ICAP Credit Risk Conference Bucharest, Romania June 15, 2010

Emerging vs. Developed Markets How Corporates have Fared, and Where are the Real Risks Hiding
Richard Hunter Group Managing Director, Corporates

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

Industrial Production Picking Up

Industrial Production (2005=100)
125 120 115 110 105 100 95 90 85 Apr 05
Source: OECD
2

OECD

G7

Brazil

India (RHS)

150 140 130 120 110 100 90

Oct 05

Apr 06

Oct 06

Apr 07

Oct 07

Apr 08

Oct 08

Apr 09

Oct 09

Fitch View: Decoupling No, Convergence Yes

> Gap between developed & emerging market corporates shrinking > Ratings for emerging market corporates have been more resilient > Corporate outlooks (were) stabilising > In weak growth environment, corporates relatively robust > But they dont live in a bubble
2008: Structured Finance 2009: Financial Institutions 2010: Sovereigns 2011: .?

Recovered Two Thirds of Collapse in World Trade

World Trade Volumes (2000=100)
165 160 155 150 145 140 135 130 2006M1 2007M1 2008M1 2009M1 2010M1

Source: Dutch Bureau of Economic Policy Research

4

GDP Trough Mid-2009 in Major Advanced Economies

Real GDP 2008Q1=100
US 101.0 99.0 97.0 95.0 93.0 91.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010
Source: Datastream, Fitch
5

UK

EA

Japan
Forecast

Fitch GDP Forecasts for 2010 Revised Upwards

GDP Growth in 2010 in Major Advanced Economies
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 US
Source: Fitch
6

April 2010 Revision December 2009 GEO Forecast

Euro

Japan

UK

MAEs

Fitch GDP Forecasts for 2010 Revised Upwards

GDP Growth in 2010 in Brazil, Russia, India, China
10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Brazil
Source: Fitch
7

April 2010 Revision December 2009 GEO Forecast

Russia

India

China

Fitch GDP Forecasts for 2010 Revised Upwards

GDP Growth in 2010 in Convergence Countries
2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 Romania Bulgaria Czech Republic Hungary Poland Serbia April 2010 Revision December 2009 GEO Forecast

Source: Fitch
8

Fiscal Stimulus Starts to be Withdrawn Next Year

General Government Balance (% GDP)
-15.0 -13.0 -11.0 -9.0 -7.0 -5.0 -3.0 -1.0 France
Source: Fitch
9

2009

2010

2011

Germany

Italy

Spain

UK

US

Japan

No Decoupling, But Shift in Credit Quality

GDP Growth, %

10.0 8.0 6.0 4.0 2.0 0.0 2007 -2.0 -4.0

Source: IMF WEO

World Advanced Economies Emerging Market Economies

2008

2009

2010f

2011f

10

Central & Eastern Europe in Context

Fitch View on GDP Growth
(%) 8 6 4 2 0 -2 -4 -6 -8 2008 2009 2010f 2011f CEE WEU/NA Romania

Fitch View on Deficit/GDP

(%) 0 -1 -2 -3 -4 -5 -6 -7 -8 2008 2009 2010f 2011f CEE WEU/NA Romania

Source: Fitch Sovereign Comparator CEE Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia
11

Volatility
Stock Exchange, USD:ROL, Fitch Sovereign Credit Rating
BET
12,000 10,000 8,000 6,000 4,000 B 2,000 0 0 1 BB 2 BB 3

RON

Rating
4

Sep-97

Sep-99

Sep-01

Sep-03

Sep-05

Sep-07

Sep-09

BET: 10 most liquid issuers on Bucharest Exchange, FX rate includes 2005 redenomination Source: Bloomberg, Fitch
12

Volatility II
Dollar Exchange Rate
RON
4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0

EUR
1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8

Jul-05

Jul-07

Jul-09

BET: 10 most liquid issuers on Bucharest Exchange, FX rate includes 2005 redenomination Source: Bloomberg, Fitch
13

Rating Impact
Bank Individual Ratings 2007-2010
Developed Markets
B

Emerging Markets

B/C

C/D

1.1.2007

1.1.2008

1.1.2009

1.1.2010

Simple Average by Issuer Count, not Asset-Weighted Source: Fitch

14

Fitch Bank Individual Ratings, 2007-2010

Developed Markets
(%) A A/B B B/C C C/D D D/E E
1.1.2007 1.1.2008 1.1.2009 1.1.2010

Emerging Markets
(%) A A/B B B/C C C/D D D/E E
1.1.2007 1.1.2008 1.1.2009 1.1.2010

Unweighted Issuer Count Source: Fitch

Unweighted Issuer Count Source: Fitch

15

Fitch Bank Individual Ratings, 2007-2010

Developed Markets
(%) A A/B B B/C C C/D D D/E E
1.1.2007 1.1.2008 1.1.2009 1.1.2010

Emerging Markets
(%) A A/B B B/C C C/D Major Romanian D Banks D/E E
1.1.2007 1.1.2008 1.1.2009 1.1.2010

Unweighted Issuer Count Source: Fitch

Unweighted Issuer Count Source: Fitch

16

Fitch Negative Corporate Actions, 2008-2010

Developed Markets
0 -5 -10 -15 -20 -25 -30 -35 Jan Apr Jul Oct Jan Apr Jul Oct Jan

Emerging Markets
0 -5 -10 -15 -20 -25 -30 -35 Jan Apr Jul Oct Jan Apr Jul Oct Jan

EMEA/APAC, Rating Downgrades and assignment of Negative Outlooks/Watches Source: Fitch

17

The Worst Hit Fitchs Double Dippers

Ratings Lowered and left on Rating Outlook/Watch Negative
Developed Markets
20 15 10 5 0

Emerging Markets

Se Jul y pt em b N o v er em be r Ja nu ar y M ar ch

Ju l Se p

N ov

ay

Ja n

Ja n

EMEA/APAC Source: Fitch

18

Directional Fitch Rating Outlooks, 2006-2010

Global Developed
Negative
20% 10% 0% Q406 -10% -20% -30% -40% -50% -60% Q407 Q408 Q409

Global Emerging
Negative
20% 10% 0% Q406 -10% -20% -30% -40% -50% -60% Q407 Q408 Q409 -10% -20% -30% -40% -50% -60%

Emerging EMEA
Negative
20% 10% 0% Q406 Q407 Q408 Q409

Positive

Positive

Positive

Corporate Issuer Default Ratings Source: Fitch

19

ay

ay

ar

ar

10

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

Fitch Forecasts 2009 to 2011

Sub-Sectors by Cumulative EBITDA Movement 2007 A 2011 E
(%) 30 20 10 0 -10 -20 Build mats Chemicals Healthcare Consumer Other manuf. Transport Auto Tech Oil & gas Media Telco Nat resources Retail FBT
21

EBITDA

Revenue

-30

Source: Forecasting EMEA Corporates' Recovery, December 2009

11

Corporate Europes Future in Aggregate

USDbn Revenue OCF Capex FCF 2007 5,257 998 454 80 2008 5,895 1,057 544 -26 2009 5,415 1,083 515 22

Clear Thinking

2010f 5,827 1,059 525 53

2011f 6,124 1,142 538 92

Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts
22

Fitch Corporate Forecasts

2009 Not the Massive Correction Expected?
(USDbn) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2007 2008 2009 2010f
Aggregate

Clear Thinking

2011f

Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts
23

12

Fitch Corporate Forecasts

Clear Thinking

But Energy & Utilities predominate in top-line increases

(USDbn) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2007 2008 2009 2010f 2011f
Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts
24

Aggregate RLCP

Industrials Infrastructure

TMT

3000 2500 2000 1500 1000 500 0

Fitch Corporate Forecasts

Free Cash Flow Recovers to 2007 Levels
(USDbn) 150 100 50 0 2007 -50 -100
Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts

Clear Thinking

Aggregate

2008

2009

2010f

2011f

25

13

Fitch Corporate Forecasts

But Again Energy & Utilities are Key
(USDbn) 150 100 50 0 2007 -50 -100
Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts

Clear Thinking

Aggregate RLCP

Industrials Infrastructure

TMT

2008

2009

2010f

2011f

26

Net Results: Leverage

Non-Critical Rise Less than One Turn of Cash Flow
(USDbn) 3.5 3.0 2.5 2.0 1.5 1.0 2007 2008 2009 2010f
Aggregate

Clear Thinking

2011f

Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts
27

14

Net Results: Leverage

Clear Thinking

Pressure Points on Consumer and Energy/Utilities

(USDbn) 3.5 3.0 2.5 2.0 1.5 1.0 2007 2008 2009 2010f 2011f
Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts
28

Aggregate RLCP

Industrials Infrastructure

TMT

Net Results: Interest Cover

In Aggregate, Sustainable and Comfortable Levels
(x) 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2007 2008 2009 2010f
Aggregate

Clear Thinking

2011f

Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts
29

15

Net Results: Interest Cover

Add Another 200bps of Funding Cost?
(x) 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2007 2008 2009 2010f
Aggregate Stressed

Clear Thinking

2011f

Representative sample of Fitch rated universe in EMEA Source: Company financials; Fitch forecasts
30

Where Are the Real Risks?

Developed EMEA vs. Emerging EMEA
(USD) 6,000 5,000 4,000 3,000 2,000 1,000 0 2010f
Growth rates in constant USD terms Source: Fitch forecasts

Clear Thinking

DM Revenues EM Revenues (rhs)

DM EBITDA EM EBITDA (rhs) 900

5%

7%

750 600 450

9% 7%
2011f

300 150 0

31

16

Where Are the Real Risks? Industrials

Developed EMEA
Revenues 2,000 1,600 1,200 800 400 0 2010f
Fitch forecasts as at 1.04.10 Source: Fitch

Emerging EMEA
EBITDA 200 Revenues EBITDA

5%

160 120 80

11%

13%

17%
40 0

2011f

2010f
Fitch forecasts as at 1.04.10 Source: Fitch

2011f

32

Where Are the Real Risks? Telecom/Media/Tech

Developed EMEA
Revenues 1,000 EBITDA 125

Emerging EMEA
Revenues EBITDA

2%
750 100 75 500

6%

2.5%
250

50 25 0

5%

0 2010f
Fitch forecasts as at 1.04.10 Source: Fitch

2011f

2010f
Fitch forecasts as at 1.04.10 Source: Fitch

2011f

33

17

Where Are the Real Risks? Energy & Utilities

Developed EMEA
Revenues 2,500 2,000 1,500 1,000 500 0 2010f
Fitch forecasts as at 1.04.10 Source: Fitch

Emerging EMEA
EBITDA 600 Revenues EBITDA

5%

500 400 300 200

6%

8%
2011f

100 0 2010f
Fitch forecasts as at 1.04.10 Source: Fitch

8%
2011f

34

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

18

Resurgent Consumption

Investor Need for Yield

End of the Risk Trade?

2010

Where Did the Leverage Go?

Liquidity Bubble forming for Corporates

Capacity Gap, depressing Business Investment

36

Other Fitch Concerns?

> Consumer Confidence > Zombies! > Commodities Long-run Up, Short-run Down > Policymaker Shuffle > Crowding Out of Corporate Debt > Reliance on Banks

37

19

Bond Markets Getting a Rating

Clear Thinking

> CRAs place a high value on trustworthiness of responses

Opacity (public or private) is penalised by committees A genuine Dont Know is better than a bluff

> Nobody likes surprises

CRAs operate with confidentiality undertakings Bad news is best served warm Dont turn a good surprise into a bad one

> Admit mistakes

People who never make mistakes never learn Admission shows thoughtfulness and readiness to respond Explain the problem - and your remedy
38

We Live in the Future, not the Past

> CRAs are more forward-looking, respond to that
Discuss forecasts with CRAs as freely as you can Detail on your assumptions will be impressive Dont expect your forecasts to be adopted by the CRA But do ask the CRA where their forecasts came out

Clear Thinking

> Talk frankly about your position

Feel free to discuss your peer group - but avoid insults! Admission of weaknesses displays candour Rating committees will focus on your challenges
> So should your discussion with the CRA

39

20

ClearThinking
> New research initiative > Each issuer report carries a peer study and a selection of forecast information > New, transparent criteria reports by sub-sector and region > Visit our microsite for more information > clearthinking.fitchratings.co.uk
40

New Criteria Format

41

21

Example Virgin Media

Building Blocks - European Telecoms Companies:
Sector Risk Profile Market share & competitive intensity AA Company-Specific Traits Integrated network owner Geographical diversification & absolute scale Financial Profile (Historical where relevant and forecast, mid-points) Technology leadership FFO adj. net leverage (x) FFO int. cover (x) Op. EBITDAR margin (%) Pre div FCF/ sales (%)

FFO adj. leverage (x)

Dominant market positions >40% + no. 1 or no. 2 market position Incumbent operators Smaller incumbents and strong market challengers 20%-40% Market challenger 15%-20% Market challenger <15% market share General Essential service Broadly constant demand Technology risk Regulated licenses and tariffs Benefits from economies of scale

Operates and owns both fixed and mobile platforms Ownership can be limited to single platform Ownership often limited to single platform Single platform and may not have ownership

Deploying latest network upgrades (FTTH/FttC) + 4g Slower rollout of technology upgrades

Operates in a number of markets. Large multijurisdictional operators Limited to one or two geographies. Smaller incumbents Single geography Single geography

2.5

2.0

c. 35

15

BBB

3.0

2.5

c. 30

10

BB

Cable TV and Altnets

Selective network upgrades

4.0

4.0

c. 20

0-7

Limited by scale to upgrade

5.0

5.0

c. 15

Negative-2

Indicative factors observed or extrapolated for rated issuers in developed markets. Ratio levels refer to the mid-point of a through-the-cycle range; actual observations are likely to vary from these. Certain sub-sectors may contain a small number of observations; where no observations currently exist, guidelines for a category are extrapolated based on Fitch judgement. The factors give a high-level overview and are neither exhaustive in scope nor uniformly applicable. Additional factors will influence ratings, particularly in emerging markets and where group relationships constrain or enhance a rating level.

42

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

43

22

Fitch Ratings www.fitchratings.com

New York One State Street Plaza New York, NY 10004 +1 212 908 0500 +1 800 75 FITCH

London 101 Finsbury Pavement London EC2A 1RS +44 20 7417 4222

Singapore 7 Temasek Blvd. Singapore 038987 +65 6336 6801

The Fitch Group

Fitch Ratings

Algorithmics

Fitch Solutions

23