Michael Lavelle, Head of EMEA Capital Markets, Citi

2013 Capital Markets Outlook

Transaction Services

Table of Contents

1. What are Citi’s Equity Strategists Saying?

2. What are Citi’s Debt Strategists Saying?

3. What has Happened to Issuance?

1. What are Citi’s Equity Strategists Saying?

Equity Market Outlook

● Macro — de-leveraging, lower growth, 0% & QE to continue

● Market — stay bullish in 2013-14, but reduce risk near-term

● Earnings — analysts on 10%+, strategists on 5% (2013E)

● Valuation — re-rated but never cheaper

● Risk appetite — cult of the bond, rising risk appetites in 2013E

● Themes — Champs, Growth, Income/De-eq, Restructuring

● Risks — Politics, Social Unrest, Re-rating/Re-leveraging

4

Record Low Funding, Discuss… Record low cost of debt funding for corporates; what do CEOs/CFOs do in 2013 (and asset allocators)?

0

2

4

6

8

10

99 00 01 02 03 04 05 06 07 08 09 10 11 12

IBOXX Euro BBB - Bond YieldPan European Equities - Dividend YIeld

Source: Datastream & Citi Research

5

Market — Risk On in 2012, Further Gains in 2013Policy actions reduced tail risks in 2012 to drive strong gains for risk assets; stay bullish for next 1-2 years

-5

0

5

10

15

20

25

Stoxx

High Yield

EM Equities

Dev Equiti

es S&P

US Corp A

Gov Bonds

Commodities

US Cash

Source: Datastream

6

Earnings — Modest Downgrades Still AheadHard to see big upgrades unless economic growth picks up sharply; downgrades to end in mid-13?

30

35

40

45

50

55

60

65

Nov-88 Nov-90 Nov-92 Nov-94 Nov-96 Nov-98 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12-50

-40

-30

-20

-10

0

10

20

30

40

US ISM Index - 6mth Lead (LHS) European PMI - 6 Mth Lead (LHS)

12m Fwd Earn - YoY Growth % (RHS)

Source: Datastream & Citi Research

7

Investor Flows — Cult of the BondBonds never so popular vs equities never so unpopular…we expect flow to return to equities in 2013

(600)

(400)

(200)

-

200

400

600

800

1,000

1,200

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

5-Year Rolling Annual Equity Net Inflows (US$bn)

5-Year Rolling Annual Bond Net Inflows (US$bn)

Source: ICI

8

2. What are Citi’s Debt Strategists Saying?

Tightening in the face of fundamentals

How long can we go on defying reality?

Recession no longer priced iniBoxx € non-fins. vs Eurozone eco. sentiment indicator, 2000-12

Source: Citi Research, Markit, Haver Analytics

y = 0.11x2 - 25.0x + 1538R2 = 0.74

0

50

100

150

200

250

300

65 80 95 110 125

2012

Current

Eco. sentiment

iBoxx

Increasing leverage; falling spreadsEuropean net debt to EBITDA* vs iBoxx € IG non-fin. Spread (bp)

Source: Citi Research, Bloomberg, Markit. *: Based on a sample of 290 non-financial corporates in the EuroStoxx 600 index.

1.0x

1.3x

1.6x

1.9x

2.2x

2.5x

01 03 06 09 110

50

100

150

200

250

300

IG spreadLeverage

10

How to ignore the macro backdrop

Take comfort in the low level of defaults!

Still upside if defaults stay low?European HY default rate vs iTraxx Crossover spread (bp)

Source: Citi Research, Moody’s, Haver Analytics Source: Citi Research, Moody’s, Markit

Recession not reflected in HY defaults European HY default rate vs EuroCOIN GDP indicator

0%

3%

6%

9%

12%

15%

18%

99 02 05 08 11

-1.5

-1.0

-0.5

0.0

0.5

1.0

European HY default rate

EuroCOIN GDP indicator

0%

3%

6%

9%

12%

04 07 10 13200

400

600

800

1000

1200European HY default rate

iTraxx Crossover

11

But why are defaults so low?

A rolled loan gathers no loss

Interest expense remains very lowInterest expense, % of EBITDA*

Source: Citi Research, S&P LCD Report Q2 2012, Markit Source: Citi Research, Bloomberg. *: Based on a sample of 150 European non-financials (mostly IG) in the EuroStoxx 600 index

Refinancing has been pushed out European lev. loan & HY bond maturity profile, € bn

8%

10%

12%

14%

16%

18%

20%

22%

07 08 09 10 11 120

5

10

15

20

25

30

35

40

2013 2014 2015 2016 2017 2018 2019

LoansBonds

12

Investment in decline

Cash is being returned to shareholders at a record rate

0

20

40

60

80

100

120

60 70 80 90 00 10

Investment

Borrowing

Capital returned

Profits no longer invested in the businessBorrowing and use of capital, US non-fin corp, % profits, 5y avg

Source: Federal Reserve Flow of Funds, Haver Analytics.

3%

5%

7%

9%

11%

13%

0.6 0.7 0.8 0.9 1

Japan

EU + US

Asia ex Japan

'95

'10

'95

'10

'95

'10

“Corporate margin improvement”Margins vs sales/assets

Source: Citi Research. See Margins Migrate West, Sales Migrate East, H. Tevfik & R. Buckland, Mar 2012. See also Asset-light over capex-heavy, A. Cattley, Apr 2012.

13

Meanwhile, the political balancing act continues

Any missteps prone to cause a fall in markets

Systemic risks lingerRating transitions, 2011-2012

Source: Citi Research Source: Citi Research

Policy inconsistencies are obviousKey policy questions for 2013

● Austerity vs. growth

● Direct ESM bank recaps?

● SSM – how fast, how comprehensive?

● Greek OSI?

● OMT purchases

● OMT pari passu vs ‘no monetary financing’

● Growth assumptions in Spanish budget

● Regional fracturing

1

4

7

10

13

16Jan '11 Now Jan '11 Now

MDYS&PFitch

Spain Italy

AAA

AA-

A-

BBB-

BB-

14

As voter patience runs thin …

… political room to manoeuvre dwindles

Austerity doesn’t get you re-electedIncumbent approval ratings, %

Source: Citi Research, national press, polling agenciesSource:Edelman Trust Barometer, Haver Analytics.

-2%

0%

2%

4%

6%

8%

10%

10% 20% 30% 40% 50% 60% 70% 80%

Argentina India

Russia

Poland MexicoS. Korea

BrazilGermany

Japan

SpainItaly

IrelandU.K.

France U.S.Australia

Canada

Netherlands

UAESweden

Hong Kong

Singapore

China

Indonesia

Malaysia

People want growth!2011 growth vs “trust in government” polls

0

10

20

30

40

50

60

70

80

Jun-09 Jun-10 Jun-11 Jun-12

Papandreou

Papa-demosCowen

Kenny

Sarkozy

Coelho

Berlusconi

Monti

Socrates

Zapatero

Hollande

Rajoy

Samaras

15

From QE to asset prices – the “demand effect”

Money being forced into risky assets

… in Europe and in the USUS weekly mutual fund inflows into corp. credit ($ bn) vs reported inflows among € investors in Citi’s credit survey

Source: Citi Research, EPFR

The lower the yield, the more we crave it…Net US mutual fund inflows, annual, $bn

-1.0

0.0

1.0

2.0

3.0

06 07 08 09 10 11 12-0.4

0.0

0.4

0.8

1.2

US

Europe

Source: ICI, Haver Analytics. “Govt” excludes MBS.

-40

-20

0

20

40

60

80

100

120

2008 2009 2010 2011 2012YTD0

1

2

3

4

5

6

7HYIGGovtAvg corp yield

16

From QE to asset prices – the “supply effect”

Central banks shrinking the investible universe

Source: Citi Research, Haver. *: Federal Reserve & ECB

CBs constraining supply of new securitiesNet iss. of new securities vs CB* interventions, 12m rolling, $ tr

-3

-2

-1

0

1

2

3

4

5

06 08 10 12

CB interventions

Net

Govt.

Non-finbonds

Shares

Fin.bonds

€ credit market is still shrinkingOutstanding in € IG corp. credit, € tr

Source: Citi Research, Dealogic. For more details see More bonds, please, J. Faith, 2 Jan 2013.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1999 2002 2005 2008 2011

Non-financialsFinancials

17

Hey presto!

Artificially boosted asset prices

CB liquidity propping up global markets MSCI World vs CB liquidity injections ($bn), 3m chg.

Source: Citi Research, Haver Source: Citi Research, Haver. Note: Global liquidity captures the sum of Fed, ECB, BoJ and BoE asset purchase schemes and the LTROs for the ECB

QE is still propping up US marketsFed’s holdings of securities (5yr+ maturity) vs S&P 500

0

500

1000

1500

2000

2500

09 10 11 12 13700

900

1100

1300

1500

Fed security holdings (5yr+)

S&P 500

+37%-3%

+10%-11%

+15%

-400

0

400

800

1200

09 10 11 12 13-20%

-10%

0%

10%

20%

30%

40%MSCI GlobalCB liquidity

18

Yields to Grind Tighter Still

Source: Citi Research

Modest tightening on more stimulus…Citi Credit modal forecasts for 2013

Current End-'13F Total return

iBoxx € Corp 145bp 125bp 2.5%

iBoxx € HY 480bp 415bp 5.0%

iTraxx Main 103bp 105bp

iTraxx Xover 424bp 430bp

19

3. What Has Happened To Issuance?

What to Expect in the Corporate Bond Market in 2013Key Issuance Themes for 2013 Corporate Bond Yields Remain Near All-Time Lows

Source: Markit as of 11 March 2013

1

3

5

7

9

11

13

15

17

2003 2005 2007 2009 2011 2013Yi

eld

(%)

iBoxx € Non-Financials AAiBoxx € Non-Financials AiBoxx € Non-Financials BBBiBoxx € High Yield Non-Financials BB

21

92

75 73

26 2529 30 29

49

30

50

15

0

10

20

30

40

50

60

70

80

90

100

Jan-

12

Feb-

12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12 Sep

-12

Oct

-12

Nov

-12 Dec

-12

Issu

ance

EU

Rbn

equi

vale

nt Covered Bonds Sub/Senior Other*

DCM Corporate, FIG and SAS Issuance2012 IGD European Corporate Bond Issuance

2012 IGD SAS Bond Issuance Forecast Issuance for 2013

2012 European FIG Bond Issuance

Note: SAS Bond Issuance excludes US Agencies*Other includes ABS, RMBS, Money Market, Short Term debt, Non-US AgencySource: Dealogic , Citi Research

Total 2012: ~€500bn equiv.

43

37 37

10

3530 28

19

55

30

45

13

0

10

20

30

40

50

60

70Ja

n-12

Feb-

12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Issu

ance

EU

Rbn

equ

ival

ent

Total 2012: ~€380bn equiv.

123

93

75

4861

4350

34

51

68

33

10

0

20

40

60

80

100

120

140

Jan- 12 Feb-

12 Mar

-12 Apr

-12

May

-12 Ju

n- 12

Jul-1

2

Aug

-12 Sep

-12 Oct

-12 Nov

-12 Dec

-12

Issu

ance

EU

Rbn

equ

ival

ent

Total 2012: ~€690bn equiv. • In 2012, the corporate market saw the highest overall volume for Euro and

Sterling gross issuance since the record in 2009• As in 2012, Euro corporate issuance is likely to remain relatively strong with a

slight decline forecasted in 2013 to €185bn• Citi’s forecast is for Corporate US$ Yankee bond volumes to increase by 10%

to $218bn in 2013• Niche and local currently funding is also expected to grow, as issuers may

increasingly look to fund projects locally in order to minimize the costs of cross currency swaps

Cor

pora

tes

FIG • FIG forecast volumes for 2013 are €480m across the spectrum of security

types

SA

S • SAS issuance in 2013 is likely to stay approximately in line with 2012 levels of roughly €690bn equivalent

$1,758

$1,051$786 $966 $1,067

$712

$369

$422

$294$263

$287

$222

2,7972,651

2,406 2,3812,664

1,950

0

500

1,000

1,500

2,000

2,500

3,000

$0

$500

$1,000

$1,500

$2,000

$2,500

2007 2008 2009 2010 2011 2012

Western Europe CEEMEA Number of Deals

EMEA Volumes (2007 – 2012)

Finance13%

Oil & Gas9%

Utilities9%

Consumer8%

Food & Beverage

7%M & M

7%

Construction7%

Industrials7%

Transport7%

Telecoms6%

Healthcare4%

Chemicals3%

Other13%

Industry Split (2012)

EMEA Loan Volumes 2012

• Despite ongoing macroeconomic uncertainty in the Eurozone we expect refinancing to pick up in 2013

• Event driven volumes are recovering but remain subdued compared to the peaks of 2007 and 2008

• Broadly pricing has stabilised and even softened for GIIPS. Overall, Basel III pressure means banks will be challenged on non-investment grade and longer tenor deals

• Banks are focussed on conserving capital in the face of a changing regulatory environment resulting in continued rationalisation of credit

• The secondary market remains well bid due to a lack of primary issuance. The hunt for yield has pushed buyers towards second tier banks and in to emerging markets

After the pressures of late 2010 and 2011 a degree of stabilisation occurred in 2012 amongst European banks with capital, asset and dollar funding strains easing.

Market Outlook for 2013

0

100

200

300

400

500

600

700

800

900

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Signed Maturing

GCP/Refinancing Volumes and Maturities by Year1

Volume in US$bn

Source: DealogicNote1: Does not take into account deals refinanced / taken out early

(bn)

$2,127

$1,472

$1,080$1,229

$1,354

$933

Top 10 Country Volumes (2012)Country Volume ($m)

1 UK 142,747

2 Germany 110,092

3 France 93,004

4 Switzerland 66,365

5 Spain 56,501

6 Russia 52,407

7 Netherlands 41,788

8 Italy 39,197

9 Belgium 28,731

10 Turkey 23,898Source: Dealogic

23

Current & Historical Yield Environment

0%

5%

10%

15%

20%

25%

30%

35%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Yield to Worst, All BB Rated Yield to Worst, All B Rated Yield to Worst, All CCC Rated

Historical High Yield Secondary Trading Levels(Yield to Worst %)

Source: Citi Yield Book

CCC Index20-Yr. Avg: 14.58%Current: 9.16%High: 29.49%Low: 8.99%

B Index20-Yr. Avg: 10.07%Current: 5.69%High: 20.93%Low: 5.57%

BB Index20-Yr. Avg: 8.13%Current: 4.37%High: 14.61%Low: 4.22%

24

2012 & Historical High Yield Issuance

$ 8.

0

$ 12

.3

$ 10

.4

$ 3.

3

$ 3.

1

$ 2.

9

$ 3.

7

$ 1.

3

$ 12

.5

$ 10

.7

$ 7.

2

$ 3.

7

$ 11

.5 $ 13

.8

$ 1.

3

0

3

6

9

12

15

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb-

13

Mar

-13

US

Dol

lars

in b

illio

ns

2012 European Market High Yield Issuance(USD equivalent)

Historical European Market High Yield Issuance(USD equivalent, split by currency)

$0.5

$1.0

$3.3

$3.1

$6.2

$15.

6

$17.

7

$13.

5

$6.7

$4.1

$17.

3

$24.

8

$21.

3

$38.

6

$26.

4

$0.0

$41.

1

$66.

1

$67.

6

$79.

3

$26.

6

0

10

20

30

40

50

60

70

80

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

US

Dol

lars

in b

illio

ns

Dollar Denominated

Non $ Denominated

Source: Citi, LCDNote: Volumes include European companies issuing in the US Dollar market25

EMEA Equity Issuance EvolutionIn the first half of 2012, EMEA equity issuance was driven by follow-ons. Since H2 2012, we have seen a resurgence of IPOs and converts with FIG leading the issuances as the positive sentiment returns to the equity markets.

0.2 0.2

2.2

0.5 0.6 0.1 0.3 0.2 0.4

4.5

2.0 1.4 1.22.0

0.1

10.8

5.6

8.9

4.4

7.8

1.7

13.4

5.0

8.4

7.1

7.59.4

6.0 5.0

3.2

0.3

2.9

2.2

0.2

0.2

0.3

0.1

0.1

4.4

1.24.5

1.0

5.2

0.6

0.412

32

49

29

23

14

22

12

30

46

39

26

30 31

12

0

10

20

30

40

50

60

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13

No.

of D

eals

Tota

l Iss

uanc

e (€

bn)

IPOs Follow-on Converts No. of Deals

FIG28%

Telecom10%

Energy12%

IT9%

Industrials10%

Metals & Mining

5%

Consumer9%

Others17%

FIG39%

Telecom11%

Energy9%

IT2%

Industrials21%

Metals & Mining

4%

Consumer4%

Others10% FIG

24%

Telecom9%

Energy11%IT

10%Industrials

5%

Metals & Mining17%

Consumer4%

Others20%

H1 2012 H2 2012 H1 2013

Source: Dealogic.

26