15 March 2010

Cross Asset Quant Research

Weekly
www.sgresearch.com

Credit QuantSight
Credit back in line with other markets
■ The lack of concrete news on the sovereign front and the 100 Main Model
95
end of the earnings season have brought an end to the The iTraxx Mainn
90 is now almost back in line
bullish trend on the stock market. However, credit indices with its model value
85
tightened across the board last week (-4bp for the iTraxx 80
Main, -13bp for the iTraxx X-Over). 75

70

■ We see this outperformance as a correction between the 65

credit and the other markets since our statistical models 60

ln Main = 15.4 + ln 1yEq.Vol*0.7 + ln EuroSX 50*-1.7 + ln
55
had highlighted credit indices as too wide against the GovYield *-0.1
50
other markets but they are now fair-valued. 01/10 02/10 03/10

Option volatility decreased but extreme risk remains high

■ In the exotic space, credit implied volatility decreased 3m Implied Vol 3m Hist Vol Risk premium
180% 50%
sharply last week, especially on short-term expiries (-8%
160% 40%
for April-10 ATM Main volatility). 30%
140%
3m iTraxx Main Vol

20%

Risk premium (%)

■ We see this decrease as a correction between implied 120%
10%
100%
and realised volatility. Indeed, the risk premium between 0%
80%
historical and realised volatility was unsustainably high -10%
60%
and is now back to its historical average. -20%
40% -30%
■ However, the volatility skew is still extremely steep. So, 20% -40%
0% -50%
market participants looking for macro-hedges should buy
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
ATM options while volatility sellers should focus on OTM
options.

Time for negative basis trades

■ The sharp tightening in the past couple of weeks has 120 Average Basis Average CDS spread 100
Stdev Basis
90
pushed the basis between CDS and cash back into
Avg spread & Stdev Basis (bp)

70 80
negative territory (-6bp on average in our IG universe).
70
Adjusted basis (bp)

■ The sectors that offer the best opportunities for negative 20 60

50
basis trades are the sectors that tightened the most last The basis is
-30 back into negative 40
week: Retailers and Autos companies. territory while 30
the average size
-80 of decreased 20
■ For instance, we recommend negative basis trades on
further
10
Volvo-14 or Volvo-17 as well as on Casino-13 or Casino-
-130 0
14. Sep-09 Dec-09 Mar-10 Jun-10

Contents Analysts
Credit indices 2 Marc Teyssier (Credit) marc.teyssier@sgcib.com +33 1 42 13 55 96
The volatility corner 10
The correlation corner 11 Julien Turc (Head) julien.turc@sgcib.com +33 1 42 13 40 90
Single-name movements 13 Benjamin Herzog (Top-down) benjamin.herzog@sgcib.com +33 1 42 13 67 49
Equity vs. Credit 14 Karsten Hippler (Interest rates) karsten.hippler@sgcib.com +33 1 42 13 93 75
CDS Curves 13 Lorenzo Ravagli (Foreign lorenzo.ravagli@sgcib.com +33 1 42 13 73 76
CDS vs. Cash basis 14 Sandrine Ungari (Interest rates) sandrine.ungari@sgcib.com +33 1 42 13 43 02
Trade idea monitor 15

Macro Commodities Forex Rates Equity Credit Derivatives

Please see disclaimer and disclosures at the end of the document
 Credit QuantSight

Market comments

Credit back in line with other markets

The lack of concrete news on the sovereign front and the end of the earnings season have
brought an end to the bullish trend on the stock market. Stocks ended the week slightly
positive (+0.7% for the EuroStoxx) but equity volatility increased last week (+0.6% for 1y
EuroStoxx 50 VarSwap volatility).

For the past month, we had highlighted credit indices as too wide against other markets.
According to our statistical X-asset model, the rise in equity volatility should have resulted in
wider credit spreads (despite slightly higher stocks), but credit indices actually tightened
across the board (-4bp for the iTraxx Main, -13bp for the iTraxx X-Over). We see this
outperformance as a correction between the credit and the other markets: our statistical
model now highlights credit indices as fairly priced against equity, equity volatility and
government rates.

The iTraxx Main is back in line with other markets Like the Main index, the X-Over is now fair valued
100 Main Model 550 X-over Model
95
90 500
85
80 450
75
70 400
ln Xover = 11.4 + ln 1yEq.Vol*1.1 + ln EuroSX
65 50*-1.2 + ln GovYield *0.5
60 350
ln Main = 15.4 + ln 1yEq.Vol*0.7 + ln EuroSX 50*-1.7 + ln
55 GovYield *-0.1
50 300
01/10 02/10 03/10 01/10 02/10 03/10

Source: SG Cross Asset Research

Cyclicals and consumers are leading the bullish trend while HY and financials
are lagging behind
In terms of sector movement, our SHARP model highlights an outperformance of cyclical
companies against non-cyclicals as well as of consumers vs industrials. These movements
reflect the strong performance of Retailers and Autos companies (which are both cyclical and
consumer-related sectors) fuelled by positive macroeconomic figures (euro area industrial
production was up in January and there were gains in US retail sales in February).

Furthermore, financials underperformed non-financials while HY spreads decompressed

against IG. These single-name CDS movements were fairly in line with indices: financial
indices underperformed slightly (+0.8bp for the SenFin against Main) and the X-Over index
widened by 6bp against the Main.

Finally, the outperformance of the US against European companies was brought to a halt as
the CDX IG widened by 3bp against the Main (but it remains almost 10bp too tight against the
Main historically).

2 15 March 2010
 Credit QuantSight

The X-Over index widened by 6bp against the Main last week Relative movements of credit indices
Current alpha 1w mvt 1w (%) 1m mvt 1m (%)
100 X-Over = 4.53 x Main + 118.19 R²=93%
Against Main
80
X-Over -42.5bp +6.0 +1.5% -12.2 -3.0%
60
HiVol -31.5bp +3.2 +2.9% +11.4 +10.3%
40
Sen Fin +17.4bp +0.8 +1.0% -6.1 -7.6%
Alpha (bp)

20
Sub Fin +26.4bp +0.2 +0.2% -12.4 -9.2%
0
-20
CDX IG -9.7bp +2.9 +3.4% +3.8 +4.6%

-40
Others
-60 Sub vs. Sen Fin -2.7bp -1.0 -0.7% -0.9 -0.6%
+6bp
-80 X-Over vs. HiVol +24.8bp -1.3 -0.3% -38.3 -9.3%
-100
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-1

Source: SG Cross Asset Research

Credit volatility plummets but beware of extreme risk

In the exotic space, credit implied volatility decreased sharply last week, especially on short-
term expiries (-8% for April-10 ATM Main volatility). We see this decrease as a correction
between implied and realised volatility. The risk premium on credit options – i.e. the difference
between implied and realised volatility – was historically high two weeks ago as market
participants, scared by the sovereign debt crisis, had rushed onto the option market to hedge
their credit exposure. This dislocation was not sustainable and volatility arbitrageurs took
advantage of this by selling volatility.

The risk premium tightened sharply as volatility decreased… … but the volatility smile is historically steep

3m Implied Vol 3m Hist Vol Risk premium ATMVol Now (vol) Skew Now (skew)
180% 50% 140% 6%
160% 40%
120% 5%
140% 30%

(vol 20% OTM - ATM)

100%
3m iTraxx Main Vol

20%
Risk premium (%)

120% 4%
Vol 3m ATM

Skew 3m

10% 80%
100% 3%
0%
60%
80%
-10% 2%
60% 40%
-20%
40% 20% 1%
-30%
20% -40% 0% 0%
0% -50% 0 50 100 150 200 250
5y iTraxx Main
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Source: SG Cross Asset Research

As delta-hedging is less risky on a short-term horizon, the decrease in volatility affected

mostly April-10 expiries. Jun-10 ATM volatility on the Main decreased too but OTM options
remain expensive. In other words, the volatility skew is now historically steep. However, given
the lack of liquidity on options, we do not see this as a relative value opportunity as the trade
potential of a short OTM straddle vs long ATM straddle position would not offset transaction
costs. Nevertheless, this is an interesting signal for volatility players: market participants
looking to buy volatility (e.g. macro-hedgers) should buy short-term ATM options while
volatility sellers (e.g. risk takers) should focus on long-term OTM options.

15 March 2010 3
 Credit QuantSight

Correlation: waiting for the roll

As indices are due to roll at the end of the week, the correlation market seems to be focused
on technicals and there was therefore no clear movement in the tranche market. Equity pieces
outperformed slightly – especially on the CDX index (-3.8% for a delta-hedged 5y CDX 0-3%
tranche) – driven by the decline in dispersion (-4.6% in the CDX IG S9 dispersion).

In the meantime, super-senior tranches tightened against indices too, especially on 7y and
10y maturities. As a result, value flew from the wings into the belly of the capital structure.

Time for negative basis trades

For the past month, we have recommended unwinding negative basis trades as wider CDS
had pushed the basis between CDS and cash into positive territory. The sharp tightening in
the past couple of weeks has moved the basis in the other direction (because cash spreads
have lagged behind the rally in the CDS market) and the basis is now negative: in our
European IG universe, the average basis is trading on average at -6bp, a 2m low. Moreover,
the average potential of basis trades, measured by the standard deviation of basis trades in
our bond universe, is historically tight. This shows that the risk transfer between the CDS and
bond markets is working well. That is why we see the current environment as very attractive
for negative basis trades.

The average basis in Europe is back into negative territory

120 Average Basis Average CDS spread Stdev Basis 100

90

Avg spread & Stdev Basis (bp)

70 80

70
Adjusted basis (bp)

20 60

50
The basis is
-30 back into negative 40
territory while 30
the average size
-80 20
of basis
decreased further 10

-130 0
Sep-09 Dec-09 Mar-10 Jun-10

Source: SG Cross Asset Research

The sectors that offer the best opportunities for negative basis trades are the sectors that
tightened the most last week: Retailers and Autos companies. For instance, we recommend
negative basis trades on Volvo-14 and Volvo-17 as well as on Casino-13 and Casino-14. For
more negative basis opportunities, please refer to our daily Basis Monitor.

4 15 March 2010
 Credit QuantSight

Credit indices: iTraxx indices vs other financial markets

Equity and rate markets Credit indices
Current 1w mvt 1w (%) 1m mvt 1m (%) Main X-Over HiVol SubFin
Equity Indices Market 74 410 111 135
EuroStoxx 50 2898 +21 +0.7% +224 +7.7% Last week's close 78 423 116 142
S&P 500 1150 +11 +1.0% +74 +6.5% Change (bp) -4 -13 -5 -7
5y Bond yields (%) Change (%) -5.3% -3.0% -4.6% -4.9%
Bund 2.2% 0.0% +1.4% 0.0% -0.7%
T-Bill 2.4% 0.1% 2.8% 0.1% 3.1% Model 73 412 104 132
Change (bp) +0 +9 +3 -2
1y Var Swap Vol (%) Change (%) +0.6% +2.2% +3.3% -1.2%
EuroStoxx 50 26.0 +0.6 +2.2% -3.1 -11.8%
S&P 500 23.3 +0.2 +0.7% -2.8 -11.8% Market vs model (%) 1% -1% 7% 2%
Equity vs credit spreads Main vs model
5,000 0 250 Main Model

50 200
4,000
5y iTraxx Main (bp)
EuroStoxx 50 (€)

100 150
3,000
150 100

2,000
200 50
ln Main = 15.4 + ln 1yEq.Vol*0.7 + ln EuroSX 50*-1.7 + ln
GovYield *-0.1
1,000 250 0
Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10

Government rates vs credit spreads X-Over vs model

5.0 0 1350 X-over Model

1150 ln Xover = 11.4 + ln 1yEq.Vol*1.1 + ln EuroSX

4.0 50 50*-1.2 + ln GovYield *0.5
5y iTraxx Main (bp)
5y Bund yield (%)

950
3.0 100

750

2.0 150
550

1.0 200
350

0.0 250 150

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10

Equity volatility vs credit spreads HiVol vs model

56 250 600 HiVol Model

51
500
200
EuroStoxx 50 1y vol (%)

46
5y iTraxx Main (bp)

400
41
150
36 300

31 100
200
26
50
100
21 ln HiVol = 18 + ln 1yEq.Vol*1.2 + ln EuroSX50*-2.2 +
ln GovYield *0.8
16 0 0
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10

Source: SG Cross Asset Research

Models are based on a 1y statistical regression of credit indices of iTraxx indices against other financial markets.

15 March 2010 5
 Credit QuantSight

Beta movements – the SHARP model

Risk factor changes (in % spread mvt) Weekly index movements: basket vs. model in bp
1W mvt 1M mvt 1Y mvt

Model (M6)
Market -4.7% -18.4% -91%

Market

Basket
Fin. vs. Corp. +0.7% +1.3% +14%

Alpha
M1

M2

M3

M4

M5
Decompression HY vs. IG +0.5% -1.9% -22%
Cyclicals vs. Non-Cyclicals -0.7% -1.6% -5% Main -4.3 -4.0 -4 -4 -4 -4 -4 -4.2 +0.2
Consum. vs. Indust. -0.7% +0.4% +5% X-Over -13.0 -16.1 -16 -17 -14 -14 -12 -12.4 -3.6
Insurance +0.1% -0.1% -13% SnrFin -3.5 -5.3 -6 -5 -5 -5 -5 -4.9 -0.4
HiVol -5.5 -4.6 -5 -6 -6 -6 -6 -6.3 +1.7

First three risk axes (long term) Last three risk axes (short term)

200% Market (LHS) 80% 125% 40%

Fin. vs. Corp. (RHS)
Decompression HY vs. IG (RHS) 100%
30%
150% 60%
Equivalent spread movement

Equivalent spread movement 75%

20%
50%
100% 40%
25% 10%

50% 20% 0% 0%
-25% -10%
0% 0%
-50%
Market (LHS) -20%
-75% Fin. vs. Corp. (RHS)
-50% -20%
Decompression HY vs. IG (RHS) -30%
-100%
-100% -40% -125% -40%
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10

Last three risk axes (long term) Last three risk axes (short term)
40% Cyclicals vs. Non-Cyclicals Cyclicals vs. Non-Cyclicals
Consum. vs. Indust. 20% Consum. vs. Indust.
30%
Insurance Insurance
Equivalent spread movement

Equivalent spread movement

20% 10%

10%
0%
0%

-10% -10%

-20%
-20%
-30%

-40% -30%
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10

Source: SG Cross Asset Research

The SHARP model : the six risk axes

This section shows beta movements in the CDS market. Using our Statistical Hedging and Arbitrage for Portfolios (SHARP)
model, we found 6 main risk axes which explain more than 60% of weekly spread movements. More details on this
methodology are given in our May 08 article “Statistical hedging: a multi-factor model based on PCA”.

Axis movements are given in equivalent percentage spread movements, i.e. a +10% increase of a factor means that the spread
of a company with a beta of 100% with respect to this factor increased by 10% (e.g. +10bp for a CDS trading at 100bp).

The top right-hand table highlights each expected index weekly movement given the movements of our 6 risk axes. M1 stands
for the expected movement given the first factor only, M2 is the expected movement given the first two factors, and so on. The
model column represents the expected index movement given all 6 risk axes.

6 15 March 2010
 Credit QuantSight

iTraxx Main corner

Spread, curves and analytics iTraxx Main

Current 1w mvt 1m mvt 230 -40
Index spread 210

5-10y inverted curve (bp)

-30
5y 74bp -4bp -16bp 190
3-5y 23bp +1bp +7bp

Spread 5y (bp)
-20
170
5-7y 9bp +1bp +4bp
150 -10
5-10y 18bp +1bp +6bp
130
0
110
Basket analytics
90 10
Skew 5y 0bp -0bp +1bp
70
Skew 5-10y 2bp +0bp +3bp 20
Dispersion 36.2% +0.7% -2.6% 50
Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

Skew: basis between index and components Credit spreads: indices, single names and cash
30 5y 5-10y 300
20

10 250

0
200
Basis (bp)

-10

-20 150
-30

-40 100

-50 5y iTraxx Main

50
-60 Cash spreads (Main-skew-basis)
Single name CDS spread (Main - skew)
-70 0
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

Best individual performers - Main iTraxx Main vs CDX IG

1 Next PLC (-15bp @92bp) 250
300
2 Volvo (-14bp @188bp)
Roll-cor iTraxx Main 5y (bp)

3 Finmeccanica (-11bp @96bp) 200 250 Roll-cor CDX IG 5y (bp)

4 Casino (-11bp @86bp)
200
5 Holcim (-11bp @115bp) 150

Worst individual performers - Main 150

1 Arcelor (+30bp @114bp) 100
100
2 Telecom Italia (+7bp @148bp)
50
3 Alstom (+5bp @105bp) 50
4 Portugal Telecom (+5bp @100bp)
0 0
5 OTE (+2bp @96bp)
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

Source: SG Cross Asset Research

15 March 2010 7
 Credit QuantSight

iTraxx X-Over corner

Spread, curves and analytics iTraxx X-Over

Current 1w mvt 1m mvt 1200 -275
Index spread 1100 -225

5-10y inverted curve (bp)

5y 410bp -13bp -85bp 1000
-175
3-5y 60bp +4bp -6bp

Spread 5y (bp)
900
5-7y 14bp +0bp +21bp -125
800
5-10y 23bp +3bp +10bp -75
700
-25
600
Basket analytics
25
500
Skew 5y 1bp +3bp +4bp
75
Skew 5-10y 11bp -0bp -0bp 400

Dispersion 67.7% +1.3% +3.2% 300 125

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

iTraxx X-Over basis to components against index iTraxx X-Over dispersion

80 Basis X-Over 5y Basis X-Over 5-10y 115% 1350
60
105%
1150
40
95%
Basket dispersion

5y Spread (bp)
20
950
85%
Basis (bp)

-20 75% 750

-40 65%
550
-60
55%
-80 350
45%
-100

-120 35% 150

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Best individual performers - X-Over iTraxx X-Over vs iTraxx Main

1 ONO (-120bp @969bp)
2 Grohe (-78bp @1045bp) 1100 200

Roll-cor iTraxx Main 5y (bp)

Roll-cor iTraxx X-Over 5y

3 DSG International (-70bp @628bp)

4 Norske Skog (-47bp @1009bp) 900
150
5 NXP B.V. (-31bp @1063bp)
700
Worst individual performers - X-Over
100
1 Seat Pagine Gialle (+26bp @1465bp) 500
2 International Power (0bp @201bp)
50
3 UPC (-5bp @495bp) 300

4 Smurfit Kappa Funding (-5bp @519bp)

100 0
5 Clariant (-5bp @112bp)
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Source: SG Cross Asset Research

8 15 March 2010
 Credit QuantSight

Index relative value

Relative movements of credit indices CDX IG vs iTraxx Main

Current alpha 1w mvt 1w (%) 1m mvt 1m (%) 50
CDX = 1.2 x Main + 4.33 R²=98%
Against Main 40
X-Over -42.5bp +6.0 +1.5% -12.2 -3.0%
30 S7 S8
HiVol -31.5bp +3.2 +2.9% +11.4 +10.3%

Alpha (bp)
S9 S10
Sen Fin +17.4bp +0.8 +1.0% -6.1 -7.6% 20
S11 S12
Sub Fin +26.4bp +0.2 +0.2% -12.4 -9.2% 10

CDX IG -9.7bp +2.9 +3.4% +3.8 +4.6% 0

Others
-10
Sub vs. Sen Fin -2.7bp -1.0 -0.7% -0.9 -0.6%
-20
X-Over vs. HiVol +24.8bp -1.3 -0.3% -38.3 -9.3%
-30
Jun-07 Dec-07 Jul-08 Jan-09 Aug-09 Feb-10 Sep-10

iTraxx X-Over vs iTraxx Main iTraxx HiVol vs iTraxx Main

120
300 X-Over = 4.53 x Main + 118.19 R²=93% HiVol = 2.07 x Main - 10.29 R²=95%
100
200 80
60
100
Alpha (bp)

40
Alpha (bp)

0 20
0
-100
-20
-200 -40
S7 S8 S9
S7 S8 S9
-60
-300 S10 S11 S12
-80 S10 S11 S12
-400 -100
Jun-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Jun-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10

iTraxx SubFin vs iTraxx SnrFin iTraxx SubFin vs iTraxx Main

150
80 SubFin = 1.75 x SnrFin - 2.54 R²=98% SubFin = 1.72 x Main - 18.47 R²=89%
S7 S8 S9 100
60
S10 S11 S12
40 50
Alpha (bp)
Alpha (bp)

20
0
0
-50
-20

-100 S7 S8 S9
-40
S10 S11 S12

-60 -150
Jun-07 Dec-07 Jul-08 Jan-09 Aug-09 Feb-10 Sep-10 Jun-07 Dec-07 Jul-08 Jan-09 Aug-09 Feb-10 Sep-10

Source: SG Cross Asset Research

Alpha of regressions and roll-correction

The alpha is the residual error in the regression of the spread of one index against the spread of another reference index. When
the alpha is positive, it means that the index we want to regress has underperformed the reference index (is wider than the
reference index on a beta-adjusted basis). When it is negative, it means the index has outperformed the reference index.

In order to compare past spreads of credit indices, we need to correct them from the mismatch of composition and maturity so
that they reflect where the current series with the current maturity should be trading. For more details on our methodology for
roll-correcting spreads, please refer to our August 2007 article “Bridging the gap between series of credit indices”.

15 March 2010 9
 Credit QuantSight

The Volatility corner

iTraxx Main spread options Historical vs. market implied volatilities

Current 1w mvt 3m Implied Vol 3m Hist Vol Risk premium
ATM Apr-10 vol 58% -8.0% 180% 50%

ATM Jun-10 vol 64% -3.5% 160% 40%

3m historical volatilty 45% +0.9% 140% 30%

3m iTraxx Main Vol

20%
3m risk premium 18% -5.6%

Risk premium (%)

120%
10%
Index Spread 75bp -5bp 100%
0%
Most likely spread in Apr-10 74bp -3bp 80%
-10%
Most likely spread in Jun-10 68bp -2bp 60%
-20%
BEV Apr-10 (Rec/Pay) 70/81 -3.4/-7.1 40% -30%
BEV Jun-10 (Rec/Pay) 66/86 -3.9/-7.2 20% -40%
0% -50%
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Mar-10 iTraxx Main volatility smile Jun-10 iTraxx Main volatility smile
90% Jun-10 (current week)
85%
Jun-10 (last week)
85%
80%

75% 80%

70% 75%

65%
70%

60% Apr-10 (current week)

65%
Apr-10 (last week)
55%
60%
50% 50 70 90 110 130 150 170 190
50 70 90 110 130 150

Market implied distributions in Mar-10 Market implied distributions in Jun-10

Apr-10 implied distribution Weekly change 40% Jun-10 implied distribution Weekly change
60%
35%
50%
30%

40% 25%

30% 20%

15%
20%
10%
10%
5%
0% 0%

-10% -5%
<40 60 80 100 120 140 160 180 200 <40 60 80 100 120 140 160 180 200

Source: SG Cross Asset Research

The Volatility corner

The implied volatility smile is interpolated using a credit version of the SABR model. More details are available in our paper from March
2007, “Credit options: reading the market’s smile”.

10 15 March 2010
 Credit QuantSight

The Correlation corner

Correlation market movements Delta-hedged tranches
Current 1w mvt 1m mvt Current 1w mvt 1m mvt
5y iTraxx Main S9 5y iTraxx Main S9
Ref 70bp -10bp -15bp 0-3% (Upf+500bp) 26.5% -0.94% -1.12%
Expected Loss 2.2% -0.32% -0.5% 3-6% (Upf+500bp) -4.0% -0.17% +0.34%
Upfront 0-3% 26.5% -3.8% -5.3% 6-9% (Upf+500bp) -10.3% +0.24% +0.69%
Correlation 0-3% 40.2% -0.4% -1.0% 9-12% 95bp +2bp +8bp
Basket dispersion 52.5% +1.0% -0.9% 12-22% 37bp +2bp +1bp
Spread 22-100% 13bp -3bp -6bp 22-100% 13bp +0bp -1bp
5y CDX IG S9 5y CDX IG S9
Ref 102bp -8bp -25bp 0-3% (Upf+500bp) 50.3% -2.37% -3.77%
Expected Loss 2.7% -0.23% -0.7% 3-7% (Upf+500bp) 7.1% -0.14% -2.28%
Upfront 0-3% 50.3% -3.8% -7.8% 7-10% (Upf+500bp) -6.7% +0.23% -0.21%
Correlation 0-3% 38.8% -3.0% -8.6% 10-15% (Upf+100bp) -0.3% +0.08% +0.57%
Basket dispersion 83.2% -4.6% -7.6% 15-30% (Upf+100bp) -2.1% +0.15% +0.43%
Spread 30-100% 10bp -1bp -6bp 30-100 (Upf+100bp) -2.5% +0.01% -0.03%
5y Equity correlations Base correlation smile
90% iTraxx 5y 0-3% correlation 100% iTraxx 5y
CDX 5y normalized by EL
80% CDX 5y 0-3% correlation
90% Last week (iTraxx)
70% Last week (CDX)
80%
60%

50% 70%

40% 60%
30%
50%
20%
40%
10%

0% 30%
Jan-07 Jul-07 Feb-08 Aug-08 Mar-09 Sep-09 Apr-10 Nov-10 0% 5% 10% 15% 20% 25% 30%

iTraxx basket dispersion vs. delta-hedged equity CDX basket dispersion vs. delta-hedged equity
90% 40%
125% 60%
80% 30%
115%
70% 40%
20%
105%
60% 10%
20%
95%
50% 0%

40% 85% 0%
-10%

30% -20% 75%

-20%
iTraxx 5y dispersion
20% -30% 65% CDX 5y dispersion
Delta-hedged 5y 0-3% iTraxx upfront 5y 0-3% upfront at cst. bench (RHS)
10% -40% 55% -40%
Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09

iTraxx basket dispersion vs. delta-hedged equity CDX basket dispersion vs. delta-hedged equity
70% 100% 5Y
5Y
90% 7Y
60% 7Y
80% 10Y
10Y
50% 70%
60%
40%
50%
30% 40%

20% 30%
20%
10%
10%
0% 0%
3% 6% 9% 12% 22% 3% 7% 10% 15% 30%

Source: SG Cross Asset Research

15 March 2010 11
 Credit QuantSight

iTraxx Main 5y delta-hedged junior tranches iTraxx Main 5y delta-hedged senior tranches
200 3-6% 6-9% 0-3% Upfront (RHS) 60% 40 9-12% 12-22% 22-100% 15

150 50% 20
10
0
100 40%
-20 5
50 30%
-40 0
0 20% -60
-5
-50 10% -80
-100 -10
-100 0%
-120 -15
-150 -10%
-140
-200 -20% -20
-160
-250 -30% -180 -25
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

iTraxx 5y expected loss distribution… iTraxx 5y expected loss distribution…

100% 3.0%

90% 2.5%

80% 2.0%

70% 1.5%

1.0%
60%

EL 22-100% 0.5%
50%
EL 12-22%
0.0%
40% EL 9-12% 0-3% 3-6% 6-9% 9-12% 12-22% 22-100%
EL 6-9% -0.5%
30%
EL 3-6%
-1.0%
20% EL 0-3%
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 -1.5%

CDX IG 5y delta-hedged junior tranches CDX IG 5y delta-hedged senior tranches

1000 60% 150 40
3-7% 7-10% 0-3% Upfront (RHS) 10-15% 15-30% 30-100%
800 50%
100 30
600 40%

400 30% 50
20
200 20%
0
0 10% 10
-200 0% -50
0
-400 -10% -100
-600 -20%
-150 -10
-800 -30%

-1000 -40% -200 -20

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

CDX IG 5y expected loss distribution… … and weekly changes

100% 1.0%

90% 0.8%

80% 0.6%

70%
0.4%

60%
0.2%
50%
0.0%
40% 0-3% 3-7% 7-10% 10-15% 15-30% 30-100%
EL 30-100%
-0.2%
EL 15-30%
30% EL 10-15%
EL 7-10% -0.4%
20% EL 3-7%
Jan-07 EL
May-07
0-3% Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 -0.6%

Source: SG Cross Asset Research

12 15 March 2010
 Credit QuantSight

Issuer-specific monitor

Single-name movements – the SHARP model

Spread volatility Surprise index by sector

Current 1w mvt 3m avg 3m Z-score 160% Autos Consumers
Financials Industrials
Total = Alpha + Beta 49.8% -32.3% 55% -28%
140% Insurance TMT

Average Alpha volatility by sector

Alpha 26.0% +6.7% 26% 1% Utilities & Energy
120%
Beta 23.8% -39.0% 29% -21%
1 Market 23.5% -38.1% 28% -18% 100%

2 Financials 0.3% +0.3% 0.3% 2% 80%

3 HY vs IG 0.0% -0.5% 0.3% -147%
60%
4 Cyclicals 0.0% -0.3% 0.3% -66%
40%
5 Consum vs Indus 0.0% -0.2% 0.1% -131%
6 Insurance 0.0% -0.2% 0.1% -83% 20%

0%
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

Breakdown of weekly volatility Split of weekly variance between alpha and beta
180% Alpha Insurance 100%
Consum. vs. Indust. Cyclicals vs. Non-Cyclicals Market Fin. vs. Corp.
160% 90% Decompression HY vs. IG Cyclicals vs. Non-Cyclicals
Decompression HY vs. IG Fin. vs. Corp.
Market 80% Consum. vs. Indust. Insurance
140% Alpha
70%
Part of the variance

120%
Weekly volatility

60%
100%
50%
80%
40%
60%
30%
40% 20%
20% 10%

0% 0%
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

3-month worst alpha performers 3-month top alpha performers

Credit opinion Spd mvt Alpha mvt Z-Score Credit opinion Spd mvt Alpha mvt Z-Score
1 Allied Irish Banks Negative +21% +19% +2.5 1 Japan Tobacco Stable -35% -22% -2.6
2 TNT NV No Reco +36% +36% +2.0 2 Lloyds TSB Group Negative -9% -15% -2.5
3 FCE Bank - +13% +12% +1.9 3 DSM Stable -12% -15% -2.1
4 Havas Stable +7% +8% +1.9 4 Endesa Stable -40% -22% -1.8
5 ABB Stable -18% +12% +1.9 5 Continental Negative -39% -26% -1.8
6 Dong Stable -10% +6% +1.9 6 ISS Holding - -6% -2% -1.7
7 Rexam - +7% +10% +1.8 7 UBS Negative -18% -7% -1.5
8 Hanson - +6% +16% +1.8 8 Lafarge Stable -23% -8% -1.4
9 Ericsson Negative +2% +20% +1.8 9 J Sainsbury Stable -19% -11% -1.4
10 Svenska Cellulosa Stable -1% +4% +1.8 10 Suez No Reco -21% -18% -1.4
Source: SG Cross Asset Research

SHARP – single-name spread movements

This section highlights alpha movement – i.e. spread movements stripped from the movement of the six market factors found
by our SHARP model.

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 Credit QuantSight

Capital structure arbitrage – The S2C model

iTraxx Main against EuroStoxx 50… … and against EuroStoxx variance swaps

230 Roll-corrected 5y Main EuroStoxx 50 (inverted) 1500 230 Roll-corrected 5y Main EuroStoxx 12m VarSwaps 55

210 210 50
190 2000 190
45

Inverted stock price

170 170
40

Spreads (bp)
Spreads (bp)

Volatility (%)
2500
150 150
35
130 130
3000 30
110 110
25
90 90
3500
70 70 20

50 4000 50 15
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Model vs market volatility Model vs market CDS spread

United States
1500 Sinclair Broadcast
100% Hartford Steel
1300 Financial AK Steel
90% American
Airlines
Dynegy INC 1100 Gecina
80%
Model CDS spread

Level 3 Comm
S2C volatility

900
70% Ford inc
Motor MGM Mirage 700
60% C dit
Level 3 Comm inc
50% 500

40% 300 UNISYS CORP

30% 100 BMWDynegyMGM Mirage

20% -100
-100 100 300 500 700 900 1100 1300 1500
0% 20% 40% 60% 80% 100%
Market volatility Market CDS spread

The S2C model

The Smile-to-credit model is a relative value framework that analyses CDS curves using equity implied volatility inputs and
balance sheet data. We initially calibrate the model to the short-term CDS curve and then compute a theoretical volatility level.
This section compares these model volatilities to market ones. A full description of this model is available in our March 2008
paper: “The S2C model: an integrated framework for equity-credit relative value”.

14 15 March 2010
 Credit QuantSight

Buy CDS opportunities

Entity Ticker Sector Market Model Market Model Vol CDS Stock Mkt Vol S2C Vol
CDS CDS Vol change change change change
M-Real MRLBV FH Industrial & Building Mat 727 2537 47.68% 57.71% -21.0 5.62% 21.74% 29.00%
Volkswagen VOW GR Autos 87 1798 33.37% 35.39% -7.9 5.30% 2.78% -0.05%
Hartford Financial Services HIG US Insurance 181 1437 40.60% 41.98% -12.9 1.46% 6.51% 4.29%
United States Steel X US Industrial & Building Mat 279 1455 46.69% 46.93% -30.8 6.28% 27.48% 23.65%
AK Steel AKS US Industrial & Building Mat 427 1325 48.16% 48.24% -6.3 -4.97% 0.78% -0.31%
Gecina GFC FP Real Estate 192 1050 32.11% 32.19% -24.8 2.51% 3.24% -2.33%
Generali Sub G IM Insurance 105 955 23.42% 31.19% -17.4 3.11% -1.60% -0.92%
AMR AMR US Aerospace, Defense & Airlines 1405 2226 64.31% 74.53% -195.0 7.84% -1.15% 4.17%
Daimler DAI GR Autos 88 908 30.46% 35.80% -7.9 1.77% 0.88% 0.37%
Sinclair Broadcast Sub SBGI US Media 723 1400 56.03% 54.13% 0.0 4.54%
Generali G IM Insurance 70 717 23.42% 31.07% -8.9 3.11%
Wendel Investissement MF FP Industrial & Building Mat 335 821 35.43% 37.14% -24.4 2.05%
Masco MAS US Industrial & Building Mat 199 657 38.80% 41.01% -14.8 5.26% -8.02% -6.19%
Porsche PAH3 GR Autos 105 548 35.21% 38.47% -8.0 6.45% 11.90% 12.99%
Amerada Hess AHC US Media 85 524 60.07% 51.12% 0.0 0.00% -1.45% -0.08%
Scania AB SCVA SS Autos 74 505 30.58% 34.29% -6.9 4.60%
Air France-KLM AF FP Aerospace, Defense & Airlines 319 697 36.68% 40.22% -14.7 2.75% 0.00% 0.24%
Swiss Re Sub RUKN VX Insurance 102 421 28.09% 32.71% -6.0 -0.50% -1.05% -0.59%
Volvo VOLVB SS Autos 189 506 29.72% 35.35% -13.9 6.97% 11.44% 9.46%
Arcelor MT NA Industrial & Building Mat 115 390 36.69% 37.92% 29.8 0.74% -0.32% 0.16%
Source: SG Cross Asset Research

Sell CDS opportunities

Entity Ticker Sector Market Model Market Vol Model Vol CDS Stock Mkt Vol S2C Vol
CDS CDS change change change change
Seat Pagine Gialle PG IM Media 1466 447 42.83% 56.20% 25.9 -0.83%
Boyd Gaming BYD US Travel & Leisure 1140 529 52.76% 59.59% -47.0 5.51% -1.62% -1.64%
Norske Skog NSG NO Industrial & Building Mat 1010 474 62.86% 56.14% -47.1 3.38% 39.77% 27.32%
TUI TUI1 GR Travel & Leisure 796 312 46.25% 52.41% -30.4 -0.40% 13.96% 14.96%
DSG International DSGI LN Retailers 629 157 43.92% 46.61% -69.9 2.70% 0.14% -0.76%
Rallye SA RAL FP Retailers 477 44 25.14% 28.99% -14.1 4.70% -2.58% -3.86%
Amkor Technology AMKR US Industrial & Building Mat 548 119 40.96% 46.53% -6.0 3.36% -0.54% -0.04%
Eastman Kodak Co EK US Consumer Goods 806 382 59.66% 62.92% -59.0 0.17% -4.57% -0.37%
Dynegy Holdings DYN US Utilities & Energy 920 522 43.19% 83.34% -22.0 5.48% -1.99% -5.64%
Sol Melia SOL SM Travel & Leisure 490 108 39.72% 45.19% -24.4 7.32%
AES AES US Utilities & Energy 485 114 38.71% 50.65% -25.8 0.69% 0.71% 1.74%
NRG Energy NRG US Utilities & Energy 466 101 33.61% 42.96% -19.2 -2.12%
Community Health Systems CYH US Chemical & Pharma 524 161 33.87% 43.88% -11.2 -4.90% -0.99% -0.54%
Iron Mountain Sub IRM US Services 398 42 26.51% 34.48% -20.3 -0.62%
Sanmina-SCI Sub SANM US Industrial & Building Mat 583 231 51.37% 49.60% -23.0 0.60% -0.91% -3.09%
Level 3 Communications LVLT US Telecom 1119 768 43.98% 69.44% 0.0 3.94%
UPC LBTYA US Utilities & Energy 495 155 34.55% 43.86% -4.8 1.00% 5.65% 10.89%
Polyone POL US Chemical & Pharma 523 187 41.91% 45.80% -21.5 3.99% 4.80% 6.29%
Avis Europe AVE LN Autos 560 236 48.07% 47.84% -30.0 -6.87% -0.83% -0.87%
Tenet Healthcare THC US Chemical & Pharma 567 316 51.38% 62.76% -23.5 -2.98%
Source: SG Cross Asset Research

15 March 2010 15
 Credit QuantSight

CDS curves – EC-hedge model

Curves and analytics iTraxx Main

3-5y (1w mvt) 5-7y (1w mvt) 5-10y (1w mvt) Last week curve Current curve
Last week dgr Current debt growth rate 1%
Average Curves
115
Main +19.6bp (+1.1) +6.9bp (+0.5) +14.8bp (+0.7) 3-5y
105
(+0.4) (+0.4) +19.0bp (+0.4)

Benchmark CDS Curves

HiVol +25.9bp +9.4bp

Debt growth rate

95 0%
X-Over +24.2bp (+4.5) +4.3bp (+1.3) +8.7bp (+2.0)
Sub Fin +72bp (+3.7) +12bp (+1.4) +16bp (+2.2) 85

75
-1%
Adj debt growth rate 65
Main 0.7% (+0.0%) -11.0% (+0.0%) -1.7% (+0.0%) 5-10y
55
HiVol -0.5% (+0.0%) -9.7% (+0.0%) -1.4% (+0.0%)
45 -2%
X-Over -0.5% (+0.2%) -9.3% (+0.0%) -1.1% (+0.1%) 3 5 Maturity (years)
7 9
Sub Fin -5.6% (+0.1%) -18.1% (+0.1%) -5.0% (+0.0%)

iTraxx HiVol iTraxx X-Over

200 0% 600 Last week curve Current curve 0%
Last week curve Current curve
Last week dgr Current debt growth rate
Last week dgr Current debt growth rate
180 550
Benchmark CDS Curves
Benchmark CDS Curves

160 3-5y
3-5y

Debt growth rate

Debt growth rate

500
140
-1% 450 5-10y -1%
120
5-10y 400
100

80 350

60 -2% 300 -2%

3 5 7 9 3 5 7 9
Maturity (years) Maturity (years)

3y-5y adjusted debt growth rate history 5y-10y adjusted debt growth rate history
20% X-Over Main HiVol 12% X-Over Main HiVol
3y-5y adjusted debt growth rate

10% 7%
5y-10y adjusted debt growth rate

2%
0%
-3%
-10%
-8%
-20%
-13%
-30%
-18%

-40% -23%

-50% -28%
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Source: SG Cross Asset Research

SGs CDS curves model: the EC-Hedge model

SG has developed an innovative methodology to analyse CDS curves. It consists of translating CDS curve market data into an
implied debt growth rate indicator for each bucket of the curve (1y-3y, 3y-5y, 5y-7y and 7y-10y). This debt growth rate is the
market anticipation of the dynamics of a company’s leverage in the future. The higher the debt growth rate, the steeper the
curve, according to the model. We therefore usually recommend playing steepeners on curves with a low debt growth rate and
flatteners on curves with a high debt growth rate. For more details on our CDS curves methodology, please refer to our articles
dated Nov 2004 Introduction to the CDS curves monitor and May 2005 Hedging CDS curve trades: a case study.

16 15 March 2010
 Credit QuantSight

CDS vs. cash basis monitor

Basis movements Adjusted basis against CDS spreads: Inv. Grade

Current 1w mvt 1m mvt 3m Z-Score 120 Average Basis Average CDS spread 310
Stdev Basis
Avg ASW Spread 77bp +1bp -6bp +0.1

Avg spread & Stdev Basis (bp)

260
Avg CDS Spread 71bp -4bp -16bp -0.5 70

Avg Basis -6bp -5bp -10bp -0.7

Adjusted basis (bp)

210
Stdev Basis 25bp -1bp -4bp -1.8 20
160
-30
110

-80
60

-130 10
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

Cash vs. CDS leading/lagging indicator Adjusted basis by vintage

100% 300 60 <2003 2004 2005 2006
Cash leading CDS leading

2007 2008 2009

75% 40
250
Average CDS spread (bp)

50% 20
200
25% 0

0% 150 -20

-25% -40
100
-50% -60
50
-75% -80

-100% 0 -100
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

Average adjusted basis by sector Adjusted basis by maturity

This week Last week Movement This week Last week Movement
20 4

15 2
Average basis by maturity (bp)

10 0

-2
5
-4
0
-6
Chemical & Pharma

Industrial & Building

Consumer Goods &

-5
-8
Utilities & Energy

-10
-10
Autos

-15
TMT

-12
Financials

Insurance
Retailers

-20 -14
1y 2y 3y 5y 7y 10y

Source: SG Cross Asset Research

15 March 2010 17
 Credit QuantSight

Trade ideas monitor

This section has not been updated. Performance of our CDS curve strategy
4,000,000 €

3,500,000 €

3,000,000 €

2,500,000 €

2,000,000 €

1,500,000 €

1,000,000 €

500,000 €

0€
Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08

Performance of our equity-credit strategy Performance of our basis strategy

3 500 000 € 2,500,000 €

3 000 000 €
2,000,000 €
2 500 000 €

1,500,000 €
2 000 000 €

1 500 000 € 1,000,000 €

1 000 000 €
500,000 €
500 000 €

0€ 0€
Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09
-500 000 €
-500,000 €

Performance of our hybrid strategy Performance of our index strategy

1,600,000 € 1,800,000 €

1,400,000 € 1,600,000 €

1,200,000 € 1,400,000 €

1,000,000 € 1,200,000 €

800,000 € 1,000,000 €

800,000 €
600,000 €
600,000 €
400,000 €
400,000 €
200,000 €
200,000 €
0€
Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 0€
-200,000 €
Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09
-200,000 €

Source: SG Quantitative Research

Performance calculations

All performances are calculated using mid-market data from SG market makers. They do not include any transaction costs.

18 15 March 2010
 Credit QuantSight

Index trades
Performance of our index recommendations

Trade Entry Date Exit Date Current Perf Min Perf Max Perf Entry Diff Exit Diff Target Stop-loss

short XOver vs. Main S5 22-Jun-06 23-Jun-06 -36,868 € -36,868 € 0€ 259 272 37,500 € -37,500 €
short XOver vs. HiVol S6 06-Nov-06 09-Nov-06 354,775 € 0€ 354,775 € 193 192 325,000 € -325,000 €
Xover flattener vs. HiVol steepener 27-Nov-06 23-Feb-07 333,432 € -29,970 € 333,432 € 32 33 325,000 € -325,000 €
short X-Over vs. HiVol fwd 20-Mar-07 16-Aug-07 400,905 € -24,369 € 475,806 € 102 71 345,000 € -345,000 €
long X-Over vs. Main S7 30-Jul-07 31-Jul-07 554,770 € 0€ 554,770 € 401 353 275,000 € -275,000 €
long X-Over vs. Main S7 13-Aug-07 14-Aug-07 -257,550 € -257,550 € 0€ 284 294 230,000 € -230,000 €
long X-Over vs. Main S8 07-Jan-08 08-Feb-08 -238,957 € -238,957 € 0€ 329 435 200,000 € -200,000 €
Main steepener 21-Jan-08 27-Nov-08 -127,680 € -127,680 € 83,753 € 6 - 33 100,000 € -100,000 €
Index barbell 25-Feb-08 13-Mar-08 -165,741 € -165,741 € 2,298 € 381 376 150,000 € -150,000 €
Main vs CDX 10-Mar-08 25-Mar-08 158,640 € -26,041 € 158,640 € 31 35 150,000 € -150,000 €
Cyclical Decompression 14-Nov-08 -79,258 € -87,516 € 197,233 € 175 119 250,000 € -250,000 €
Us-Eur decompression 05-Jan-09 16-Jan-09 120,730 € 0€ 120,730 € 22 53 120,000 € -120,000 €
Sub vs. Senior compression 23-Feb-09 12-Mar-09 -148,466 € -148,466 € 41,756 € 141 207 100,000 € 100,000 €
Steepener S6 vs. Flattener S10 08-Jun-09 18-Aug-09 525,923 € -141,028 € 525,923 € 500,000 € -500,000 €
Bearish Trade CDX vs iTraxx 6-Oct-09 28-Oct-09 236,506 € 73,260 € 236,506 € 250,000 € -250,000 €
Total 1,631,161 € -1,210,926 € 3,085,622 € 2354.54 2406.09 2,137,500 € -2,137,500 €
Source: SG Credit Research

Index option trades

Performance of our index option recommendations
Strategy Entry date Exit date Current perf Min perf Max perf Target Stop-loss
Long X-Over vol/Short main vol 24-Oct-05 21-Dec-05 278,496 € -126,944 € 278,496 € 500,000 € -500,000 €
Short ATM /Long out-of-the-money X-Over volatility 05-Dec-05 20-Mar-06 -245,877 € -245,877 € 449,897 € 500,000 € -1,000,000 €
Long 350 X-Over payer/Short 250bp receiver and 300bp payer 09-Oct-06 15-Dec-06 435,636 € 0€ 435,636 € 500,000 € -1,800,000 €
Short X-Over Jun-07 225bp payer vs. 250bp payer 08-Jan-07 22-Feb-07 151,055 € -49 € 151,055 € 140,000 € -250,000 €
Short X-Over Sep-07 175bp payer vs. 225bp payer 23-Apr-07 11-Jul-07 177,152 € -63,995 € 195,871 € 200,000 € -380,000 €
Short X-Over Dec-07 225bp payer vs. 275bp payer 02-Jul-07 27-Jul-07 -185,587 € -185,587 € 0€ 140,000 € -140,000 €
Short HiVol Receiver/Long Main Receiver 24-Sep-07 20-Dec-07 -6,640 € -23,893 € 5,498 € 75,000 € -75,000 €
Long X-Over 275bp payer vs. 450bp payer 01-Oct-07 20-Dec-07 12,892 € -60,022 € 80,892 € 120,000 € -120,000 €
Short €5m Dec-07 X-Over 275bp payers vs. €10m Mar-08 450bp payers 29-Oct-07 20-Dec-07 -74,644 € -77,024 € 0€ 85,000 € -85,000 €
X-over vs Main Bear spread 07-Nov-07 11-Feb-08 -374,787 € -374,787 € 0€ 200,000 € -200,000 €
Total 167,696 € -1,158,178 € 1,597,346 € 2,460,000 € -4,550,000 €
Source: SG Credit Research

LBO portfolio
No open trades.

15 March 2010 19
 Credit QuantSight

Equity-credit trades
No open trades.

20 15 March 2010
 Credit QuantSight

15 March 2010 21
 Credit QuantSight

CDS curve trades

No open trades.

Performance of 2005 CDS curve recommendations

Issuer Strategy Hedge ratio Entry date Exit date Current perf Min perf Max perf Start curve End curve

Havas 5y-10y steepener 170% 21-Mar-05 10-May-05 143 372 € 0€ 143 372 € 40 60
Fiat 5y-7y flattener 110% 18-Apr-05 20-Jun-05 97 732 € -76 750 € 106 252 € 30 35
Valeo 5y-10y steepener 187% 25-Apr-05 13-Jan-06 80 797 € -58 155 € 80 797 € 38 44
Arcelor 5y-10y steepener 190% 30-May-05 03-Oct-05 37 245 € -453 € 61 688 € 25 27
Linde 5y-10y flattener 230% 30-May-05 03-Oct-05 -57 920 € -57 920 € 25 488 € 30 32
Havas 5y-10y steepener 150% 31-May-05 26-Sep-05 188 570 € -52 140 € 216 345 € 46 72
SeatPagine 5y-10y flattener 131% 31-May-05 12-Jan-06 -169 945 € -169 945 € 100 076 € 75 127
UBM 5y-10y steepener 195% 11-Jul-05 17-Oct-05 61 425 € 0€ 61 425 € 14 15
WPP flattener 5y-10y flattener 260% 11-Jul-05 17-Oct-05 19 288 € -11 192 € 33 700 € 28 29
Continental 5y-10y steepener 245% 18-Jul-05 24-Oct-05 40 688 € 0€ 56 068 € 20 23
Deutsche Telekom 3y-5y flattener 255% 18-Jul-05 24-Oct-05 28 826 € -4 645 € 29 047 € 15 15
Michelin 5y-10y flattener 290% 25-Aug-05 26-Sep-05 50 167 € 0€ 50 167 € 20 26
Peugeot 5y-10y steepener 230% 25-Aug-05 26-Sep-05 24 917 € -28 833 € 25 258 € 25 20
BT 5y-10y flattener 250% 05-Sep-05 01-Dec-05 -46 080 € -46 080 € 0€ 33 37
Ericsson 5y-10y steepener 225% 05-Sep-05 03-Oct-05 36 798 € 0€ 38 608 € 31 33
Portugal Telecom 3y-5y steepener 210% 17-Oct-05 01-Dec-05 27 198 € 0€ 27 198 € 11 14
GUS 5y-10y steepener 218% 31-Oct-05 10-Feb-06 60 731 € -9 332 € 60 731 € 29 35
Thomson 3y-5y steepener 185% 07-Nov-05 16-Nov-05 57 813 € 0€ 57 813 € 17 28
Thyssenkrupp 3y-5y flattener 220% 07-Nov-05 09-May-06 17 810 € -3 406 € 26 594 € 30 21
BA 3y-5y flattener 235% 14-Nov-05 09-Feb-06 -34 031 € -34 031 € 18 646 € 60 64
HeidelbergCement 5y-10y steepener 175% 14-Nov-05 23-Dec-05 70 605 € 0€ 70 605 € 40 48
Kingfisher 5y-10y steepener 170% 28-Nov-05 19-Jan-06 100 605 € -1 047 € 100 605 € 31 43
Average 38 028 € -25 179 € 63 204 € 31 39
Source: SG Credit Research

22 15 March 2010
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Basis trades
Performance of our basis recommendations
Issuer Strategy Entry Date Exit Date Current Perf Min Perf Max Perf Entry spd diff Exit spd diff Target Stop-loss

Finmeccanica 25 Long bond/long 10y CDS 12-Sep-05 09-Dec-05 -101,440 € -110,420 € 60,270 € 33 39 80,000 € -70,000 €
Lafarge 20 Long bond/long 10y CDS 12-Sep-05 18-Oct-05 -79,895 € -79,895 € 24,540 € 18 25 100,000 € -75,000 €
Peugeot 33 Long bond/long 10y CDS 26-Sep-05 02-Nov-05 106,084 € -61,484 € 106,084 € 56 50 85,000 € -85,000 €
Enel 23 Long bond/long 10y CDS 21-Nov-05 09-Dec-05 118,633 € 0€ 169,839 € 24 17 100,000 € -100,000 €
Suez 23 Short bond/short 10y CDS 21-Nov-05 09-Dec-05 45,127 € -45,619 € 45,127 € 9 12 100,000 € -100,000 €
Alstom 10 Long bond/long 3y CDS 09-Jan-06 26-Jan-06 95,964 € 0€ 95,964 € 52 27 75,000 € -75,000 €
Fiat 11 Short bond/short 5y CDS 23-Jan-06 07-Feb-06 62,749 € -42,170 € 62,749 € 56 32 50,000 € -50,000 €
Compass 09 Long bond/long 7y CDS 06-Feb-06 21-Aug-06 -59,604 € -59,604 € 25,270 € 50 13 55,000 € -55,000 €
NGG 20 Long bond/long 5y CDS 13-Feb-06 24-Feb-06 2,245 € -10,547 € 18,962 € 38 46
Suez 23 Long bond/long 5y CDS 13-Feb-06 24-Feb-06 61,544 € -19,702 € 90,599 € 28 38 70,000 € -70,000 €
Kingfisher 10 Long bond/long 10y CDS 20-Feb-06 11-Jan-07 61,651 € -38,929 € 61,651 € 33 44 50,000 € -50,000 €
BAT 11 Long bond/long Jun-11 CDS 06-Mar-06 18-Jan-07 48,492 € -7,468 € 52,987 € 15 6 45,000 € -45,000 €
Autostrade 14 Long bond/long 5y CDS 09-May-06 07-Jul-06 61,665 € -30,360 € 61,665 € 34 25 60,000 € -50,000 €
Rallye 09 Long bond/ long Mar-09 CDS 22-May-06 23-Jun-06 -27,050 € -27,050 € 32,710 € 24 36 50,000 € -50,000 €
Repsol 13 Long bond/ long 10y CDS 22-May-06 20-Jul-07 104,790 € -36,685 € 147,798 € 1 18 90,000 € -90,000 €
Nuon 14 Long bond/long 10y CDS 29-May-06 25-Jul-07 64,544 € -37,188 € 64,544 € 4 15 75,000 € -75,000 €
LVMH 11 Long bond/long 10y CDS 10-Jul-06 10-Nov-06 68,262 € -7,385 € 68,262 € 7 22 50,000 € -50,000 €
Repsol 14 Long bond/long 5y CDS 02-Oct-06 01-Feb-07 58,730 € -19,400 € 58,730 € 27 18 50,000 € -50,000 €
ABB 11 Long bond/long 3y & 10y CDS 30-Oct-06 06-Feb-07 46,165 € -18,319 € 46,165 € 30 17 40,000 € -40,000 €
Ono 14 Short Bond/Long 1y Short 5y CDS 18-Dec-06 14-Feb-07 235,258 € -17,513 € 235,258 € 286 216 200,000 € -200,000 €
Fiat 11 Long bond/long 5y CDS 05-Feb-07 29-Mar-07 40,410 € -45,760 € 44,220 € 14 4 40,000 € -40,000 €
Rallye 11 Short bond/short 5y CDS 05-Feb-07 11-Jul-07 -124,795 € -124,795 € 51,580 € 107 183 100,000 € -100,000 €
Altadis 15 Long bong/long 5Y CDS 12-Feb-07 15-Mar-07 104,900 € 0€ 104,900 € 8 -7 70,000 € -70,000 €
Imperial Tobacco 13 Long bong/long 7Y CDS 12-Feb-07 19-Mar-07 89,900 € -2,250 € 101,300 € 3 18 60,000 € -60,000 €
ISS 10 Long bong/long Sep-10 CDS 12-Mar-07 12-Apr-07 75,260 € 0€ 75,260 € 15 -8 65,000 € -65,000 €
Telefonica 16 Long bond/ long 5y CDS 02-Apr-07 22-May-07 74,550 € -12,756 € 74,550 € 26 17 55,000 € -55,000 €
Fiat 13 Long bond/ long 5y CDS 27-Aug-07 30-Nov-07 -107,510 € -108,980 € 76,150 € 41 66 100,000 € -100,000 €
Portugal Telecom 17 Long bond/ long 10y CDS 27-Aug-07 30-Jan-08 -151,930 € -1,960,070 € 126,000 € 19 40 150,000 € -150,000 €
TKA 13 Long bond/long Sep-13 CDS 03-Sep-07 02-Nov-07 57,580 € -59,710 € 57,580 € 16 5 60,000 € -60,000 €
DT 11 Long bond/long July-11 CDS 17-Sep-07 22-Nov-07 104,050 € -15,289 € 104,050 € 77 53 90,000 € -90,000 €
TI 11 Long bond/long Jun-11 CDS 24-Sep-07 11-Feb-08 130,867 € -62,551 € 130,867 € 27 -2 90,000 € -90,000 €
Schneider 15 Long bond/ long Mar-15 CDS 01-Oct-07 21-Nov-07 172,290 € -7,400 € 172,290 € 24 -4 120,000 € -120,000 €
iTV 11 Long bond/long Dec-11 CDS 08-Oct-07 09-Jan-08 141,970 € -8,820 € 141,970 € 6 -34 110,000 € -110,000 €
Volvo 17 Long bond/long Jun-17 CDS 15-Oct-07 02-Nov-07 119,280 € 0€ 119,280 € 19 3 90,000 € -90,000 €
Bertelsmann 15 Long bond/long 10y CDS 22-Oct-07 05-Dec-07 -63,943 € -63,943 € 48,307 € 5 11 55,000 € -55,000 €
France Telecom 13 Long bond/long 7y CDS 22-Oct-07 30-Nov-07 -58,544 € -58,544 € 34,593 € 10 22 55,000 € -55,000 €
KPN 13 Long bond/long 7y CDS 22-Oct-07 08-Nov-07 -62,940 € -62,940 € 17,303 € 5 17 55,000 € -55,000 €
TI 19 Long bond/long 10y CDS 22-Oct-07 30-Nov-07 -63,619 € -63,619 € 34,083 € 23 37 55,000 € -55,000 €
Nell 15 Long bond/long 5y CDS 19-Nov-07 28-Nov-07 -107,480 € -107,480 € 0€ 43 -5 90,000 € -90,000 €
KPN 15 Long bond/long Jun-15 CDS 26-Nov-07 16-Jan-08 -122,504 € -130,821 € 4,890 € 27 44 120,000 € -120,000 €
Basell 15 Long bond/long 5y CDS 04-Feb-08 17-Sep-08 -198,630 € -198,630 € 135,621 € 92 574 200,000 € -200,000 €
Altadis 15 Long bond/long 5y CDS 11-Feb-08 14-Mar-08 131,083 € -8,001 € 131,083 € 51 4 130,000 € -130,000 €
Grohe 14 Long bond/long 5y CDS 03-Mar-08 15-May-08 139,642 € -133,204 € 332,611 € 108 -21 130,000 € -130,000 €
Schneider 15 Long bond/long 5y CDS 31-Mar-08 05-Aug-08 -256,408 € -256,408 € 48,555 € 9 57 200,000 € -200,000 €
KPN 13 Long bond/long 5y CDS 07-Apr-08 09-Jun-08 249,282 € 0€ 249,282 € 60 7 220,000 € -220,000 €
TI 13 Long bond/long 10y CDS 28-Apr-08 04-Jun-08 176,646 € -7,528 € 176,646 € 31 -10 170,000 € -170,000 €
Basket Telcos Long bond / long 5y cds 19-Sep-08 02-Oct-08 -757,796 € -757,796 € 0€ 96 173 450,000 € -450,000 €
Basket releveraging Long bond / long 5y cds 03-Nov-08 16-Feb-09 451,310 € -93,369 € 451,310 € 149 86 450,000 € -450,000 €
Basket Long Term long bond / long 10y cds 16-Feb-09 13-May-09 589,185 € -341,265 € 589,185 € 128 92 500,000 € -500,000 €
ISS 14 Long bond / long 5y cds 04-Dec-09 22-Jul-10 55,306 € -61,613 € 96,832 € 200,000 € -200,000 €
Sum 1,801,326 € -5,423,278 € 5,259,470 €
Source: SG Credit Research

15 March 2010 23
 Credit QuantSight

Hybrid trades
No open trades in this portfolio.

24 15 March 2010
 Credit QuantSight

Long/short CDS trades

Performance of our long/short CDS recommendations

Trade Hedge ratio Entry Date Exit Date Current Perf Min Perf Max Perf Entry Diff Exit Diff

Short Seat Pagine vs. X-Over 107% 12-Dec-05 01-May-06 -51,545 € -54,816 € 48,190 € 19 39
Short Commerzbank 10y sub vs. Senior 140% 06-Jun-06 01-Feb-07 129,784 € 0€ 134,524 € 25 15
Long BT vs. HiVol S6 125% 09-Oct-06 27-Jul-07 -76,770 € -76,770 € 57,018 € 11 31
Long Ciba vs. HiVol S6 110% 09-Oct-06 27-Jul-07 -26,620 € -26,620 € 48,439 € 14 14
Long iTV vs. HiVol S6 45% 09-Oct-06 27-Jul-07 -90,658 € -90,658 € 148,666 € 60 32
Long KPN vs. HiVol S6 90% 09-Oct-06 27-Jul-07 -93,020 € -93,020 € 57,483 € 4 -21
Long Lanxess vs. HiVol S6 75% 09-Oct-06 04-May-07 48,733 € -17,020 € 48,733 € 15 24
Long Pearson vs. HiVol S6 145% 09-Oct-06 18-Jan-07 197,550 € -10,984 € 197,550 € 18 -16
Long Telia vs. HiVol S6 125% 09-Oct-06 18-Jan-07 49,323 € -70 € 63,930 € 12 1
Long Wolters vs. HiVol S6 120% 09-Oct-06 08-Feb-07 35,884 € -17,152 € 44,266 € 11 2
Long BAE vs Main S6 100% 23-Oct-06 27-Jul-07 -79,750 € -79,750 € 3,740 € 2 22
Long Hanson vs Main S6 60% 23-Oct-06 27-Jul-07 -86,184 € -86,184 € 45,424 € 16 -5
Long Kaupthing 10y vs. SenFin S6 420% 13-Nov-06 07-Mar-07 -53,108 € -98,030 € 96,804 € 41 29
Long Altadis, Gallaher vs BAT 100% 18-Dec-06 15-Mar-07 67,150 € -21,403 € 67,150 € 14 31
Long OTE vs. Telenor 5y protection 90% 21-Mar-07 18-Jan-08 63,784 € -37,614 € 63,784 € 6 29
Short Kabel vs. Ono and Unity Media 100% 21-Mar-07 24-Apr-07 110,271 € 0€ 110,271 € 15 28
Short Safeway vs. Tesco 270% 02-Apr-07 18-Sep-07 106,063 € -79,675 € 106,063 € 44 43
Short Telefonica vs. TI 75% 09-May-07 05-Feb-08 45,653 € -17,365 € 61,348 € 10 10
Short SES vs. BskyB 100% 29-May-07 30-Nov-07 56,280 € -34,290 € 56,280 € 11 -2
Long BA vs Lufthansa 50% 09-Jul-07 23-Jul-07 64,175 € -1,130 € 64,175 € 35 74
Short Arcelor vs. Glencore 60% 20-Aug-07 14-Dec-07 -88,070 € -93,152 € 0€ 36 5
Short Endesa vs. EDP 100% 20-Aug-07 14-Sep-07 51,630 € -4,500 € 51,630 € 16 4
Short Bertelsmann vs. Wolters 95% 27-Aug-07 30-Nov-07 -56,465 € -58,254 € 5,574 € 1 -13
Short Casino vs. Rentokil 120% 14-Jan-08 28-Feb-08 466,144 € 0€ 466,144 € 24 -59
Short Banco Esperito Santo vs. Barclays 120% 04-Feb-08 27-Mar-08 -129,864 € -129,864 € 10,748 € 8 30
Consumer Basket 11-Feb-08 20-Feb-08 -254,616 € -254,616 € 40,384 € 32 31
Thyssen vs. Glencore 61% 17-Mar-08 19-Mar-08 300,320 € 0€ 300,320 € 95 35
Bear Cyclicals 12-May-08 03-Oct-08 -318,576 € -318,576 € 76,450 € 242 242
Inflation Trade 16-Jun-08 16-Sep-08 -126,231 € -126,231 € 64,418 € 27 4
Long Ahold vs Cadbury 04-Aug-08 23-Sep-08 -177,540 € -177,540 € 45,800 € 59 82
Long CapGemini vs Casino 01-Sep-08 03-Oct-08 -135,386 € -135,386 € 40,411 € 20 61
Short Iberdrola vs Edison 12-Sep-08 13-Oct-08 -60,920 € -60,920 € 28,839 € 33 79
Long Volvo vs Short Peugeot 18-Jan-10 22-Jul-10 207,055 € 0€ 207,055 €
Total 94,476 € -2,201,588 € 2,861,610 €
Source: SG Credit Research

15 March 2010 25
 Credit QuantSight

CROSS ASSET RESEARCH – QUANTITATIVE ANALYSIS GROUP

Global Head of Research Head of Macro Strategy
Patrick Legland Benoît Hubaud
(33) 1 42 13 97 79 (44) 20 7676 7168
patrick.legland@sgcib.com benoit.hubaud@sgcib.com

Julien Turc (Head) Benjamin Herzog Karsten Hippler Lorenzo Ravagli

(33) 1 42 13 40 90 (33) 1 42 13 67 49 (33) 1 42 13 94 75 (33) 1 42 13 73 76
julien.turc@sgcib.com benjamin.herzog@sgcib.com karsten.hippler@sgcib.com lorenzo.ravagli@sgcib.com

Marc Teyssier Sandrine Ungari

(33) 1 42 13 55 96 (33) 1 42 13 43 02
marc.tessier@sgcib.com sandrine.ungari@sgcib.com

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