Fitch Reasearch

Credit Market Research
www.fitchratings.com 25 May 2010
EMEA Special Report
European Senior Fixed Income Investor Survey

Q210 SovereignRefinancing ChallengesEscalate
Highlights The results of Fitch Ratings’ latest survey of fixed income investors across Europe clearly capture the
rising worries about the euro zone. Conducted during April 2010, the survey preceded the EU/ECB/IMF support package
announced on 10 May, which resulted in the faltering of the 14‐month‐long credit rally.
Intensifying investor concerns regarding developed‐market sovereigns are expressed throughout the survey results.
Respondents believed this bedrock asset class would have by far the biggest difficulty refinancing debt, against a backdrop
of an expected weakening in credit fundamentals due to rising budget deficits and debt. Survey participants signalled that
governments will face higher funding costs amid a rising concern over future defaults and losses.
This pessimism contrasts sharply with the more generally enthusiastic outlook for most other asset classes. Credit profiles
are anticipated to strengthen further, and confidence has grown over whether the loss‐taking is over. Investors perceive that
commercial lending conditions will loosen further, except in the small‐ and medium‐sized enterprise (SME) segment.
However, in a sign of the contagion risk of sovereign concerns, survey participants indicated that the broad spread‐
tightening observed since mid‐2009 is reversing for most asset classes.
The corporate sector is expected to continue to hoard cash and repay debt, and capex is viewed as a low priority. There is
greater conviction that companies will engage in merger and acquisition activity, although investors expect deals to be
financed by a mix of debt and equity, protecting credit profiles.
Expectations have fallen for credit strength in financial institutions, driven partly by concerns relating to the impact of new
regulation. At the same time, respondents became more bullish on the prospects of a loosening in the lending standards of
commercial banks.
70
11
0 20 40 60 80 100
Sovereign ‐ developed market
Sovereign ‐ emerging market

Investment grade ‐ financials
Investment grade ‐ non‐financials
Speculative grade
Emerging market corporate
Structured Finance
The Greatest Refinancing Challenge Over the Next 12 Months Will be Faced by:
Source: Fitch
(%)
Analyst Monica Insoll +44 20 7417 4281 monica.insoll@fitchratings.com
Investor Contact Charles Marling +44 20 7417 4260 charles.marling@fitchratings.com
Related Research · European Senior Fixed Income Investor Survey Q110 (February 2010) · U.S. Senior Fixed Income Investors
Cautiously Optimistic in 2010 (February 2010)
· Global Economic Outlook (April 2010) · The Credit Outlook: Sovereign Debt Worries Cloud Fragile Economic Recovery (May 2010)
· Fitch: European Corporates to Hoard Cash Despite Expected Increase in M&A (May 2010)
· Fitch: European Investors Express Sovereign Refinancing Concerns (May 2010) · Fitch: Bank Regulation Uncertainty Concerns European Investors (May 2010) ·
Credit Asset Management Quarterly ‐ Q110
(March 2010)
Survey Background This survey features 70 responses from the top 100 investing
institutions in Europe, obtained during April 2010.
The survey sample consisted primarily of traditional asset management companies (76%; unchanged on the Q110 survey), with 48% focusing primarily on corporate
debt (down from 63%). Investors with a focus on sovereign debt rose to 23% of the sample (up from 16%). Respondents with more than USD100bn of assets under
management accounted for 52% (43%) of the sample (please refer to page 13 for more details).

European Senior Fixed Income Investor Survey Q210 ‐ Sovereign Refinancing Challenges Escalate May 2010 2
The Paradox: Persistent Sovereign Concerns Contrastwith Greater Optimism for

Risky Assets
19
1
6
54
15
19
20
19
15
13
36
25
32
28
34
48
13
41
47
45
43
48
28
5
0 20 40 60 80 100
Sovereign developed market
Sovereign emerging market
Investment grade financials
Investment grade nonfinancials
Speculative grade
Structured Finance
Deteriorate significantly Deteriorate somewhat Stay the same
Improve somewhat Improve significantly
Over the Next 12 Months, Fundamental Credit Conditions in the Following
European Asset Classes Will…(Q210)
Source: Fitch
(%)
11
59
13
31
14
16
18
48
21
21
35
26
24
35
38
21
52
49
38
55
42
38
20
20
0 20 40 60 80 100
Sovereign
Investment grade corporate
Speculative grade corporate
Asset backed
Residential mortgage backed
Commercial mortgage backed

CDOs
Over the Next 12 Months, Fundamental Credit Conditions in the Following
European Asset Classes Will…(Q110)
Source: Fitch
(%)
Investors signalled intensified concern over developed‐market sovereign issuers, with the proportion expecting significant
credit deterioration nearly doubling to 19%. More broadly, the total share of respondents anticipating deterioration (74%)
remained in the 70%‐80% range which has prevailed since early 2009.
In an apparently paradoxical shift in sentiment, worries about most other asset classes declined further. An unusual level of
homogeneity was displayed across investment‐grade, speculative‐grade and emerging markets, with improvement believed
likely by 44%‐54% of respondents. The outlook for structured finance remains more cautious, with only 33% expressing
such optimism.
Fitch notes that this increased optimism for more risky assets appears to be linked to a hunt for yield. Recent funds flow
data shows that inflows to high yield and emerging bond funds were substantially greater than flows to investment grade
corporate bond funds between January 2009 and April 2010 (according to iBoxx, JP Morgan and iShares). However, the
recent market volatility may result in reduced allocations to high yield and emerging markets debt in the context of
increased risk aversion.

The Challenge: Issuance Expected to Rise

3
15
21
21
17
61
25
47
25
37
52
57
34
51
29
64
53
17
18
0 20 40 60 80 100
Speculative grade

Structured Finance
Decrease by more more than 25% Decrease by up to 25% Remain similar to LTM volumes
Increase by up to 25% Increase by more than 25%
What are Your Expectations for Issuance Over the Next 12 Months by the
Following Categories? (Q210)
Source: Fitch
(%)
32
11
18
25
14
30
20
38
42
40
56
59
59
29
58
43
46
39
19
24
15
10
11
0 20 40 60 80 100
Sovereign
Asset backed
CDOs
Decrease by more more than 25% Decrease by up to 25% Remain similar to 2009 volumes
Increase by up to 25% Increase by more than 25%
What are Your Expectations for Issuance in 2010 by the Following Categories?
(Q110)
Source: Fitch
(%)
On balance, most investors continue to expect issuance to rise across the board, with the exception of investment‐grade non‐
financial corporates, EM sovereigns and structured finance. Behind sovereigns — with their challenging borrowing
requirements of some EUR2.2trn in 2010 — speculative‐grade borrowers are ranked most highly with regard to new
issuance expectations. However, this response rate declined somewhat to 67% from 73%, possibly flagging concerns that
broader market troubles may have an impact on the risk appetite for this asset class.
Respondents continue to have low expectations for investment‐grade corporate issuance. This reconciles well with the
general healthy liquidity and capital structures of this segment, as well as its cautious approach to new investment and
M&A in the absence of stronger economic growth signals.
In 2010 to date, European issuance has been lagging 2009 activity across all major asset classes, by a total of 25%
(according to Dealogic data). Central governments have raised USD737bn, 5% less than at the same time a year ago, while
banks are running at 38% behind their 2009 rate, with USD500bn raised to date. In a more positive development, high‐yield
issuance is up 80%, to USD39bn.

The Cost: Spreads Widen

9
45
16
25
22
23
16
22
27
39
24
46
26
33
45
17
41
43
31
40
46
26
0 20 40 60 80 100
Speculative grade
Structured Finance
Widen significantly Widen somewhat Remain within recent ranges
Tighten somewhat Tighten significantly
What are Your Expectations for Spread Movement Over the Next 12 Months in
These Areas? (Q210)
Source: Fitch
(%)
45
9
19
10
10
17
29
20
33
42
25
34
27
25
25
39
10
42
50
52
52
50
38
35
10
6
4
10
0 20 40 60 80 100
Sovereign
Asset backed
CDOs
Widen significantly Widen somewhat Remain within recent ranges
Tighten somewhat Tighten significantly
What are Your Expectations for Spread Movement in 2010 in These Areas?
(Q110)
Source: Fitch
(%)
The reading for sovereign issuer spread expectations again points to the higher cost that investors expect indebted euro zone
governments to pay. In addition, the data signals a general shift of the debt capital markets towards a more cautious mood,
with spreads also anticipated to trend up for all other asset classes. For example, in the Q110 survey, 49% of participants
expected investment‐grade corporate spreads to tighten, while the latest data shows this down to 31% for non‐financials and
46% for financials.

Broadly Reduced Concerns over Losses, but Pessimism Increases for Sovereigns
60
14
13
9
20
13
13
26
23
34
25
29
23
43
14
63
52
66
51
65
44
0 20 40 60 80 100
Speculative grade
Structured Finance
We are yet to see the peak of the losstaking We are in the middle of the losstaking
We are past the worst of the losstaking
What are Your Expectations for Default/Market Driven Losses? (For Financial
Institutions, Read Loss Disclosure, for Corporates and Structured, Read Loss
Taking for Investors) (Q210)
Source: Fitch
(%)
37
21
36
25
35 38 50 44
39
50
24
64
52 50 42 40
24
29
12 13
40
0 20 40 60 80 100
Sovereign
Investment grade corporate Speculative grade corporate Emerging market corporate Asset backed Residential mortgage backed Commercial mortgage backed
CDOs
We are yet to see the peak of the losstaking We are in the middle of the losstaking
We are past the worst of the losstaking
What are Your Expectations for Default/Market Driven Losses? (For Banks, Read
Loss Disclosure, for Corporates and Structured, Read Loss Taking for Investors)
(Q110)
Source: Fitch
(%)
Respondents became more sanguine over the likelihood of avoiding losses on investments. Averaged across all asset classes
(excluding developed‐market sovereigns), 57% of participants believed that the worst of the loss‐taking was over — a clear
signal of increased confidence compared with the 44% in Q110.
In stark contrast, a total of 60% of investors believed the peak of loss‐taking is still to come in developed‐market
sovereigns, up sharply from 40% in the previous survey.

Sovereign Debt Contagion Takes Centre Stage

47
90
45
54
43
33
53
10
55
46
57
67
0 20 40 60 80 100
Double‐dip recession
Sovereign debt problems
Geopolitical risk
Withdrawal of central bank credit market easing/QE
Anticipation of basle 3/regulatory overhaul
Chinese monetary tightening
High Low
Please Rate the Degree of Risk Posed by the Following Factors to the European Credit Markets Over the Next 12
Months (Q210)
Source: Fitch
(%)
40
38
48
65
45
62
45
57
26
19
23 15
53
17
26
15
0 20 40 60 80 100
Inflation
Deflation
Benchmark' government debt issuer funding failure
Geopolitical risk
Withdrawal of central bank credit market easing/QE
Other
High Moderate Low
Please Rate the Degree of Risk Posed by the Following Factors to the European Credit Markets Over the Next 12
Months (Q110)
Source: Fitch
(%)
Continuing the consistent message, respondents expressed a clear focus on sovereign debt problems as the single‐largest
threat to the smooth functioning of European debt markets. Since the closing of the survey at end‐April, major market
volatility — triggered by concerns over the region’s ability to contain the Greek problem — necessitated a EUR750bn
ECB/IMF rescue package to support the euro.
Furthermore, investors remain cautious, on balance, regarding the execution risk of liquidity withdrawal. In a sign of the
difficulty of switching off such market life support, the European rescue deal includes an introduction of certain new market
liquidity measures as well as a re‐activation of other such operations.

Goldilocks: Neither Inflation nor Deflation Expected

22
23
78
77
0 20 40 60 80 100
Inflation
Deflation
High Low
As Central Banks and Governments Balance Their Pressing Priorities, How Serious is the Risk of Inflation or
Deflation Respectively Over the Next 12 Months?
Source: Fitch
(%)
Optimism Fades onFundamental Credit Conditions in Finance and Industry

Expectations for financial institution credit strength deteriorated sharply during the last quarter. The proportion of investors
anticipating improved fundamentals slipped to 40%, from 63% in Q110. Furthermore, this reading is lower than for Q409
(49%). The cyclical corporate sectors — retail, leisure and consumer products (RLCP) and industrials — also saw lower
optimistic readings, and even more stable industries were affected. However, in contrast with the banking sector, none of
the non‐financial corporate segments saw swings below their Q409 levels.
34
27
13
19
19
26
40
66
37
56
38
32
20
40
23
0 20 40 60 80 100
Financial institutions
Retail, leisure & consumer products
Energy/utilities
Industrials/manufacturing
Telecoms/media
Over the Next 12 Months, Fundamental Credit Conditions in the Following European Industries Will….(Q210)
Source: Fitch
(%)
10
23
17
11
19
24
37
58
38
52
53
38
21
47
29
10
0 20 40 60 80 100
Financial institutions
Retail, leisure & consumer products
Energy/utilities
Industrials/manufacturing
Telecoms/media
Over the Next 12 Months, Fundamental Credit Conditions in the Following European Industries Will… (Q110)
Source: Fitch
(%)

Commercial Bank Lending Conditions to Improve
2
13
10
45
52
45
68
50
35
45
22
0 20 40 60 80 100
Investment grade corporates
SMEs
Standards will tighten further Standards will remain moderately tight
Standards will loosen moderately Standards will loosen significantly
What is Likely to Happen to Commercial Bank Lending Conditions in Europe Over the Next 12 Months? (Q210)
Source: Fitch
(%)
24
46
55
47
42
22
36
17
10
0 20 40 60 80 100
Standards will tighten further Standards will remain moderately tight
Standards will loosen moderately Standards will loosen significantly
What is Likely to Happen to Commercial Bank Lending Conditions in Europe in 2010? (Q110)
Source: Fitch
(%)
In line with continued public pressure on banks to increase commercial lending, investors signalled an expectation of a shift
towards looser credit conditions. The proportion of respondents anticipating tighter conditions for EM and speculative‐
grade entities roughly halved. The investment‐grade universe saw an even stronger signal of improvement, with more than
half the responses pointing to a loosening of standards. SMEs are believed to face the greatest challenge, with more than
three‐ quarters of investors believing standards will stay tight or tighten further.

Cash Remains King, but M&A Expectations Rise

10
15 20
30
47
33
58
55 47
49
43
48
36 27
28
21
13
0 20 40 60 80 100
Capex
Share repurchase
Dividends M&A
Debt amortisation/pay downs Maintain cash cushion
Significant Moderate Limited Not at all
How Do You Expect European Firms to Use Cash Over the Next 12 Months? (Q210)
Source: Fitch
(%)
66
33
54
75
61
58
26
51
36
20
20
12 30
20
10
0 20 40 60 80 100
Capex
Share repurchase
Dividends
M&A
Debt amortisation/pay downs
Maintain cash cushion
Significant Moderate Limited Not at all
How Do You Expect European Firms to Use Cash in 2010? (Q110)
Source: Fitch
(%)
Overall, the survey results showed that, while remaining at high levels, investors are signalling a slightly reduced focus on
conservative financial priorities such as maintaining cash cushions and prioritising amortisation of debt. However, in terms
of the outlook for capex, investors remained cautious in the face of weak demand growth and persistent production
overcapacity.
There was also more than a doubling in the level of expectations for “significant” M&A activity in the next 12 months,
perhaps reflecting improved sentiment for economic growth 2010 or a belief that equity valuations and funding availability
warrant such considerations.

Acquisitions would be Funded Conservatively

11
84
0 20 40 60 80 100
Fully cash/debt funded
Mix of debt and equity
Equity funded
directly, or indirectly through new issuance
To the Extent They Engage in M&A, How Will Most European Firms Finance Such Activity in the Next 12 Months?
Source: Fitch
(%)
To the extent that European firms engage in M&A, a strong majority of investors assume they will be mindful of protecting
their credit profiles, using a mix of debt and equity as tender. Only 11% of investors expect firms to fund acquisitions
entirely with debt or cash, while funding 100% via the equity route is seen as most likely by a small minority.
Fitch notes that M&A activity by European firms has been muted so far in 2010, with a total of EUR81.2bn of deals
announced by mid‐May. This continues the negative trajectory since the 2007 peak, when regional M&A activity totalled
EUR1.3trn. In recent months, Europe has accounted for a notably smaller proportion of global M&A, at 11%‐16% versus an
average 30% during 2005‐Q309.
Regulation Still the MainRisk to Bank Credit Quality

24
14
27
22
57
43
56
48
17
41
10
30
2
5
0 20 40 60 80 100
Macro economy
Stimulus/QE withdrawal
Regulation
Commercial property exposure
Critical Important Limited Neutral Irrelevant
How Important are the Following Risks to Banks‘ Credit Quality Over the Next 12 Months? (Q210)
Source: Fitch
(%)
18
55
58
52
65
18
18
14
21
4 10
30
24
0 20 40 60 80 100
Macro economy
Stimulus/QE withdrawal
Regulation
Commercial property exposure
Critical Important Limited Neutral Irrelevant
How Important are the Following Risks to Banks‘ Credit Quality? (Q110)
Source: Fitch
(%)
Regulation remains a concern for investors, with 83% believing proposed changes represent critical or important risks to the
credit quality of the bank sector. Potential changes to resolution regimes may provide that certain bank creditors have to
share the costs of bank failure. Such changes could have potentially serious implications for bank investors right across the
capital and funding structure.

New rules for banks rank just ahead of macroeconomic risk, which is seen as a threat by 81% of respondents. Investor
sensitivity to both regulation and the economic outlook increased marginally from the already‐elevated levels reported in
the Q110 survey.
European Recovery: a Tale of North and South?

13
13
74
59
13
25
0 20 40 60 80 100
Germany
France
UK
Italy
Spain
Among the slowest to recover Among the fastest to recover
With Europe Lagging the US in Recovering from the Crisis and the Recession, These Major Economies Will be…
Source: Fitch
(%)
The Relationship between Sovereign and Corporate/ Financial Institution Ratings

0
22
38
40
0 20 40 60 80 100
Yes, both corporates and financial institutions
Yes, but only corporates
Yes, but only financial institutions
No, neither can be stronger than their home sovereign
Do you Think that the Fundamental Credit Quality of Corporates and Financial Institutions Can be Stronger than
that of Their ‘Home’ Sovereign?
Source: Fitch
(%)
Investor Flexibility to Sovereign Rating Changes

24%
67%
10%
00000111
Yes, major reallocation would take place and supply/demand for that sovereign would be affected in the long run
Yes, but the effect would be limited and temporary
No
In Your Opinion, Would a Downgrade of a Major ‘AAA’ Sovereign Issuer Trigger Market Flow Changes, e.g. Due
to Investment Guidelines and Constraints and/or Market Indices Rebalancing?
Source: Fitch
(%)
Sovereign CDS Usage and Regulation Impact

2
11
20
62
0 10 20 30 40 50 60 70
Hedge sovereign
As a means to hedging
As a means to hedging
For active investing?
combination
Not at all
Do You Use Sovereign CDS to:
Source: Fitch (%)
Hedge sovereign debt directly? As a means to hedging bank debt from that country? As a means to hedging corporate debt from that country? For active investing?
A combination of active investing and hedging?
Not at all
32
28
12
28
0 10 20 30 40
Reduced ability to effectively Reduced

potential returns Reduced liquidity,
thereby No impact ‐ the CDS market is a
What Will Be the Main Impact of Any Regulation of the Sovereign CDS Market?
Source: Fitch (%)
Reduced ability to effectively hedge risk
Reduced potential returns
Reduced liquidity, thereby driving up trading costs
No impact ‐ the CDS market is a poor guide to sovereign credit risk and can distort the pricing of government bonds
Sovereign CDS remains a core asset class for both hedging and active investing for over one‐third of investors. However, its
use as a pure hedge for sovereign debt is limited, with the majority using the product for both investing and hedging,
highlighting the blur between “investors and hedgers”.
Nearly three‐quarters of the investor community believes that attempts to regulate the sovereign CDS market may have a
number of negative effects. One‐third of respondents felt that regulation would have an impact on liquidity, thus driving up
trading costs, and 28% of respondents believed that this would reduce the ability to hedge risk effectively. One possible
consequence of the inability of investors to hedge risk effectively might be an increase in yields to compensate investors for
the extra risk they would be taking on.
Incremental Investment Index

5
10
14
19
16
13
18
15
0 20 40 60 80 100

Speculative grade
Structured Finance
Cash
Least favoured Most favoured
If You Have EUR1 to Invest Today, Which Would be Your Most and Least
Favoured Choice Respectively?
Source: Fitch
(%)

Description of Respondents
76
9 8 6 2 0
76
12
0 0
20
40
60
80
Traditional asset management company
Insurance company
Pension fund Bank Foundation or
endowment
Hedge fund
Q210 Q110
Which of the Following Best Describes Your Firm?
(%)
Source: Fitch
52
17
21
11
43
18 18
22
15
30
45
60
More than USD100bn USD50bn‐ USD100bn
USD20bn‐ USD50bn Up to USD20bn
Q210 Q110
Which of the Following Best Describes the Amount of Fixed Income Assets Under Management at Your Firm?
(%)
Source: Fitch
48
23 23
63
18 16
4
10
20
30
40
50
60
70
Corporate debt All Sovereign
debt
Structured debt
Q210 Q110
Which of the Following is Your
Primary Focus?
(%)
Source: Fitch

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Copyright © 2010 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1‐800‐753‐4824, (212) 908‐0500. Fax:
(212) 480‐4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. All of the information contained herein is
based on information obtained from issuers, other obligors, underwriters, and other sources which Fitch believes to be reliable. Fitch does not audit or verify the truth
or accuracy of any such information. As a result, the information in this report is provided "as is" without any representation or warranty of any kind. A Fitch rating is
an opinion as to the creditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically
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Credit Market Research

www.fitchratings.com 25 May 2010

EMEA Special Report

European Senior Fixed Income Investor Survey

Sovereign ‐ developed market

Sovereign ‐ emerging market

Investment grade ‐ non‐financials

Emerging market corporate

Analyst Monica Insoll +44 20 7417 4281 monica.insoll@fitchratings.com

Investor Contact Charles Marling +44 20 7417 4260 charles.marling@fitchratings.com

Cautiously Optimistic in 2010 (February 2010)

institutions in Europe, obtained during April 2010.

Credit Market Research

The Paradox: Persistent Sovereign Concerns Contrastwith Greater Optimism for

Sovereign developed market

Sovereign emerging market

Investment grade financials

Investment grade nonfinancials

Emerging market corporate

Deteriorate significantly Deteriorate somewhat Stay the same

Improve somewhat Improve significantly

Over the Next 12 Months, Fundamental Credit Conditions in the Following

European Asset Classes Will…(Q210)

Investment grade corporate

Speculative grade corporate

Emerging market corporate

Residential mortgage backed

Commercial mortgage backed

Deteriorate significantly Deteriorate somewhat Stay the same

Improve somewhat Improve significantly

Over the Next 12 Months, Fundamental Credit Conditions in the Following

European Asset Classes Will…(Q110)

Credit Market Research

The Challenge: Issuance Expected to Rise

Sovereign developed market

Sovereign emerging market

Investment grade financials

Investment grade nonfinancials

Emerging market corporate

Increase by up to 25% Increase by more than 25%

Following Categories? (Q210)

Investment grade corporate

Speculative grade corporate

Emerging market corporate

Residential mortgage backed

Commercial mortgage backed

Increase by up to 25% Increase by more than 25%

Credit Market Research

The Cost: Spreads Widen

Sovereign developed market

Sovereign emerging market

Investment grade financials

Investment grade nonfinancials

Emerging market corporate

Widen significantly Widen somewhat Remain within recent ranges

Tighten somewhat Tighten significantly

These Areas? (Q210)

Investment grade corporate

Speculative grade corporate

Emerging market corporate

Residential mortgage backed

Commercial mortgage backed

Widen significantly Widen somewhat Remain within recent ranges