14: Levered opportunities limited with tightening

spreads
As of February 2012

Sector

Rating

ABS
WAL Spread
(yrs)
(bp)

As of November 2012

ABS
Levered Spread
Yield
Yield
(bp)

Yield

Levered
Yield
5%

Subprime Auto

BBB

315 3.72%

10%

180 2.25%

Prime Auto

BBB

150 2.07%

5%

210 2.10%

5%

UK RMBS

AAA

160 2.13%

4%

80 0.81%

-1%

Private Credit SL

AAA

235 2.61%

6%

146 1.46%

2%

New Issue CMBS

AAA

65 1.22%

2%

40 0.85%

0%

New Issue CMBS

BBB

10

790 9.83%

29%

435 5.98%

13%

Source: JP Morgan
10

US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook
November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

open principal window. The long-last cash flow

AAA A-2B (AAA 4.48 years) on SLMA 2012-E
came at LIBOR +175bp. Given that the private credit
sector tends to be more vulnerable to volatility, we
prefer the shorter, more liquid tranche with much
shorter credit exposure as well.
Subordinate auto ABS cheap to comparably rated
corporates
The most recent subordinate BBB prime and
subprime auto loan ABS spreads priced at 140bp and
180bp to swaps, respectively. The BBB prime auto
loan ABS are essentially flat to comparably rated
JULI automotive corporates of 3- to 5-year maturities,
while the subprime auto loan ABS offer roughly 40bp
of spread pickup (Exhibit 13). In comparison to the
unsecured corporates, the subordinate auto ABS paper
has roughly 3-year WAL and a relatively short and
consistently positive rating outlook. Spread
tightening potential can be realized by rolling down
the yield curve and/or getting rating upgrades.
Furthermore, the subordinate auto ABS sector has
shown lower spread volatility over the past two years.
With the BBB subordinate ABS, there remains
opportunity to finance purchases and achieve decent
levered yields (Exhibit 14) around 4-5%, as financing
costs have come down with asset spreads this year
(haircuts unchanged). Given these positive ABS
features, we believe spreads will go even tighter
(should be through comparable corporates) and can
continue to outperform.

11

US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook
November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

Exhibit 15: 2012 ABS spread performance

Spread to benchmark (bp)

Current
Benchmark

YTD

11/16/12 Change

Current

YTD
Avg Min Max

Credit Card - Fixed Rate

Benchmark

YTD

YTD

11/16/12 Change Avg Min Max

Student Loans (FFELP)

2-yr

Swaps

-4

3-yr

Swaps

10

-4

11

5-yr

Swaps

23

-2

24

10

3-yr

Libor

20

-35

31

20

55

14

7-yr

Libor

65

-30

74

65

100

23

25

Private Credit Student Loan

125

-110

167 125 235

10-yr

Swaps

40

-5

44

40

45

AAA 3-yr

B-Piece (5-yr)

Swaps

70

-20

74

65

90

Global RMBS (UK Bullet)

C-Piece (5-yr)

Swaps

90

-45

111

90

135

3-yr AAA

Libor

50

-110

118

50

160

5-yr AAA

Libor

80

-90

135

80

170

-6

12

Credit Card - Floating Rate

Libor

2-yr

Libor

13

13

3-yr

Libor

18

13

12

18

Stranded Assets

5-yr

Libor

30

23

22

30

2-yr

Swaps

10-yr

Libor

44

-5

12

10

17

-20

44
90

12

70

38
65

Swaps

Libor

38
75

3-yr

B-Piece (5-yr)

5-yr

Swaps

25

-5

27

25

30

C-Piece (5-yr)

Libor

135

-35

111 100 135

10-yr

Swaps

60

20

60

40

60

1-yr

EDSF

-1

45

2-yr

Swaps

12

-6

3-yr

Swaps

18

-12

B-Piece

Swaps

85

-20

90

Auto - Prime

Auto - Subprime
5

1-yr

EDSF

20

-25

29

12

11

18

2-yr

Swaps

26

-44

48

26

70

21

10

30

3-yr AA

Swaps

70

-90

99

70

160

85

105

3-yr A

Swaps

120

-130

165 120 250

Note: Tier 1 names represented by above

Source: JP Morgan

Exhibit 16: Cross-sector spreads (3-year)

bp

Exhibit 17: Cross-sector yields (%)

5-year AAA Card ABS and Treasury, JULI Financials, FNMA Current Coupon 30-year

300

200

Current
18
18
20
59
90

Credit Card ABS

Prime Auto Loan ABS
FFELP Student Loan ABS
JULI AA Bank (1-3 year)
CMBS

10

Treasury
AAA Card ABS
Agency MBS
Financials

8
6

Current
0.7
1.0
2.2
3.0

4
100

2
0
Jan-10

Jul-10

Source: JP Morgan

Jan-11

Jul-11

Jan-12

Jul-12

0
Jan-10

Oct-10

Jul-11

Apr-12

Source: JP Morgan

12

US Fixed Income Strategy

US Fixed Income Markets 2013 Outlook
November 21, 2012
Amy Sze, CFA AC (1-212) 270-0030
Kaustub Samant (1-212) 834-5444
J.P. Morgan Securities LLC

Exhibit 18: 3-year fixed-rate AAA ABS spread to swaps

Exhibit 21: 3-year floating-rate AAA ABS spread to Libor

bp

bp

50
45
40
35
30
25
20
15
10
5
0
Jan-10

Current
Prime Auto
12
Credit Card
6
Subprime Auto (Right) 26

Jul-10

Jan-11

Jul-11

Jan-12

80

80
70
60
50
40
30
20
10
0

bp

Current
Credit Card
23
Stranded Asset 25

50
45

Current
18

Prime Auto

18

Student Loan 20
40
20
0
Jan-10

Jul-12

Exhibit 19: 5-year fixed-rate AAA ABS spread to swaps

55

60

Credit Card

Jul-10

Jan-11

Jul-11

Jan-12

Exhibit 22: 5-year fixed-rate AAA-ABS spread to

Treasuries
bp

80

60

40
35
30

40

Current
38

Credit Card

25

Stranded Asset

20
15
Jan-10

Jul-12

Jul-10

Jan-11

Jul-11

Jan-12

20
Jan-10

Jul-12

Jul-10

Jan-11

Jul-11

Jan-12

40
Jul-12

Exhibit 20: 3-year single-A fixed-rate ABS spread to swaps

bp

180
160
140
120
100
80
60
40
Jan-10

Exhibit 23: 3-year floating-rate AAA ABS spreads to Libor

Current
50
Credit card
Prime Auto
85
Subprime Auto (Right) 70

bp
200
150
100
50
0

Jul-10

Source: JP Morgan

Jan-11

Jul-11

Jan-12

Jul-12

450
400
350
300
250
200
150
100
50
0
Jan-10

Current
US$ UK
50
RMBS
Private Credit
125
Student Loans

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Source: JP Morgan

13

Disclosures
Conflict of Interest
This research contains the views, opinions and recommendations of J.P. Morgan research analysts. J.P. Morgan has adopted
research conflict of interest policies, including prohibitions on non-research personnel influencing the content of research.
Research analysts still may speak to J.P. Morgan trading desk personnel in formulating views, opinions and recommendations.
Trading desks may trade, or have traded, as principal on the basis of the research analysts views and research. Therefore, this
research may not be independent from the proprietary interests of J.P. Morgan trading desks which may conflict with your
interests. As a general matter, J.P. Morgan and/or its affiliates trade as principal in connection with making markets in fixed
income securities, commodities and other investment instruments discussed in research reports.
Analysts' Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various
factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.

Other Disclosures
J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing
name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.
Options related research: If the information contained herein regards options related research, such information is available only to persons who have
received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options,
please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf
Legal Entities Disclosures
U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the
UK by the Financial Services Authority. U.K.: J.P. Morgan Securities plc (JPMS plc) is a member of the London Stock Exchange and is authorized and
regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 25 Bank Street, London, E14 5JP. South
Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan
Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in
Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan
Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245
234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a
participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private
Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock
Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI
Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities
(Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange
Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK.
Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange
Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P.
Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer
by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities
Singapore Private Limited (JPMSS) [MICA (P) 088/04/2012 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities
Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB
Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd
(18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities
Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities
and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of
Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079
and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai:
JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai
International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.
Country and Region Specific Disclosures
U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc.
Investment research issued by JPMS plc has been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of
publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This
report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons
who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be
engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in
their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue or
distribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior written
consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G of
the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch and J.P.Morgan Chase
Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of
the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with

the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data
from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear
contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk.
Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the
exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and
consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan
Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau
(kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial
Instruments Firms Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time
by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities
discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above.
India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed
by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their
business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section
3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent
of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public
offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory
thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus
with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an
exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information
contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of
the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of
Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities
commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein
or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded
as professional clients as defined under the DFSA rules.
General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co.
or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to
JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the
securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change
without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any
financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not
intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own
independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S.
affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or
announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P.
Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
"Other Disclosures" last revised September 29, 2012.

Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of J.P. Morgan. #$J&098$#*P