JUL 30 UniCredit Credit Research

8/9/2019 JUL 30 UniCredit Credit Research

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30 July 2010 Credit Research

Daily Credit Briefing

UniCredit Research page 1 See last pages for disclaimer.

Credit Strategy Highlights

Market activity continues to feel the summer lull, with daily moves onsynthetic indices being very moderate. Nevertheless, the tone remainedpositive, supported by encouraging data releases in the eurozoneyesterday; besides several corporate earnings reports, the better-than-expected German unemployment data were the most prominent macroreleases. The XO tightened 7bp to 480bp, the Main as well as theFinSen tightened by 1bp to 105bp and 115bp, respectively, while theFinSub remained flat at 183bp. However, this morning, disappointingJapanese industrial production (1.5% mom decline vs. 0.2 consensus)and higher-than-expected unemployment rate (5.3%) as well asdisappointing German retail sales (-0.9% mom vs. -0.2% expected)highlight the vulnerability of the recovery and are likely to slightly dampensentiment in the early trading session. Later in the day, the focus will be

on the US 2Q GDP data, where our economists expect a slightly morepronounced growth deceleration to 2.3% versus the consensus (2.5%)following 2.7% in 1Q. (Continued on the next page)

iTraxx opening: Main 103.5/104.5bp, XO 475/478bp, Sen 113/115bp,Sub 180/183bp

Relative Value Trading Idea

We recommend a CDS pair trade on Bayer (A3s/A-n/A-n) and Merck KGaA(Baa2s/BBB+s/---): Sell 5Y CDS on Merck KGaA at 83bp and buy 5Y CDSon Bayer at 62bp for a pick-up of 21bp.

Top Credit StoriesTMT: BT Group releases slightly better-than-expected 1Q10/11 results 3

Energy: Repsol, Enel and Vattenfall show improved credit ratios _____ 4

Industrials: Saint Gobain rebound in operating performance in 2Q;EADS raises FY10 guidance; Schneider: excellent results and highermargin guidance ___________________________________________ 6

Autos: MAN's, VW's and Continental's 2Q10 credit metrics improve __ 8

Consumers: Japan Tobacco with weaker 1Q10/11 results; AstraZenecawith strong 1H10 figures; PPR with solid 1H10 results ____________ 10

High Yield: Rhodia with strong 2Q10; Heidelberg with strong 2Q10;Wind with decent 2Q10 _____________________________________ 12

Banks: Caja Madrid's low-quality 2Q10; Pastor's 2Q10/1H10; Erste's2Q10 ___________________________________________________ 15

Insurance: SCOR reports a good set of 1H10 figures ____________ 18

Corporate Snapshots: EDF & EDP 1H10, Vale 2Q10, Mondi 1H10,Rentokil 1H10 , Anglo 1H10, Sanofi (potential USD 20bn+ bid forGenzyme), Belgacom 1H10, Renault, Michelin 1H10______________ 20

Market Overview

iTraxx Page / Traders' Comment / Primary Market __________________ 21

Rating Actions / Recent Credit Research Publications _______________ 22

Credit drivers

current 1D 1

EuroStoxx 2,753 -13 3DAX 6,135 -44 -

VDAX [%] 20.6 0.3 -0.

S&P 1,102 -5

VIX [%] 24.1 -0.1 -0.

DJUBS Index 131.8 1.9 1.

Crude Oil Ft 78.2 -0.2 -0.

EUR-USD 1.308 .000 .01

iTraxx Europe (Series 13), Thursday closing

5Y chg*

Europe Benchmark 105 -2

Financials Sen 115 -48

Financials Sub 181 -6Crossover 478 -96

SovX WE 109 -5

ASW spreads by quality/sector

current 1d 1

iBoxx ALL 100.9 -2.1 -10.0

iBoxx AAA 27.1 -2.1 0.1

AA 53.2 -1.6 -6.3

A 78.5 -1.9 -7.3

BBB 146.8 -2.7 -15.0

iBoxx FIN 201.6 -1.0 -20.5

ATO 82.0 -1.8 -10.6

TEL 117.4 -2.6 -14.UTI 91.4 -2.2 -8.8

IGS 123.7 -3.3 -9.1

PHG 82.3 -1.2 -5.0

TAL 162.2 -1.6 -14.3

OIG 101.4 -2.2 -11.5

Hybrids 286.4 0.7 -27.0

Yields in %

current 1d 1

2Y Bund 0.833 -1.7 13.0

5Y Bund 1.713 -3.0 9.9

10Y Bund 2.717 -3.2 5.2

2Y TSY 0.562 -1.6 -2.25Y TSY 1.655 -0.3 -7.7

10Y TSY 2.970 -0.9 -2.

Swap spreads

current 1d 1

5Y EUR 45.56 0.00 -5.82

10Y EUR 25.48 -0.28 0.80

BloombergUCCR

Internet

www.research.unicreditgroup.eu


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Credit Strategy Highlights

Corporates earnings continuesurprising on the positive side A bunch of earnings results from large firms in Europe such as Siemens, BASF, Volkswagen,and Royal Dutch Shell yesterday added to a similar picture observed also in the US:

corporate results continue, on balance, to surprise on the positive side. So far, 298 out of S&P500 companies have reported 2Q results. Looking at the S&P 500 as a broad-based index,most of them surprised positively, particularly on net income (72%), while 62% surprised onsales revenues. Sector-wise, on the net income side, most positive surprises are coming fromindustrials, consumers, and financials and to a lesser extent from utilities and the oil&gassector. On the sales side, most positive surprises came also from consumer services,industrials, technology and financials sectors.

Our view The continuous outperformance of net income over sales reflects cost-saving measures onthe corporate side and also deleveraging where companies have been much more successfulthan, for example, private households. It is noteworthy that cyclical sectors still surprised moreon the positive side than non-cyclicals. However, we would not interpret this as a harbinger forstronger economic and corporate recovery in 2H. The strong performance of cyclical sectorsis reflecting, in particular, exposure of multinational firms to large and rapidly growingemerging markets in Asia and LatAm, which is proving extremely beneficial, particularly forinvestment demand-related industrials and technology sectors. The overall positive corporatenewsflow contrasts, to some extent, with the rather mixed macro data, which continue toreaffirm consumer spending weakness. Besides a more advanced deleveraging process onthe corporate side, there is another important difference between consumers (and alsogovernments) on the one hand and large firms on the other, which is diversification of theirrevenues. While the former two have a very narrow spectrum of revenue sources, large USand European corporations have fairly well geographically-diversified revenues. Thus, theexposure to Emerging Markets allows notably European firms to weather the adverse impact

of austerity measures on demand in the eurozone. Going forward, however, there issubstantial risk that firms will feel the economic slowdown: (1) austerity measures in theeurozone periphery economies are just starting to feed through, and will have a morepronounced impact on demand in 2H. (2) Also large Emerging Markets are feeling a slowinggrowth momentum, e.g. China and also Brazil, whose central bank indicated yesterday thatgrowth has slowed down recently.

Today's data releases Today, Chevron reports quarterly results. In regard to macro data, the 2Q US GDP reading isin the limelight. In the eurozone, we have the eurozone unemployment rate.

Dr. Stefan Kolek (UniCredit Bank)+49 89 [email protected]

Relative Value Trading Idea

Trade idea We recommend a CDS pair trade on Bayer (A3s/A-n/A-n) and Merck KGaA

(Baa2s/BBB+s/---): Sell 5Y CDS on Merck KGaA at 83bp and buy 5Y CDS on Bayer at

62bp for a pick-up of 21bp.

Rationale Bayer reported 1H10/2Q10 results which missed analysts' estimates. Fundamentally, Bayerremains optimistic for 2010 on the back of the favorable developments in its MS businesssegment, where sales and earnings should increase significantly. However, the weak spot inBayer's business portfolio remains the HC unit, where the sales forecast was reduced to 3%

yoy (initially 5%), which remains well below the industry average. We expect the designatedCEO and successor of Mr. Wenning, Mr. Dekker, to address this issue sooner or later andwould, hence, not be surprised to see a large-scale acquisition to foster growth, which could


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happen sooner rather than later. We maintain our underweight recommendation for Bayer onthe back of tight spread levels and heightened event risk.

Merck KGaA reported strong 2Q10 results above market expectations and raised its guidancefor FY10. The raised guidance for FY10 will support Merck's ability to deleverage its balancesheet more quickly than initially expected. Despite the recent pipeline setbacks andheightened competition in the Liquid Crystals business (which reached a pre-crisis operatingmargin of 53%+!), we take comfort from the highly cash-generative acquired Milliporebusiness, expected free cash flow of more than EUR 500mn after dividend payments fromFY10 onwards (management expects to repay the EUR 500mn bond due in 11/2010 by freecash flow), and from our impression that management will focus on deleveraging and refrainfrom larger M&A activity during the next few years. We keep our overweight recommendationand we are a protection seller on the name.

Rocco Schilling (UniCredit Bank)+49 89 [email protected]

Jochen Schlachter (UniCredit Bank)+49 89 378-13212

[email protected]

TMT

Event Yesterday, BT Group (Baa2n/BBB-s/BBBs) released slightly better-than-expected

1Q10/11 results and confirmed its outlook for FY10/11. Revenues (Retail -7%, Wholesale-6%, Global Services -3%, Openreach -4%) decreased by 4% yoy to GBP 5,006mn(consensus of GBP 4.97bn) and adjusted EBITDA post leaver costs (Retail -2%, Wholesale0.0%, Openreach +8%) rose by 6% yoy to GBP 1,399mn (consensus of GBP 1.39bn), as theGlobal Services EBITDA rose to GBP 130mn from GBP 62mn in 2Q09. Excluding the GlobalServices segment, EBITDA was flattish yoy, mainly thanks to cost reduction measures. Theadjusted EBITDA margin was 27.9% compared to 28.2% in 4Q09/10 or 25.3% in 1Q09/10.

Impact FCF (defined as OCF minus capex) strongly increased yoy to GBP 415mn in 1Q10/11 fromminus GBP 122mn, mainly due to lower W/C-related cash outflows (GBP 449mn), whichbenefitted from the receipt of a major customer contract. In addition, FCF benefitted from acapex decline (GBP 71mn) and improved profitability. We are still skeptical about thesustainability of FCF improvements, but admit that the company's FCF target for FY10/11 isachievable. The usually weak first quarter FCF reduced reported net debt from GBP 9.3bn toGBP 8.9bn. According to our calculations, adjusted net debt to adjusted EBITDA declined to2.9x qoq from 3.0x, which should be in line with a BBB- rating at S&P.

BT confirmed its outlook for FY10/11: Revenues are expected to decline yoy by 4.4% to EUR20bn and adjusted EBITDA is expected at the same level as in FY09/10 at around GBP 5.8bn.

Capex should be around GBP 2.6bn and free cash flow at GBP 1.8bn (before pension deficitpayments of GBP 525mn but after the cash flows related to specific items of around GBP150mn) versus GBP 1.9bn in FY09/10. The company has indicated in the past that it may rollout fiber to around two-thirds of the UK by 2015, with total fiber investments of GBP 2.5bn,while these investments should be covered by the above-mentioned annual capex guidance.The company further targets to reduce net debt to below GBP 9.0bn in FY10/11, which it hasalready reached.

The net pension deficit remained qoq stable at GBP 5.7bn. During the conference call,management was unable to provide additional details regarding the ongoing discussions withthe pension regulator about the crown guarantee (not expected to have an impact on pensionvaluations nor payments) or the potential change in indexation (may lead to a reduction inpension liabilities).

Further significant topics during the conference call included discussions with the UK


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government regarding potential measures to reduce public spending. The U.K. government'scost-cutting plan already resulted in Cable & Wireless Worldwide issuing a profit warning lastweek. However, it is worth noting that C&W has a greater percentage of its sales derive from

government contracts than BT does. BT stated that only 10% of its revenues are governmentrelated and that these are mainly in the Global Services segment. Another point of concernwas increasing competition from Sky and Virgin, signaled by their rising marketing spending.

Name recommendation We change our underweight recommendation for BRITEL bonds to marketweight basedon the improving operating performance of the company, while we remain skeptical

about reduced public spending, increasing competition, and negative headline risk

from BT's pensions.

Stephan Haber, CFA (HVB)+49 89 [email protected]

Energy


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CDS now trades at around 140/155bp. In the past, Repsol's CDS already traded 40-50bpbelow those of Spain. As we believe in the positive trend in Repsol's credit ratios, we keep ourmarketweight recommendation for the name. We assume that in the current environment the

discount versus the sovereign CDS might be lowered, but Repsol's CDS should not exceedthose of Spain. In any case, the company is not really dependent on the Spanish market. InFY09, Repsol generated around 52% of its revenues outside Spain.

Christian Kleindienst (UniCredit Bank)+ 49 89 [email protected]

Event Vattenfall (A2s/An/An) released improved 2Q10 figures. Sales increased by 18% yoy toSEK 49.7bn, whereas reported EBIT was SEK 9.0bn, +52% yoy. Main drivers were thecompany's nuclear power plants, which benefited from higher generation volumes and pricesas well as lower maintenance costs. Furthermore, the Nordic hydro plants contributedpositively to the results, as did the trading business of the newly acquired Dutch utility Nuon.

These improvements offset the weak performance of the first quarter, which was primarilyrelated to impairments on the sold German transmission grid. For the first six months,reported EBIT therefore consequently rose by 2% yoy to SEK 19.1bn (clean EBIT was evenup 30% yoy to SEK 24.3bn)

Cash-flow generation in 2Q was also strong, offsetting the weak FFO in the first threemonths, which was primarily affected by a one-off tax payment (Swedish withholding tax).FFO in 1H09 was therefore flat yoy at SEK 21.5bn. Net debt stood at SEK 148.2bn versusSEK 151.4bn at YE09 (treating the Vattenfall hybrid as 50% debt). Credit ratios haveimproved versus 1Q10, and are now very close to the thresholds set by the agencies. Theratio of FFO/net debt adj. at the end of 2Q10 was 19.4% versus 13.8% at the end of March(YE09: 19.5%). The company has hedged 84% of its Scandinavian production in 2010 at

average prices of EUR 46/MWh (Continental Europe 94% at EUR 57/MWh).

Strategic review: Management is not satisfied with the current profitability, especially with theRoE of just 8.7% in 1H10 versus a target of 15%. A revision of the current corporate strategyis to be announced soon (presumably at the CMD in September) including asset disposals.

Expected development of creditprofile/rating

Given the pending strategic review, any forecast for the medium-term development of thecredit profile remains difficult. Nevertheless, we assume that a possible strategic shift shouldbe (credit) positive. In the conference call, management clearly stated that it regards currentdebt levels as too high, as well as the current investment program (which foreseesinvestments of SEK 200bn until 2015). In the short term, we also expect a stabilization of thecredit ratios. We expect FFO to net debt to exceed S&P's threshold for the current rating o f20% by YE10. A revision of the negative outlook at S&P to stable appears less likely for thisyear, but rating pressure has definitely abated with the sound 2Q figures.

Recommendation Given stabilized cash-flow generation, the improved credit metrics and an expected shift incorporate strategy, which could lead to a further improvement of the company's credit profile,we change our recommendation from marketweight to overweight. Vattenfall's bonds aretrading at tight levels but we regard the name as attractive as it is less exposed to sovereignrisk than many of its peers. We note that the company is less affected by the newly-proposednuclear tax (EUR 2.3bn p.a.) in Germany, as its share in total German nuclear capacity is just7%. Our favorite (senior) bond is the VATFAL 01/19, trading at indicative levels of 66/57bp(ASW).

Christian Kleindienst (UniCredit Bank)+ 49 89 [email protected]


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Event Enel (A2n/A-s/A-s) reported a solid set of 1H10 results, above expectations in terms of

EBITDA. 1H10 sales were up by 22% yoy to EUR 34.8bn, while EBITDA increased by 12%yoy to EUR 8,878mn (consensus: EUR 8,675mn; UniCredit: EUR 8,756mn), still influenced byconsolidation effects as Endesa was fully consolidated as of June 2009. Electricity sold byEnel surged by 15% yoy to 150.1 TWh, sold gas volume (to end users) was even up by 29%yoy to 5.3bn cubic meters. Within the segments, the lower trading margin in the (Italian)Generation and Energy Management division (1H10 EBITDA: EUR 1,229mn, vs. 1H09EBITDA of EUR 1,877mn) was offset by a better operating performance at Endesa and theconsolidation effects. Operating cash flow was EUR 4.0bn, up by 37% yoy and indicating astrong improvement in the second quarter (OCF in 1Q10 was just EUR 0.4bn), but it wascompletely offset by capex and dividend payouts. Reported net debt was almost EUR 54bnvs. EUR 51bn at FYE09. Credit ratios show some stability: Net debt/EBITDA is around 3.9x,whereas FFO to net debt now is now around 17%, both ratios unchanged to YE09.

Asset disposals: The IPO of Enel Green Power is expected to occur in October.Management is confident of its ability to sell a stake in its renewable subsidiary which mightgenerate proceeds of up to EUR 4bn to be used for debt reduction. Compared to the EGPIPO, Enel has more certainty about the disposal of Endesa's high voltage grid in Spain, as ithas already come to an agreement with Red Electrica (transaction announced on July 1,proceeds of EUR 1.4bn). Gas distribution activities in Spain might generate a further amountin the upper triple-digit million EUR area. A further cash inflow should come from thesecuritization of the tariff deficit. Enel still expects a first tranche between EUR 4 and EUR6bn to come to the market in October 2010 (Endesa's share is around 44%).

Expected development of creditprofile/rating Despite a slightly increased net debt level during 1H10, the credit profile remained stable due

to consolidation affects. Credit ratios are fully commensurate with the current A- rating at S&Pand Fitch. Adjusted net leverage should decline to ca. 3.2x, once the asset disposal programis completed and proceeds from the securitization of the Spanish tariff deficit arrive. In theconference call, CEO Fulvio Conti was confident about meeting the EUR 45bn net debt targetby YE10 (but net of exchange effects).

Recommendation We keep our marketweight recommendation for the name. The deleveraging story is stillintact, although there is some event risk regarding the IPO of EGP and the securitization ofthe tariff deficit. The 5Y CDS of Enel trades at around 143/153bp, which is slightly below thatof Italy (5Y CDS at around 165bp).

Christian Kleindienst (UniCredit Bank)

+ 49 89 [email protected]

Industrials

Event Saint Gobain reported a significant rebound in its operating performance thanks to initiatedcost savings measures as well as an improvement in trading conditions in 2Q10 relative to1Q10 and the prior year. 1H10 sales increased 1.0% like-for-like (0.9% volumes and 0.1%price) and 4.3% in reported terms to EUR 19,529mn, boosted by a positive (+3.0%) currencyimpact and a recovery of demand in businesses benefitting from industrial manufacturing.This is especially true for its Innovative Material segment, where sales grew 14% organically,while sales in Construction Products remained largely stable and Building Distribution

revenues fell by 4.1%, reflecting the continuously difficult trading conditions in constructionmarkets. After a slow start into the year with a volume decline of 1.7%, volumes recovered, inparticular in the second quarter (+3.1%), helped by the rise in working days. Thanks to Saint


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Gobain's cost cutting efforts with EUR 450mn in savings realized in 1H10, EBITDA increased32% to EUR 2,220mn, with the margin recovering to 11.4% vs. 9.0%. EBIT doubled to EUR1,445mn, helped by lower one-off items related to restructuring (EUR 193mn vs. EUR 264mn

yoy). Operating free cash flow was a negative EUR 386mn, reflective of a significantinvestment in working capital as volumes increased and sales rose. Earlier in the quarter,Saint Gobain announced that more than two thirds of shareholders have opted to receive ascript dividend. Net debt stood at EUR 9.1bn, down EUR 1.8bn yoy but up from EUR 7.6bn atFYE09 as a result of seasonal patterns. Leverage improved to 2.1x, down from 2.7x yoy.


In 2H10, we expect Saint Gobain to continue to benefit from robust growth in emergingmarkets (Asian and Lat Am) as well as a continuing albeit - fragile - recovery in more maturemarkets. With construction activity continuing to remain in the doldrums, the furtherdevelopment in global industrial manufacturing (for example, the automotive industry) willremain a key driver for Saint Gobain's operating performance, as a sharp rebound in housingmarkets and in commercial construction remains doubtful, in our view. Cost savings will likely

account for a significant part of the expected improvement in the operating performance in itsConstruction Products and Building Distribution segments. With EUR 450mn in cost savingsalready realized in 1H10, the company has a further EUR 150 mn of identified savings to go inthe second half to achieve its EUR 600mn target by FYE10. All in all, the company seesslightly higher operating income for 2H and a resulting significant yoy increase in operatingprofits. Better earnings, a continuing restraint in capex and tight working capital should furtherboost cash-flow generation in the seasonally stronger second half of any given year (in cashflow terms). The company has already increased its free cash flow target (being defined asFFO capex) from EUR 1.0bn (already realized in 1H10) to EUR 1.4bn for the full year. Debtlevels are also likely to come down towards year-end as a result of seasonal cash flowpatterns, probably further helped by disposal proceeds from its Packaging unit, for which thecompany sees the right timing for a disposal coming closer. In addition, Saint Gobain

announced the disposal of its Ceramics business for USD 245mn in 2Q. We do not expectlarger acquisitions for the time being, as its M&A activity is largely on hold, but Saint Gobainhinted that smaller bolt-on transactions in growth markets are again possible going forward.With respect to ratings, we do not see any rating pressure arising at this juncture.

Recommendation We maintain our marketweight recommendation on Saint Gobain's bonds. However, webelieve that, given the solid operating performance as well as our expectation of furtherimproving credit metrics, Saint Gobain's bonds offer value relative to other Baa2 rated issues,for example in the chemicals universe such as Akzo Nobel, Lanxess, Solvay and K+S.


[email protected]

Event EADS released 1H results largely in line with expectations, but raised its full year

guidance. On stable revenues of EUR 20.3bn in 1H, EBIT before one-offs halved yoy to EUR0.6bn. As expected, the operating performance was trimmed by hedge rate deterioration andhigher R&D expenses, with the A380 continuously weighing on the results. Cash generationwas nevertheless better yoy, attributable to lower working capital financing needs, with freecash flow at a minus EUR 0.7bn vs. an outflow of EUR 1.1bn a year ago. The companycontinues to run a net cash position of EUR 8.9bn at the end of 1H (vs. EUR 8.1bn in 1H09),confirming its strong financial position.

Credit profile/ Ratingdevelopment

On the back of a higher number of expected deliveries and hence upside to the company'sprofitability, management raised its FY10 guidance (now based on an assumption of aEUR/USD 1.35 rate, previously 1.40). In detail, it now expects: i) revenues of more than EUR

44bn (previously stable), and ii) an EBIT before one-offs of about EUR 1.2bn (previously EUR1bn). As already visible in the published results, EBIT will be increasingly impacted by a


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deterioration of hedge rates and higher R&D in 2H that should more than offset positiveimpacts from higher volumes and better pricing. The company kept its free cash flow beforecustomer financing guidance at break-even. Customer financing is, however, expected to be

lower than anticipated at the beginning of the year, i.e. at around EUR 0.6bn (previously EUR1bn). Also positive was the company's reported surge in new orders by 79% yoy to EUR30.8bn. Given the recent success at Farnborough, the company raised its order forecast withgross orders expected above 400 (previously 250-300).

Name recommendation We keep our marketweight recommendation on the name.

Jana Arndt, CFA (UniCredit Bank)[email protected]+49 89 378-13211

Event Schneider released excellent 1H results well above market expectations (net income of

EUR 735mn vs. expected EUR 572mn) that prompted the company to raise its full year

margin guidance. In 1H, sales increased by 10.5% (6.4% organically) to EUR 8.6bn. Top-linegrowth accelerated in 2Q, with organic sales growth at 10% (2% in 1Q), primarily driven by theindustrial market and data-centers that rebounded first. Mirroring the benefit of the company'sOne program, 1H EBITA before restructuring costs and Areva Distribution integration costs jumped by 44% to EUR 1.3bn, translating into a margin of 15.2% (11.6%). Free cash flowtotaled EUR 457mn, trimmed by a working capital build-up of EUR 492mn. Despite theacquisition payment for Areva Distribution of EUR 1bn, net debt remained at EUR 4bn, withthe net debt to EBITDA ratio staying at a robust 1.4x.

Credit profile/ Ratingdevelopment

For 2H, Schneider expects organic sales growth to progress broadly in line with the level of1H, with the later-cycle segments Buildings and Medium Voltage expected to show sequentialrecovery. By region, growth momentum in the new economies should remain strong, but

demand in mature markets should also slowly improve. On the back of the strongperformance seen to date, Schneider raised its EBITA margin target from 14% to 15.5%.

Name recommendation Overall, the company's operating performance remains strong, which is, however,

already reflected in spread levels. We keep our marketweight recommendation on the

name.

Jana Arndt, CFA (UniCredit Bank)[email protected]+49 89 378-13211

Automotive

Event MAN (A3s/BBB+s) reported 2Q10 results. For details, please refer to yesterday's CreditFlash. In 2Q10, (industrial) revenues increased by 16% yoy (1H10: +19%) to EUR 3.6bn(1H10: EUR 6.7bn), new orders increased by 64% yoy (1H10: +59%) and the order backlogwas unchanged at EUR 7.7bn qoq. In 2Q10, industrial EBITDA improved to EUR 384mn(1H10: EUR 600mn) vs. EUR 213mn (1H09: EUR 404mn) yoy and industrial FCF (after div.)improved to EUR 59mn (1H10: EUR 469mn) vs. EUR -214mn (1H09: EUR -149mn) yoy.Industrial net debt decreased to EUR 1,280mn vs. EUR 1,385mn qoq. In LTM1H10, industrialFFO/net debt (adj.) improved to 25% vs. 21% in FY09 and net debt/EBITDA (adj.) improved to1.3x vs. 1.7x in FY09. At 2Q10, MAN Group had cash and marketable securities of EUR1,019mn (vs. EUR 988mn qoq) at short-term group debt of EUR 1,324mn (vs. EUR 1,137mnqoq). MAN's next capital market maturities are EUR 240mn in bonds in December 2010 and aEUR 1.5bn undrawn loan in December 2011. In addition, the company has an undrawn EUR

300mn EIB loan, unused bilateral committed credit lines of about EUR 0.5bn, plus furtheruncommitted credit lines and a pan-European ABS platform.


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Impact On 7 April, S&P downgraded MAN by one notch to BBB+ with a stable outlook given the weakFY09 results and a lower assessment of MAN's (truck) business risk profile. S&P's hurdleratios for MAN are a group industrial operating margin improving to a mid-single-digit level in

2010, markedly improved debt protection measures with industrial FFO/industrial debt ofabout 40% and industrial debt/EBITDA 2.0x. Moody's expects: (a) the company to achievean average EBIT margin of around 6.0% through the business cycle and generate FCF oversuch a period, and (b) Debt/EBITDA 2.0x. We expect MAN's FY10 credit metrics to be inline with these hurdle ratios, but see no rating upgrade potential.

Recommendation We continue to have an overweight recommendation for MAN bonds in the iBoxx IndustrialGoods & Services model portfolio based on: (a) the company's positive credit profilemomentum, and (b) as we believe that if VW (A3s/A-n/BBB+p) were to increase itsshareholding in MAN to a majority, this would mean a rating alignment with VW and tighteningpotential of MAN bonds and CDS spreads by around 10-20bp. MAN 5Y CDS trades at125/145bp, which is wider than VW's 110/115bp or Scania's 78/88bp and a convergence

trade looks attractive. Our favorite on the cash curve is still the MANAG 7.25% 05/16 bond.

Dr. Sven Kreitmair, CFA (UniCredit Bank)+49 89 [email protected]

Event Continental (B1s/Bs/B+s) reported 2Q10 results. For details, please refer to yesterday's

Credit Flash. In 2Q10, revenues increased by 40% (1H10: 40%) yoy to EUR 6,658 mn(1H10: EUR 12,654mn). Group EBITDA improved to EUR 936mn (EUR 1,824mn) yoy vs.EUR 448mn (EUR 697mn) yoy. EBITDA in the Automotive Group again improved significantlyto EUR 478mn (EUR 950mn) vs. EUR 128mn (EUR 174mn) yoy, but also developedpositively in the more stable Rubber Group to EUR 497mn (EUR 913mn) vs. EUR 331mn

(EUR 547mn) yoy. FCF in 2Q10 weakened to EUR 274mn (EUR -101mn) vs. EUR 1,094mn(EUR 553mn) on a working capital build-up. Reported net debt decreased to EUR 8.0bn vs.EUR 8.2bn qoq, given the positive FCF generation in 2Q10. Credit metrics in LTM1H10improved slightly, to FFO/net debt (adj.) of 20% from 19% qoq. At 1Q10, Conti's cash positionwas EUR 1.2bn plus EUR 2.6bn in unutilized credit lines. Conti's debt maturities in 2010/11are EUR 1.1bn. In August 2012, Conti will see a peak in debt maturities with EUR 7.4bn.Conti's intention is to further balance its 2012 debt maturities. Conti's bank loan covenantheadroom is significant, with net debt/EBITDA of 2.28x (vs. 2.68x qoq) vs. the covenant of4.25x. The covenant schedule is: 2Q-4Q10: 4.25x, 1Q-2Q11: 3.75x, 3Q-4Q11: 3.5x, 1Q12:3.25x, 2Q12: 3x.

Impact Conti increased its OE production and RT market expectations for 2010, e.g., PCLTproduction of +6% (previously: +2%) in Europe and +35% (previously: +26%) in NAFTA and

RT markets, with now +4-6% in Europe and NAFTA from previously +4%., Truck productionEurope from +9% to +46%, TT RT market Europe from +7% to +9% and NAFTA from +8% to+16%. Subsequently, Conti already increased in early July its 2010 guidance and currentlyexpects sales growth of between +15% yoy (previously: 5-10%) and an adj. EBIT margin of8%-8.5%; Automotive Group adj. EBIT of more than EUR 768mn vs. previous guidance of"around EUR 576mn" (FY09: EUR 192mn); Rubber Group to sustain adj. EBIT (FY09: EUR1,036mn) despite raw material price burden for tires at the current natural rubber price (> 3USD/kg) of EUR 250mn in 2H10 vs. a relief of EUR 250mn in FY09; Total special items areexpected to be around EUR 100mn (FY09: EUR 1,755mn); interest result might increase toEUR -750mn (previously: EUR 750-800mn) depending on the HY bond issue (FY09: EUR-720.8mn). Conti stated that in FY10 its ability to generate FCF will be limited as capex willrise (by EUR 400mn to around EUR 1.26bn), the restructuring of 2009 (special items: EUR

754mn excl. impairments) becomes cash effective (EUR 300mn in 2010) and due to aworking capital build-up as a result of the sales increase. Conti plans to pay no dividend in


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FY11 for its FY10.

Recommendation Based on the further improved 2010 guidance and consensus expectations, we expect an

improvement of Conti's FFO/debt (adj.) to around 20% in FY10, which is closer to the BBrating range. However, Conti's rating development is also influenced by the potentialcombined debt leverage (capped by HY bond covenants) in a merger with Schaeffler.According to a press comment of Schaeffler's CEO Geiinger (Source: Bloomberg), a mergerwith Continental could begin in late 2011. Given the good liquidity situation of the companyand demonstrated access to HY bond markets, we continue to have a hold recommendationon the name.


Event Volkswagen (A3s/A-n/BBB+s) reported 2Q10 results with a net income of EUR 1.25bn,which was above the expected EUR 721mn. In 2Q10, automotive revenues increased by23.5% (1H10: + 23%) to EUR 29.6bn (1H10: EUR 55.0bn). Automotive FCF improved to EUR4.5bn in 1H10 versus EUR 2.2bn yoy. Reported automotive net cash increased to EUR15.8bn vs. EUR 12.7bn qoq. In LTM1H10, automotive FFO/net debt (adj.) improved to 111%vs. 45% at FYE09, which is significantly above the required hurdle ratios for VW's rating (excl.the impact of the planned Porsche transactions, however).

Impact Main rating driver for VW is obviously the extent of a recovery in industry conditions, also in2H10 on incentive expirations, but also the planned transactions regarding Porsche and thecommercial vehicle activities with MAN (A3s/BBB+s) and Scania (--/A-n). In 4Q09, VW took a49.9% stake in Porsche AG for EUR 3.9bn. The current high level of automotive net cash

position safeguards VW's rating and opens the way to purchase Porsche Holding GmbH,Austria, from the Porsche & Piech families for an EV of EUR 3.55bn in 2011. This in turnenables the capital increase of Porsche SE by EUR 2.5bn in common shares and by EUR2.5bn in preferred shares scheduled for 1H11. The put and call option for the PorscheZwischenholding GmbH for the remaining 50.1% stake on behalf of Porsche SE can beexercised starting from 15 November 2012. The final stage is a merger between Porsche SEand VW AG. Given the positive performance in 1H10, we believe that VW is on the way to astable rating outlook at S&P, assuming that all Porsche transactions will be executed asplanned and the company will not spend larger debt-financed cash amounts for its truckactivities (MAN/Scania cooperation). Nevertheless, we note that there is some litigation riskand legal disputes for VW and Porsche regarding their M&A activities during 2008.

Recommendation We continue to have an overweight recommendation for VW bonds given that VW's 5Y CDS

trade wider than similar-rated BMW (A3n/A-n) and Daimler (A3n/BBB+n/BBB+p). On VW'scash curve, most attractive in our view are the VW 5.375% 01/12 and VW 5.625% 02/12bonds.


Consumers

Event Japan Tobacco (Aa3s/A+s/A+s) reported 1Q10/11 results that were again burdened by

declining domestic tobacco consumption but were broadly in line with market

expectations in terms of operating profit. 1Q10/11 sales remained almost stable at JPY474bn while EBITDA was down by 6.5% yoy to JPY 133bn. Sold cigarette volumes declined


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in line with those of other tobacco firms. While the domestic cigarette volume declined by 3%yoy to 35.9bn sticks, the volume of international cigarette business dropped by 6.9% yoy to94.1bn sticks. However, price increases abroad were able to more than offset the declining

cigarette volume, in general reflecting the same picture seen at other tobacco companies. Inthe domestic market, it was not possible to adjust cigarette prices to the same extent asabroad. Operating cash flow decreased from JPY 33bn to JPY 27.5bn, which was fullyconsumed by capex. Hence, dividend payments were fully financed via debt. However,reported net debt decreased by JPY 152bn to JPY 704bn. The outlook for FY10/11 is verycautious as the company expects a weaker EBITDA than reported for FY09/10 (JPY 513bnvs. JPY 527bn). While EBITDA of the domestic tobacco business should drop by 13% yoy,international tobacco activities should perform better (+8% yoy). With the planned tobaccoexcise tax increase (JPY 3.50 per stick), which will become effective as of October 2010,demand for cigarettes should further decline in Japan.


For 1Q10/11, we calculate adj. net debt to EBITDA of 1.8x (FY08/09: 2.1x) and adj. FFO to

net debt of 35.1% (28%), similar to BAT's (Baa1s/BBB+s/BBB+s) credit profile. In our view,credit metrics are more commensurate with a weak single A rating. Given the huge tax hike inJapan from October 2010 onwards, we do not think that the credit profile is likely to improve inFY10/11. In addition to the weak outlook, event risk might also be a trigger for spread levels.First, the company has already stated that it is seeking further growth opportunities to offsetthe weakening domestic tobacco business. Second, the Japanese government still holds a50% stake in Japan Tobacco and might reduce this stake in the medium term. We note thatMoody's assigned an A1 rating on a stand-alone basis (baseline credit assessment of 5) inMay 2010, which might result in negative rating actions in case of a disposal of the 50% stakeby the Japanese government.

Name recommendation We keep our underweight recommendation on Japan Tobacco given the tight spread levels of

the outstanding bonds, the expected weak operating performance in FY10/11 and theheightened event risk. 5Y CDS trade at +39/45bp (BBG).


Event AstraZeneca's (A1s/AA-s/AA-s) 1H10 results beat market expectations in terms of sale

and operating profit. Despite the large exposure to the US (41% of sales), the first impact ofthe health-care reform on the pharma industry and generic competition, the company wasable to report a solid operating performance in 1H10. Sales were up by 4% yoy to USD16.8bn, supported by strong demand from emerging markets (+18% yoy), while the US andWestern Europe fell short with respect to the average sector growth rate which is expected tostay between 4-6% in 2010. With respect to its blockbusters, sales of its Crestor (cholesterolreducer; patent expiration: 2016; FY09 sales: USD 4.5bn) and Seroquel (treatment ofschizophrenia; patent expiration: 2011; FY09: USD 4.9bn) were up 25% and 10%,respectively. Operating profit improved by 5% yoy to USD 7.5bn, resulting in an operatingmargin of an impressive 45%. Due to higher working capital, operating cash flow decreasedbut was large enough to cover capex, share buybacks and dividend payments. Net debtremained almost unchanged at USD 1.2bn. The company updated its guidance for FY10 andnow expects an EPS of USD 6.35 to USD 6.65, up from USD 6.05 to USD 6.35. Future top-line volume should be supported by the positive voting of the FDA advisors committee onAZN's blood thinner Brilinta (competing drug: Plavix from Sanofi/BMS) and a favorabledecision of a US court regarding an end of patent protection on blockbuster Crestor.


Although reported figures were good and an improvement of the credit profile made progress

during 1H10, the medium-term outlook provided in early 2010 is anything but rosy forbondholders. With expected sales of USD 28 to USD 34bn by 2014, the top-line volume isclose to that reported for FY09 (USD 32.8bn), making bolt-on acquisitions necessary to satisfy


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shareholders. The credit profile on a total debt basis continued to improve during 2Q10. Wecalculate adj. total debt to EBITDA of 0.9x (FY09:1.0x) and adj. FFO to total debt of 80%(72%). Although the company made good progress in deleveraging its balance sheet

following the acquisition of MedImmune for almost USD 15bn in 2007, headroom undercurrent ratings would be up to ca. USD 8-10bn, depending on the cash-flow generation at theacquired target. At current multiples (EV/sales) of 2.5x to 3.0x, the company might onlyacquire a sales volume of ca. USD 4bn under current ratings (assuming a fully debt-financedacquisition).

Name recommendation We keep our underweight recommendation on the name given the tight spread levels and theelevated event risk. 5Y CDS trade at +54/59bp (BBG).


Event PPR's (---/BBB-s/---) 1H10 results published this morning beat market expectations in

terms of sale and EBITDA. 1H10 sales were up by 3.6% yoy to EUR 8.1bn (+1.7% on acomparable basis) while EBITDA surged by 14.1% to EUR 895mn (consensus: EUR 877mn),reflecting the recovery of its mature markets and the strong performance in EmergingMarkets, where sales increased by 11.3% yoy in 1H10 to EUR 1.1bn (13.4% of PPR's totalsales). The EBITDA margin improved from 10% to 11% yoy. Within the segments, GucciGroup and Conforama reported organic growth of 8.5% and 4.4% in 1H10 while sales ofPuma and Redcats Group showed a weaker performance (sales: -5.1% and -1.2% yoy,respectively). Operating cash flow (adjusted by interest payments) improved from EUR 35mnto EUR 259mn as cash flow in 1H09 was burdened by higher investments in working capital.Capex and payouts for acquisitions fully consumed the generated cash. Hence, dividends hadto be financed via additional debt. Reported net debt therefore increased from EUR 4.4bn to

EUR 4.9bn. At 1H10, PPR had cash of EUR 927mn and unused credit facilities of EUR 6.3bn.The company refrained from providing a quantified outlook for the remainder of the year.

Development of creditprofile/rating

For 1H10, we calculated adj. net debt to EBITDA of 3.0x (1H09: 3.7x) and adj. FFO to netdebt of 24.4% (17.9%), reflecting the massive reduction of net debt yoy (EUR 4.8bn vs. EUR6.5bn). Rating pressure therefore further diminished and credit metrics are now fully in linewith S&P's requirements to keep the current rating. In May 2010, S&P affirmed PPR's rating.During the last few years, management has repeatedly stated that it is committed to keepingthe investment grade rating, which, however, was not "bought" by the market when looking atspread developments (for example, in comparison with Groupe Casino).

Name recommendation We remain on overweight for the issuer and have a positive stance towards CDS. 5Y CDStrade at 153/158bp, wider than 5Y CDS of Imperial Tobacco (102/107bp) which is rated with

Baa3s/BBBs/BBB-s.


Carmen Hummel (UniCredit Bank)+49 89 [email protected]

High Yield

Event Rhodia announced strong 2Q results with strong cash generation and a further reduction innet debt. Sales were EUR 1,330mn, up 25% excluding FX effects on higher volumes (+16%)and firm pricing (+12%). Recurring EBITDA was a strong EUR 226mn at a margin of 17% ashigher raw material costs could be passed on to customers. Main drivers were Polyamide, thecare chemicals unit Novecare and Silicea. Free cash flow of EUR 101mn in the quarter was

used for a dividend of EUR 35mn as well as debt reduction, taking net debt levels to EUR


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883mn (down from EUR 949mn).

Credit profile development The company does not see a slowdown of the strong trading environment and sees recurring

EBITDA at a level of more than EUR 200mn in 3Q. Debt levels will increase in 2H10 toaround EUR 1.2bn owing to the acquisition of 87.5% of Chinese specialty amines andsurfactants manufacturer Feixiang Chemicals, valued at USD 489mn. The company, whichgenerated 56% of its sales with intermediates for surfactants and 23% directly in the Home &Personal Care, will be integrated into Rhodia's Novecare segment. Feixiang Chemicals willcontinue to strengthen Rhodia's footprint in the fast growing emerging market and China inparticular. The deal is expected to close in 2H10.

Recommendation Overall, we see little reason to change our buy recommendation on the name. The RHA FRNwas quoted at 96.75/97.75 (cash) and the newly-issued RHA 05/18 at 100.75/101.75 (cash).We continue to be sellers of protection at 345/375bp for the 5Y CDS.

Jochen Schlachter (UniCredit Bank)+49 89 [email protected]

Event HeidelbergCement released 2Q results which slightly exceeded analysts' forecast in termsof sales and OIBD (gathered by Bloomberg). 2Q turnover increased by 10% to EUR 3,296mn(forecast EUR 3,147mn), OIBD by 9% to EUR 693mn (forecast EUR 673mn), while operatingincome rose 10% to EUR 492mn. The company reported a return to growth in the NorthAmerican market, a continuing recovery in Eastern Europe and Central Asia while in AsiaPacific adverse weather conditions impacted volumes. Operating free cash flow after capexreached EUR 161mn. Net debt rose slightly to EUR 9,066mn from EUR 8,964mn as a resultof dividend payments, FX effects and working capital requirements, overall in line withseasonal patterns.

Credit profile development In 2H10, HC expects a continuing volume recovery in North America as stimulus programskick in. In Europe, the trend reveals a mixed picture (Northern Europe and the UK good,Germany and Benelux slightly weakening, Central Asia recovering and a robust developmentin Poland). Asia is expected to continue to grow. HC reiterated its focus on cost andoperational excellence and confirmed its cost savings target of EUR 300mn (EUR 250mn)after delivering EUR 124mn in savings in 1H10. All in all, we expect HC to continue on itsdeleveraging path, seeking to further improve its credit metrics. Asset disposals might offersome upside potential in the medium term, but fire sales are clearly not on the agenda.Following the recent refinancing, liquidity has significantly improved with EUR 1.7bn in short-term maturities being covered by EUR 2.9bn in available liquidity (cash EUR 961mn andheadroom of EUR 2,502mn under credit facilities pro forma the recent EUR 650mn bondissue).

Recommendation We continue to have a buy recommendation on HEIGR issues, expecting further deleveraginggoing forward.


[email protected]

Event Wind Telecommunicazioni SpA (Ba3s/B+s/BB-s) released decent 2Q10 results, given

the challenging market environment and the results of VOD Italy published recently (TI

will publish its results on 5 August). In 2Q10, revenues and EBITDA increased yoy on acomparable basis by 2.6% and 2.7% to EUR 2,892mn and EUR 1,065mn, respectively. Bythis calculation, 1H09 EBITDA was revised upwards by EUR 41mn, as the company has

revised its approach to customer acquisition costs beginning 1 January 2010, which arecapitalized over a period of 18 months. Of course, this has positive implications on EBITDA


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without any operating merits and will provide a more positive net debt to EBITDA ratio thanthe company would have shown otherwise. If we annualize the 1H10 effect, it would improveEBITDA by around EUR 80mn on a full-year basis. Given the revised treatment of SACs, the

company revised its full-year guidance for EBITDA and capex from April this year upwards:

WIND TELECOMUNICAZIONI: FY10 GUIDANCE DEVELOPMENT

as of Apr-10 10-Jul

Revenues low-to-mid single digit revenue growth low-to-mid single digit revenue growth

EBITDA EUR 2,050 - 2,100mn EUR 2,120 - 2,170mn

Capex EUR 850 - 900mn EUR 900 - 1,000mn

Source: Company info, UniCredit Research

The company's net debt declined by EUR 250mn to EUR 8,291mn in 1H10, reflectingrelatively good FCF generation during the quarter. However, we do not expect that this FCFcan be annualized going forward. Given that the company has a capex target of at least EUR950mn and spent only EUR 339mn in 1H10, we assume that the FCF of 1H10 will be used foradditional capex in 2H10. Moreover, FCF benefitted from W/C-related cash inflows in 1H10,which cannot be expected to be repeated in 2H10. Hence, we expect no or even slightlynegative FCF in 2H10. The reported net debt/EBTDA improved slightly to 3.9x from 4.0x qoq,but one should keep in mind that without the above-mentioned revised treatment of SACs theleverage would have been closer to 4.0x.


Wind repaid in advance in January 2010 loan maturities scheduled in June 2011 (Tranche A1)for an amount of EUR 336mn, and has now requested early repayment of an additional EUR360mn, including the remaining Tranche A1 of senior debt (EUR 337mn in December 2011).Wind's cash position at the end of 1H10 was EUR 438mn versus EUR 584mn at YE09. We

note that Wind has remaining scheduled repayments of EUR 494mn in 2012 and EUR 1.5bnin 2013 as well as in 2014 plus second lien notes (~EUR 664mn), which will lead torefinancing needs. The main question is when? Obviously, the above-mentioned earlyrepayments move the next scheduled repayment to 2012 and with the company's expectedFCF of roughly EUR 225-250mn p.a. (UniCredit estimate), it will likely be in a position to meetthis repayment (2012) unless extraordinary cash outflows occur (see below). Hence,theoretically the company could wait to refinance its 2013 maturities until 2012. However, thismight not be the case and the company might likely start to refinance its second lien first duein 2014 to make a refinancing of its senior debt possible. Moreover, the company mayconsider the use of senior secured bonds to refinance its senior bonds to receive morefinancial flexibility via the absence of amortization payments.

As already mentioned in the press recently, Wind confirmed that a tax audit on Windconfirmed the view that Wind has to pay 12.5% withholding taxes on investigated interestpayments, which could lead to a potential cash outflow of EUR 70mn. The tax assessmenthas not yet been issued by the tax authority, and as such no payment obligation has beenrealized. We assume that it is unlikely that Wind would have to pay the amount in a lump sumbut that it would pay the amount in installments over a couple of years. Hence, we do not seea significant threat from this potential tax payment.

Another potential cash outflow could stem from the WIND-Fastweb-Vodafone NGN initiative.A few months ago, Wind, Fastweb and Vodafone proposed to develop a new generationnetwork, i.e. FTTH network. It is envisioned that the initial rollout will involve the 15 largestItalian cities (approximately 10mn inhabitants) over a period of five years with a correspondinginvestment of EUR 2.5bn. The company commented that this project would not increase

capex over time, while it requires more of an equity investment in a new JV. Wind broughtforward a simple calculation to demonstrate the potential financial impact from such an


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initiative if it is accepted by the Italian government and regulatory authorities: EUR 2.5bndivided by three involved parties over five years would mean a maximum investment of EUR167mn per annum for Wind, if the JV would not make use of debt investments. Wind indicated

that this would be an annual investment, which is covered by internal cash flows, even thoughit would delay deleveraging. According to our calculations, it would reduce FCF generationsignificantly and would make the above-mentioned refinancing need a more urgent topic.

In our opinion, the company's operating performance is still healthy, especially in comparisonto Vodafone's Italian mobile business: Vodafone won 396,000 subscribers in 1H10, whileWind had 858,000 net adds. Vodafone's service revenues in Italy declined by 2.9% in 1H10,while Wind increased its mobile service revenues by 6.0% yoy. While mobile ARPUs wereunder pressure due to mobile termination rate cuts, this is an even bigger achievement ofWind SpA.

Name recommendation We continue to have a hold recommendation for WINDIM bonds, given the resilient

operating performance of the company and the current valuations, which alreadydiscount for the above-mentioned risks.

Stephan Haber, CFA (UniCredit Bank)+49 89 [email protected]

Banks

Event Caja Madrid (A1n/Awn/An) reported slightly better-than-expected results, but low

quality 2Q10 numbers due to boosted trading income, which absorbed a substantial

increase in impairments on financial as well as also on non-financial assets. Net profitsincreased by 67% to EUR 122mn (down 44% yoy) in 2Q10. Total revenues increased by 34%

qoq to EUR 1,055mn (down 10% yoy), despite the continuation of the declining trend in netinterest income (down 5% qoq to EUR 468mn) as particularly trading income was boosted (up1.5x qoq and still 82% yoy to EUR 358mn), which we consider as unsustainable. On apositive note, opex declined qoq by over 7% to EUR 398mn, thus driving pre-provisionincome much higher (up 82% qoq, and only down 16% yoy to EUR 657mn). Loan-lossprovisions increased surprisingly strong qoq (up 60%) to EUR 450mn. In addition, CajaMadrid recorded EUR 95mn in provisions for non-financial assets (probably real estate on thebalance sheet), which was partly funded by EUR 43mn in capital gains. In this context, thecaja reported a declining NPA ratio to 5.39% from 5.43% in 1Q10, due to the second quarte rin a row with declining NPL formation (down EUR 88mn in 2Q10 after a reduction of EUR82mn in 1Q10 and an increase of EUR 88mnn in 4Q09 and an increase of EUR 131mn in2Q09). We note, however, that the NPA figure includes all interest bearing items of the

balance sheet (i.e., securities portfolio) and off-balance sheet credit risk. We calculate theNPL ratio by dividing non-performing loans with the gross loan book, getting 6.0% in 2Q10,down from 6.2% in 1Q10 and 6.4% in 2Q09. This reduction might, however, be driven bymajor write-offs (EUR 367mn vs. EUR 204mn in 1Q10), reducing the amount of NPLs to EUR7,248mn from EUR 7,361mn in 1Q10. Furthermore, these NPLs are covered by a meager45% (up from 43%) with generic (EUR 765mn) and specific provisions (EUR 2,762mn).Foreclosed assets increased slightly qoq (up EUR 49mn to EUR 1,098mn), while acquiredreal estate assets even declined marginally qoq (down EUR 42mn to EUR 1,265mn) in 2Q10and the total provisioning coverage was 26%. The breakdown of real estate assets on thebalance sheet is dominated by terminated living units (54.5%), followed, however, by not built-up land (42.3%), which certainly will require additional provisioning under the newprovisioning requirements in FY11. Caja Madrid's core Tier-1 ratio declined by 30bp to 6.6%,while the Tier-1 ratio dropped by 20bp to 8.7% due to a reduction of EUR 412mn in core Tier-1 capital (nota bene: the Tier-2 capital increased by EUR 489mn, which is why the totalcapital ratio increased by 16bp to 10.76%. Regarding the current funding issue for Spanish


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banks, we point out that the caja's maturities within the residual 2H10 and FY11 periodamount to EUR 5,624mn, while liquidity reserves with the ECB amounted to EUR 11.4bn.

In addition, Caja Madrid announced yesterday that its board of directors approved the "cold"merger (Sistema Institutional de Proteccion, SIP) with Caja de Ahorros de Valencia, Castellny Alicante (Bancaja, A3n/--/BBBs), Caja Insular de Ahorros de Canarias (Baa1n/--/--), Caja deAhorros y Monte de Piedad de vila (Baa3s/--/--), Caixa dEstalvis Laietana (--/--/BBB-wn),Caja de Ahorros y Monte de Piedad de Segovia (Baa3s/--/--), and Caja de Ahorros de LaRioja (A3n/--/--).

Impact Caja Madrid's 2Q10 results are credit negative as the loss-absorption capacity of the

P&L continues to weaken and the pressure from asset quality deterioration has not

declined, despite the decreasing NPL ratio. In particular, the new provisioning requirementwill put additional pressure on Caja Madrid's profitability and without such strong tradingincome, these additional provisions might be difficult to absorb in FY11. We note that the

merger still requires the more challenging approvals from the general assemblies. Overall, webelieve that CAJAMM will not benefit from the current momentum due to the fact that: (i)JUPITER (the new caja group) just passed the EU stress test with a not so comfortable Tier-1ratio of 6.3% and (ii) we have our concerns regarding the quality of the bank's loss-absorbingcapacity: the EU stress test assumes an adverse 2Y cumulative pre-impairment income o fEUR 5,543mn, which compares with EUR 1,017mn in 1H10 a figure, which will not bedrastically increased in the near future, if any, in our view.

CAJA MADRID: KEY FINANCIAL HIGHLIGHTS

Figures in EUR million 2Q09 1Q10 2Q10 qoq yoy 1H09 1H10 yoy

Net interest income 716 492 468 -4.8% -34.6% 1,471 960 -34.7%

Net fees & commissions 219 177 199 12.6% -9.0% 405 376 -7.1%

Trading income 197 103 358 248.7% 82.0% 392 461 17.7%

Other income 44 18 29 65.8% -33.8% 84 47 -44.4%

Total income 1,176 789 1,055 33.7% -10.3% 2,352 1,844 -21.6%

Operating expenses -394 -429 -398 -7.2% 1.1% -812 -827 1.9%

Pre-provision income 782 360 657 82.4% -16.0% 1,540 1,017 -34.0%

Loan loss provisions -476 -282 -450 59.7% -5.5% -800 -731 -8.6%

Attributable net income 218 73 122 66.8% -44.2% 575 195 -66.1%

Cost-income ratio 33.5% 54.4% 37.8% -16.6 pp 4.3 pp 34.5% 44.9% 10 pp

Figures in EUR billion 2Q09 1Q10 2Q10 qoq yoy - - -

Total assets 191.7 191.1 199.1 4.2% 3.9% - - -

NPA ratio 5.55% 5.43% 5.39% -4 bp -16 bp - - -

NPA coverage 41.0% 44.8% 46.5% 2 pp 6 pp - - -

Shareholders equity 10.5 10.3 10.4 0.4% -1.6% - - -

Core Tier-1 ratio 6.5% 6.90% 6.60% -30 bp 9 bp

Tier-1 ratio 8.6% 8.90% 8.70% -20 bp 13 bp

Source: Caja Madrid, UniCredit Research

Dr. Dietmar Tzschentke (UniCredit Bank)+49 89 [email protected]

Event Banco Pastor (A3n/--/--) just reported net profits of EUR 61mn in 1H10 (down 25% yoy).

The reduced bottom-line result is a combination of weaker core income (NII down 4.2% yoy toEUR 261mn) and plummeted trading gains, which supported the prior year's result (down76% yoy to EUR 77mn). Thus, even much lower loan-loss provisions (down 69% yoy to EUR

120mn) could not reverse the trend. The reported NPL-ratio stood at 5.04%, slightly up from4.9% in 1Q10, while NPL coverage declined by 5pp to 51% due to the much lower LLPs. The
mailto:[email protected]:[email protected]


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core Tier-1 ratio reached a sound 8.31% and the Tier-1 ratio stood at a strong 10.43%.

Impact At first glance, Pastor's results are credit negative due to the expected weakening of

core income and the unexpected low LLPs, which negatively impacted the NPL

coverage. Pressure from asset quality is only taking a breather, in our view. Like BBVA, wewould have liked to see a strengthening of the provisioning base.

BANCO PASTOR: KEY FINANCIAL HIGHLIGHTS

Figures in EUR million 2Q09 1Q10 2Q10 qoq yoy 1H09 1H10 yoy

Net interest income 137 137 128 -6.5% -6.4% 273 265 -3.0%

Net fees & commissions 41 35 35 -1.9% -14.6% 82 70 -14.7%

Trading income 265 56 21 -61.7% -92.0% 289 77 -73.4%

Other income 11 2 -2 -176.5% -115.9% 28 1 -98.0%

Total income 453 230 182 -20.9% -59.8% 672 412 -38.6%

Operating expenses -92 -91 -98 7.1% 6.7% -180 -189 5.1%

Pre-provision income 362 139 84 -39.3% -76.7% 492 223 -54.6%

Loan loss provisions and other impairments -371 -90 -30 -66.8% -92.0% -398 -120 -69.9%

Attributable net income 37 34 27 -21.3% -26.7% 82 62 -25.0%

Cost-income ratio 20.2% 39.7% 53.7% 1404 bp 3349 bp 26.8% 45.9% 1910 bp

Figures in EUR billion 2Q09 1Q10 2Q10 qoq yoy

Total assets n.a. n.a. n.a. n.m. n.m.

Loan-deposit ratio 148% 145.39% 143.24% -215 bp -440 bp

NPL ratio (reported) 4.64% 4.9% 5.4% 46 bp 76 bp

NPL coverage (reported) 54.0% 56.1% 51.0% -510 bp -300 bp

Risk Weighted Assets 19.2 18.9 18.9 -0.2% -1.8%

Core Tier-1 ratio 7.4% 8.30% 8.30% 0 bp 90 bp

Tier-1 ratio 10.0% 10.5% 10.4% -10 bp 40 bp

Source: Banco Pastor, UniCredit Research


Event Erste Group Bank (Aa3n/An/As) reported EUR 217mn in net attributable profit for 2Q10

(down 17% qoq and 15% yoy), slightly missing market consensus of EUR 221mn,

apparently only due to higher taxes and higher profits attributable to non-controlling

interests. Pre-tax profits of EUR 363mn exceeded consensus of EUR 341mn. On a y-o-ycomparison, the bottom-line result declined by 4% to EUR 472mn. The resilient 2Q10 resultwas driven by sound net interest income and higher fees & commissions (up 3% qoq or 6%

yoy to EUR 1,361mn and 5% qoq or 11% yoy to EUR 494mn, respectively). In addition, loweropex strengthened pre-provision income, enabling the bank to absorb further increasing loan-loss provisions (up 4% qoq and 6% yoy to EUR 553mn). On the back of a slowdown of newNPL formation (up 5.9% qoq), the NPL ratio increased to 7.3%. The higher provisioningincreased the NPL coverage, which reached 59.7% in 2Q10. Solvency ratios continued toimprove, with the core Tier-1 ratio reaching 8.6%, up 30bp YTD, and the Tier-1 ratioincreasing 20bp qoq and 40bp yoy to 9.6% (calculated based on total risk; only based oncredit risk, the Tier-1 ratio stood at 11.2%, up from 10.8% in FY09). Liquidity risk was furthercontained due to an increasing deposit base (loan-deposit ratio down to 112%). In addition,the bank mentioned that it already covered more than 50% of LT funding.

Impact Erste Bank's results are credit positive, as core income showed the required

improvements to absorb still increasing loan-loss provisions. Management expectselevated risk costs for FY10 at similar levels of FY09, which means a substantial slowdown in2H10 as LLPs in 1H10 were 22% higher yoy. However, risk is tilted rather to the downside in
mailto:[email protected]:[email protected]


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this respect, but the improved risk-absorbing capacity of the P&L might offset it.

ERSTE BANK: FINANCIAL HIGHLIGHTS

Figures in EUR million 2Q09 1Q10 2Q10 yoy qoq

Net interest income 1,279 1,324 1,361 6.4% 2.8%

Net commission income 444 472 494 11.2% 4.7%

Trading income 199 141 99 -50.4% -30.0%

Other revenues -24 -50 50 n.m. n.m.

Total revenues 1,898 1,886 2,003 5.6% 6.2%

Operating expenses -984 -953 -945 -4.0% -0.8%

Loan-loss provisions -522 -531 -553 6.0% 4.1%

Pre-tax income 392 402 505 29.0% 25.6%

Attributable net income 260 255 217 -16.7% -15.1%

Return on Equity (net) 10.3% 7.7% 6.7%

Cost-income ratio 51.9% 50.5% 47.2%

Figures in EUR billion 2Q09 1Q10 2Q10 yoy qoq

Total assets 204.2 208.0 209.1 2.4% 0.5%

Risk weighted assets 107.8 105.9 104.9 -2.7% -1.0%

Shareholders equity 10.1 13.3 12.9 27.7% -3.1%

Tier-1 ratio 7.3% 9.4% 9.6%

Total capital ratio 11.1% 12.8% 12.9%

Source: Erste Bank, UniCredit Research


Insurance

Event SCOR (A2s/As/As), France's largest reinsurer, reported 2Q10 net income of EUR

120mn, up 31.9% from EUR 91mn in 2Q09, above market expectations. Results were

driven by rising income from financial investments amid higher market volatility. SCORposted a net income of EUR 156mn in 1H10, compared to EUR 184mn in 1H09. During 1H10,SCOR had premium income of EUR 3,258mn, up 8% yoy (+5% at constant exchange rates)excluding equity-indexed annuity business in the US and after normalizing the level ofProperty & Casualty business in 1H09. The operating margin was 6.0% for SCOR Global Life,while return on invested assets (excluding funds withheld by cedants) was 4.0%, andannualized ROE reached 7.7%. Shareholders equity rose to EUR 4.2bn, +8.1% compared toEUR 3.9bn at 31 December 2009, equivalent to EUR 23.2 book value per share, while

operating cash flow was EUR 208mn. In addition, SCOR says that the first quarterdemonstrated the Group's ability to absorb an abnormally high concentration of naturalcatastrophes (Chile, Haiti, Xynthia, etc.).

Gross written premiums for Life and Property & casualty reached EUR 3,258mn, remainingstable compared to 1H09 when they were EUR 3,254mn (+0.1% but -2.7% at constantexchange rates). This stability is principally due to the unfavorable impact of the planned anddeliberate reduction in equity-indexed annuity business and the development of Property &Casualty reinsurance. Excluding equity-indexed annuities business in the US and bynormalizing the level of Property & Casualty business in 1H09 to the annual growth rate of2009, premium income grew by 8% yoy (+5% at constant exchange rates). Bolstered bypositive renewals, SCOR Global P&C's (SGPC) premium income recorded growth of +3.8%

at EUR 1,764mn over 1H10 (+0.5% at constant exchange rates). The net combined ratiostands at 102.8% in 1H10, compared to 108.6% in 1Q10 and 97.5% in 1H09. Naturalcatastrophes contributed 13.1 points of net combined ratio over 1H10 (vs. 20.2 points in


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1Q10), while 2Q10 saw natural catastrophe losses in line with the budget (6 points).

The Annual General Meeting of 28 April 2010 decided on a dividend payment of EUR 1 per

share, i.e., a payout ratio of 48%. The total sum of dividends distributed for 2009 reachedEUR 179mn, EUR 42mn being paid in shares and EUR 137mn in cash. During 1H10, theGroup continued to reduce its debt ratio and currently has a leverage position of 10.6%compared to 14.6% at the end of 2009. Net investments, including cash, stood at EUR 21.7bnat 30 June 2010 (December 2009: EUR 20.0bn), consisting of bonds (48.1%), funds withheldby cedants (37.4%), cash and short-term investments (6.3%), equities (4.4%), real estate(2.1%) and other alternative investments (1.7%). Liquidity reached EUR 1.4bn at 30 June2010, (December 2009: EUR 1.7bn). SCOR says its high-quality fixed income portfolio(average rating AA) maintains a relatively short duration of 3.4 years (excluding cash andshort-term investments; December 2009: 3.7 years). Investments in inflation-linked bondsamounted to EUR 1.0bn at 30 June 2010.

Impact SCOR is on track with its integration, while its resilient operating performance andconsistently positive quarterly results are supported by its conservative business andinvestment model, and solid financials. We have a marketweight recommendation on thename. The reinsurer's sub-debt bond SCOR 6.154% 07/16-49 is part of our recommendedportfolio in "Bank & Insurance Watch".

SCOR: FINANCIAL HIGHLIGHTS

Figures in EUR millions 1H10 1H09 % change 2Q10 1Q09 % change

Gross written premiums 3,258 3,254 0.1% 1,645 1,693 -2.8%

Property & casualty 1,764 1,699 3.8% 855 831 2.9%

Life 1,494 1,555 -3.9% 790 862 -8.4%

Operating income excl impairments 234 312 -25.0% 178 159 11.9%

Net income 156 184 -15.2% 120 91 31.9%

Investment income 356 149 NM 184 153 20.3%

Net return on investments 4.0% 1.0% 4.1% 3.6%

Property & casualty combined ratio 102.8% 97.5% 97.0% 95.8%

Life operating margin 6.0% 5.1% 6.0% 5.5%

Return on equity 7.7% 10.6% 11.9% 10.5%

Investments (excl participat ions) 21,663 19,542

Reserves (gross) 23,194 20,848

Shareholders' equity 4,216 3,635

Source: Company data; UniCredit Research

Luis Maglanoc, CFA (UniCredit Bank)

+49 89 [email protected]


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Corporate Snapshots

Company(Analyst)

Comment

ELEPOR

(CK)

1H10 EBITDA of EDP (A3s/A-n/A-s) increased by 14% yoy toEUR 1,830mn (UniCredit (E): EUR 1,756mn), supported bystronger Brazilian activities, and the higher installed capacitiesin its wind business. Furthermore, acquired network assetsfrom Gas Natural also propelled 1H10 earnings as theseactivities were consolidated for the first time. FFO was EUR1,439mn, + 12% yoy. Free cash flow was negative, also due toextraordinary tax payments in Portugal. Net debt consequentlyrose by EUR 2.1bn to EUR 16.1bn. On a reported basis, netdebt to EBITDA was 4.4x, unchanged versus YE 09 and YE08.EDP spreads are still influenced by economic uncertainties inthe countries located in the European periphery and a potentialreduction of the government stake. We therefore keep ourunderweight recommendation. 5Y CDS trade at 155/165bp,slightly below those of Portugal (around 180bp). Conferencecall at 10am (UK time), +44 207 162 002

EDF

(CK)

EDF (Aa3s/A+s/A+s) released improved figures for 1H10above expectations. Sales increased by 7.7% yoy to EUR37.5bn, whereas EBTIDA was up 4.4% to EUR 10.4bn (marketconsensus of EUR 10.0bn). Around half of the revenue growthwas related to consolidation effects, in particular theacquisition of SPE in Belgium and of the 49.99% stake inConstellation Energy in the US. Excluding consolidation andcurrency effects, organic sales growth was positive at + 2.1%yoy (had been negative in 1Q10). Net debt/EBITDA is 2.5x,which is at the lower end of the company's guidance. Thegroup confirmed its FY10 guidance: 1. Organic EBITDA growthbetween 3% and 5%, and 2. Net debt between 2.5x and 3.0x.3. Stable dividend. We keep our marketweightrecommendation for the name.

VALEBZ

(JA)

Vale released strong 2Q10 results, primarily reflecting highersales prices for iron ore and pellets and higher shipment

volumes in almost all of the company's products. 2Q EBITDAsurged by 95% qoq to USD 5.58bn on a revenue increase by45% qoq to USD 9.93bn. Despite the robust internal cashgeneration (FOCF of about USD 1.4bn), net debt increasedfrom USD 12.4bn at the end of 1Q to USD 17.7bn, due toacquisition-related cash outflows of USD 5.2bn, mainly relatingto the acquired fertilizer assets. Thanks to the strong operatingperformance, debt leverage nevertheless declined from 2.4x in1Q to 1.8x. Vale yesterday also announced that it intends tobuy the Brazilian copper producer Paranapanema for USD1.1bn. Overall, the announcements underpin that thecompany's operating performance remains robust, whilegenerated cash will continuously be used for M&A activities.We keep our marketweight recommendation on the name.

MNDILN

(JA)

Ahead of its 1H figures release on August 10, Mondi justissued a trading statement confirming that the group'sunderlying operating profit is expected to be considerablyhigher yoy. We keep our buy recommendation on the name.

RENTKL(JA)

Rentokil released 2Q10 results that revealed further operatingimprovements. Sales growth (for continuing operations)remained muted in the quarter, down at 0.8% (at constantexchange rates, CER) to GBP 627mn. Operating profit fromcontinuing operations (before impairments, amortization andone-offs) improved by 18.3% at CER to GBP 61mn, positivelyinfluenced by cost savings that are materializing ahead of plan.Despite continuing challenging market conditions, as alsoreflected in strong price pressure, the company stuck to its fullyear expectations, expecting continued profit enhancement,supported by its internal measures. Rentokil also repeated itscommitment to reduce net debt to below GBP 1bn by YE (GBP1bn at 1H) and to restore its credit metrics to a BBB flat rating.We keep our marketweight recommendation on the name.

Company(Analyst)

Comment

AALLN

(JA)

Anglo published strong 1H10 results above market consensus.In 1H, revenues advanced by 35% to USD 15bn, whileEBITDA surged 81% to USD 5.4bn. Besides improving tradingconditions, the strong result was supported by benefits fromthe company's asset optimization and procurement programswith a run rate of USD 1bn in 1H. Owing to strong cashgeneration that could finance capex and the company'ssubscription to the De Beers rights issue, net debt decreasedfrom USD 11.3bn at FYE09 to USD 10.9bn. In view of thestrong performance, the company's reinstatement of dividendpayments is also of no concern. The outlook for FY10 remainsvague on the back of an increasingly uncertain outlook for theglobal economy and with leading indicators signaling lessfavorable conditions. However, Anglo repeated its confidencein the outlook for the industry in the medium to long term. Wekeep our marketweight recommendation on the name.

SANFP

(RS)

Yesterday, Mr. Chris Viehbacher, CEO, stated that Sanofi's(A1s/AA-s/AA-s) board would support a bid for US-basedbiotech company Genzyme (Baa2s/A-s/---) up to a share priceof USD 70. As the share price of Genzyme already rocketedfrom 52 to USD 71 during the last two weeks, a bid would costca. USD 18.6bn at least. As there are a couple of "active"shareholders like Mr. Carl Icahn invested in Genzyme, itshould be very difficult for Sanofi to gain the majority in thecompany assuming an offer of USD 70 per share. A premiumof 20% would result in a transaction value for Genzyme'sequity of USD 22.4bn. Assuming a fully debt-financedacquisition, adj. total debt to EBITDA would increase to 2.5x(FYE09: 1.1x) which would be in-line with that of Roche(A2s/AA-s/AA-s) immediately after the Genentech acquisition.However, as we regard Sanofi's business model as more riskythan that of Roche, (multi-notch) rating actions are very likelyin our view. We keep our underweight recommendation on thename and remain protection buyer in the name.

Belgacom(BELGBB)

(SH)

Belgacom just released solid 2Q and 1H10 results. In 1H10,revenues increased by 10.3% (2Q10: 10.7%) to EUR 3,305mn,excluding non-recurring revenue. The growth was driven bythe full-consolidation of BICS, including MTN ICS, and a solidunderlying business trend (organic revenue growth 0.3%).Group EBITDA in 1H10 rose by 0.5% yoy (organic growth: -2.1%) to EUR 999mn, with the EBITDA margin remainingstable at 30.2% as a result of a strong focus on overall costefficiencies, including initiatives enhancing product profitabilitywhile maintaining strict control of expenses. FCF in 1H10increased to EUR 598mn compared to EUR 362mn for 1H09,positively influenced by timing differences related to workingcapital and one-off items. The reported net debt to EBITDAratio was up to approximately 0.8x from 0.7x last quarter,mainly driven by dividend payments. Based on Belgacom'ssolid results so far, the company upgraded its revenue outlookfor 2010: Group revenues are expected to increase now by 9-10% versus the previously announced 8%-9% due to theconsolidation of BICS as of 1 January 2010. EBITDA shouldbe approximately 30% versus the previous 30-31% and thecapex-to-revenue ratio should be stable at 10% yoy. We keepour underweight recommendation for the name, despite thefact that the company is more than 50% owned by the Belgiangovernment. Belgacom bond spreads continue to traderelatively tight compared to peers and we regard the downsiderisk, e.g. from M&A activities and shareholder remuneration, ashigher than upside potential.


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Company(Analyst)

Comment

RENAUL

(SK)

Renault (Ba1s/BBs/BBs) reported 1H10 results with a net

income of EUR 823mn, above the consensus expectation ofEUR 377mn. Renault expects the global automotive market togrow by approximately 8% in 2010 compared to 2009, despitean estimated 7%-9% decline in the European market (previousexpectation for Europe was -10%). 1H10 performance andresults are ahead of plan according to the company. In anunusually uncertain environment in 2H10, Renault continues tofocus on its action plans, while closely monitoring changes inthe overall economic environment. 3Q10 will be important indetermining visibility for FY10 and the start of 2011 in theautomotive market. Renaults objective for 2010 remains togenerate positive FCF and increase market share in theGroups main markets. Just like Peugeot, the company pointedto a more difficult 2H10. We continue to have a marketweightrecommendation on RCI Banque (Baa2s/BBB-s) and a holdrecommendation on Renault.

Company(Analyst)

Comment

MICH

(SK)

Michelin (Baa2s/BBBn/BBB-s) reported 1H10 net income of

EUR 504mn, which was above the expected EUR 369mn. Theoperating margin improved to 9.8% vs. 4.0% yoy. FCF afterdividends weakened to EUR -90mn vs. EUR 478 mn yoy on asignificant working capital build-up of EUR 651mn yoy.FFO/net debt in LTM1H10 improved to 29%, which is nowclose to S&P's rating hurdle ratio of 30% and rating pressuretherefore eased. For FY10, the company said that the clearrebound in the tire markets is expected to continue in 2H10,although the pace of economic recovery will vary from oneregion to another. While rising raw material costs will have anegative impact on 2H10 consolidated results (and reduce full-year income by EUR 600-650mn), Michelin will benefit fromthe price increases introduced in 1H10. In addition, the Groupis announcing an increase of around 3% in its passenger carand light truck replacement tire prices in Europe starting inSeptember, thereby confirming its commitment to a responsivepricing policy. In this environment, Michelin reaffirms its FY10targets of a sales volume increase of at least 10%, positiveFCF and an operating margin before non-recurring items of

close to 9%. We continue to have a marketweightrecommendation on the name.

Analysts: CK=Christian Kleindienst, JA=Jana Arndt, RS=Rocco Schilling, SH=Stephan Haber, SK=Sven Kreitmair Source: UniCredit Research

iTraxx Page

ITRAXX INDEX LEVELS (YESTERDAY'S CLOSING)

Series 13

Europe Indices 5Y Mid Price Daily Change Europe Indices 10Y Mid Price Daily Change

Europe 104.7 -1.3 Europe 111.5 -1.3

HiVol 150.4 -2.9 HiVol 157.3 -3.5

X-Over 479.0 -6.6 X-Over 470.3 -7.3Europe Subsectors 5Y Mid Price Daily Change Europe Subsectors 10Y Mid Price Daily Change

FIN sen 5Y 114.9 -0.6 FIN sen 10Y 121.1 -1.4

FIN sub 5Y 182.1 0.2 FIN sub 10Y 187.6 -0.2

Europe Indices 3Y Mid Price Daily Change Europe Indices 7Y Mid Price Daily Change

Europe 3Y 85.1 -1.6 Europe 7Y 108.0 -1.0

HiVol 3Y 133.7 -2.2 HiVol 7Y 153.8 -3.3

Source: Bloomberg, UniCredit Research

ITRAXX INTRADAY AS OF JULY 29, 2010

101

102

103

104

105

106

107

7:30 AM 9:30 AM 11:30 AM 1:30 PM 3:30 PM 5:30 PM 7:30 PM

127.75

127.8

127.85

127.9

127.95

128

128.05

128.1

128.15

128.2

128.25iTraxx Europe Series 13 Version 1 5Y Bund Future (RS)

460

465

470

475

480

485

490

7:30 AM 9:30 AM 11:30 AM 1:30 PM 3:30 PM 5:30 PM 7:30 PM

6080

6100

6120

6140

6160

6180

6200

6220

6240

6260

iTraxx Europe Crossover Series 13 Version 1 5Y Dax Future (RS)



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Traders Comment

Utilities/EnergyAnother good start with tighter CDS and cash spreads. While cash remained in positiveterritory, CDS closed the day more or less unchanged. Flows were balanced in the end, ascredit came under pressure on the back of weaker stock markets.

Primary Market

Pipeline Comunidad De Madrid (Aa2/AA/AA) Guidance is MS+160/170bp for planned EUR 3Y issue, due 5 August 2013. Settle 5 August 2010.Denoms 1k+1k, Spanish docs. Bookrunner: CS, GS.

Priced Bank of America (A2/A/A+) EUR 2bn, due 7 August 2017, coupon 4.625%. Reoffer 99.496. Spread MS+212.5bp / DBR 4.00% 7/17

+241.9bp. Settle 05 August 2010. List London, denoms 50k+50k. EMTN. RegS only. Final book EUR 4.5bn. Bookrunner: BAML.Santander (Aa2/AA/AA) EUR 1.5bn senior unsecured, unsubordinated, due 12 August 2014, coupon 3.5%. Price 99.802. Spread MS+160bp /OBL+228.8bp. List Lux, denoms 50kx50k. Off EMTN. Bookrunner: HSBC, Natixis, Santander.

SAP (-/-/-)Tranche A: EUR 600mn, due 6 August 2013, coupon 2.25%. Reoffer 99.857. Spread MS+60bp / OBL 152 +132.1bp, yield 2.30%.Tranche B: EUR 500mn, due 6 February 2012, coupon 1.75%. Reoffer 99.853. Spread MS+50bp /DBR 5.00% 01/12 +115.2bp, yield 1.853%.

Settle 06 August 2010. List Lux, denoms 1k. Standalone docs. CoC included. Bookrunner: BarCap, DB.

Source: Bond Radar, Bloomberg

Rating Actions

SUMMARY OF RECENT RATING ACTIONS

Issuer Agency Action From To

Lukoil S&P Outlook change BBB- BBB- watch negative

Rockwood S&P Upgrade B+ BB-

Ukraine (Foreign Currency Debt) S&P Upgrade B watch positive B+

Valeo Moody's Upgrade Ba2 Ba1


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Credit Flash (HG) - Merck KGaA's 1H10 results(overweight)

Health Care Schilling

Credit Flash (HG) - Siemens: 3Q09/10 results

(Marketweight)

Industrial Goods & Services Arndt

JUL 30 UniCredit Credit Research

Documents

Transcript of JUL 30 UniCredit Credit Research