RBS - Asian Credit - Outlook and Opportunities v3 · 1.04.2011 · JACI IG Corp versus Non-IG Corp...

Asian Credit

15 February 2011

Outlook and Opportunities

Stefan MasuhrHead of Credit Structuring & Repackaging Asia Pacific

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Contents

Asian Credit Outlook 3Liquid Bond Issuances Overview 11Credit Linked Notes 15IP Renminbi Credit Fund 24

Asian Credit Outlook

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-10%

0%

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30%

2006 2007 2008 2009 2010 -5%

0%

5%

10%

15%

20%

25%

Q1 Q2 Q3 Q4 2010

JACI IG CORP NON IG CORPCORPS SOVS QUASI SOV

Credit Market Outlook: Technicals a Big Support Factor in Early 2011

• Credit markets seeped wider towards the end of 2010 as investors moved into a returns/cash preservation mode against a more uncertain macro backdrop (Korea, European periphery etc).

• We expect spreads to resume their tightening bias in H1 2011 however primarily as a result of the technical impact of QE2 and the continued flow of funds into Asia.

• Reasons to remain constructive Asian credit include (i) Economic/systemic fundamentals are sound (ii) Credit trends are positive (iii) Asian credit remains cheap to Western credit (iv) Spreads as a % of absolute yields are near recent highs, and (v) Funds flow and investor positioning remains supportive.

• Supply indigestion remains the most obvious endogenous threat to valuations at present. Exogenous threats remain European periphery, US and possibly China.

• Returns from Asian credit investment exceeded our expectations in 2010. The JACI Composite returned 10.61% largely driven by treasury price appreciation; composite spreads were approx. 20bps tighter. Sovereigns (11.85%) have been the star performer followed by Corporates(10.9%) and Quasi Sovereigns (8.4%). Non-IG (19.4%) has beaten IG (8.6%).

JACI Composite Index Returns History, 2006 to 2010

Source: Bloomberg, RBS

JACI Quarterly Returns History, 2010, Composite & Key Sub categories


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Credit Market Outlook: Valuations Are Interesting

JACI Index Composite Total Returns, 2009 to present


JACI IG Corp versus Non-IG Corp Differential, 2005 to present


JACI IG CORP – Spread as a % of Yield


JACI Non IG CORP – Spread as a % of Yield


80

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Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10

JACI composite (149)

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Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11

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6.00(%)JCAI Non IG - JACI IG Spread (300bp)

UST 5Y (RH) (2.01%)

0%10%20%30%40%50%60%70%80%90%

100%

Jan-10 M ar-10 M ay-10 Jul-10 Sep-10 Nov-10

JACI Non IG CORP - spread as % of Yield (70%)

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JACI IG CORP - spread as % of Yield (45%)

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(USD bn)IssuanceRedemptions

Exp

Asian Credit Market Technicals: Broadly Supportive

• 2010 was a record year for flow into EM bond funds. USD35bn flowed in across hard and local currencies. Flows began to tail off towards the end of the year and modest outflows have been a feature of recent weeks.

• Asia continues to be a significant beneficiary; nearly USD5bn has flown into the space over the last 12 months. • 2010 was a record year for gross (USD83bn) and net (USD41bn) bond issuance in Asia also. We expect a reduction in 2011, which

should be supportive of credit spreads.• The components of supply indicate far higher risk tolerance. 29% of supply has been in HY (26%- 2009) whilst HY corporate issuance is

nearly triple last year. Unrated borrowers have raised funds and there is risk appetite down to the single-B level.• Many investors report being under invested after hoarding cash during the May sell off.• The new issue market continues to be a source of out-performance from a tactical perspective and data shows healthy demand for

Asian credit across geographies and investor types.• Retail and non-traditional investor demand for credit remains sound and we see no signs of a near term reversal given the bigger risk

asset picture and the type of supply coming through.

Funds Flow by Region and Type (USDbn)

Source: EPFR, RBS

Asian G3 Bond Issuance and Redemption Trends, 2000-2011F (USDbn)

Source: Dealogic, RBS

Fund TypeQ4 (ex Dec) 2010 Q3 2010 Q2 2010 Q1 2010 Q4 2009 Q3 2009

All EM Equity Funds 35.2 35.4 5.7 11.4 30.1 17.6 All Equity Funds 45.1 (18.3) (18.7) 13.5 37.9 30.5 Money Market Funds 28.5 (22.5) (170.6) (314.6) (99.0) (220.9) EM Bond Funds 10.6 17.4 12.8 11.5 8.8 5.2 Global Bond Funds 18.2 31.4 27.1 33.0 29.2 21.2 HY Bond Funds 5.4 15.7 (1.9) 9.5 5.5 8.7 US Bond Funds 3.8 62.0 44.0 78.7 64.7 75.0 Balance Funds 2.3 (1.5) 3.5 10.5 3.0 12.6 All Bond Funds 38.1 126.6 82.1 132.8 108.3 110.2

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Jan-07 Sep-07 M ay-08 Jan-09 Sep-09 M ay-10

Upgrade Downgrade

0%2%4%6%8%

10%12%14%16%

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

Actual Baseline ForecastPessimistic Forecast Optimistic Forecast

Asian Credit Markets: Credit Quality Trends And Commentary

• Aggregate credit quality is on an improving trend following a sharp increase in defaults and the ratio of downgrades to upgrades in the latter part of the last decade.

• Market implied default rates remain high relative to historical data suggesting further upside in credit spreads is possible. For example, the Asia-ex IG Index, which has an average rating of low-A, is currently factoring in an 8.4% default likelihood assuming a 40% recovery rate. This compares to an actual default rate of 0.87% for a low-A rated borrower over a five year period based on S&P statistics. A 0.87% default rate would imply a spread of around 11bps.

Moody’s Global forecast Default Rates (%)

Source: Moody’s, RBS

Moody’s Global Upgrade/Downgrade Trends

Source: Moody’s, RBS

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Asia Relative to the World

JACI IG CORP vs iBoxx EUR Corps

Source: EPFR, RBS

JACI IG CORP vs iBoxx EUR Corps

Source: EPFR, RBS

iTraxx Asia ex Japan IG vs iTraxx Europe

Source: EPFR, RBS

iTraxx Asia ex Japan IG vs iTraxx Europe

Source: EPFR, RBS

0

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300


(bp)

0

50

100

150

200

250

300JACI IG - iBoxx EUR corps (30 bp)

iBoxx EUR Corps (185 bp)

JACI IG CORP (215 bp)

y = 0.591x + 149.38R2 = 0.3217

150

170

190

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290

100 150 200 250

IBOXX EUR CORP

JACI IG (bp)

C urrent

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100120140160180200


(bp)

(10)

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50(bp)iTraxx AxJ IG - iTraxx EUR (-1 bp)

ITRX.EUR (102 bp)

ITRX.AxJ.IG (101 bp)

y = 0.7811x + 34.547R2 = 0.6878

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ITRX EUR (bp)

ITRX AxJ IG (bp)

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Asia Relative to the World (Continued)

iTraxx Asia ex Japan IG vs CDX IG

Source: EPFR, RBS

iTraxx Asia ex Japan IG vs CDX IG

Source: EPFR, RBS

iTraxx Asia ex Japan IG vs iTraxx Australia

Source: EPFR, RBS

iTraxx Asia ex Japan IG vs iTraxx Australia

Source: EPFR, RBS

y = 1.1473x - 0.09R2 = 0.8675

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190

50 70 90 110 130 150

CDX IG (bp)

ITRX AxJ IG (bp)

C urrent

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(bp)

(10)(5)-5101520253035

(bp)iTraxx AxJ IG - iTraxx Australia (-1 bp)

ITRX.AUS (102 bp)


y = 0.8432x + 23.335R2 = 0.8018

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50 70 90 110 130 150 170

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ITRX AxJ IG (bp)

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50(bp)iTraxx AxJ IG - CDX IG (18 bp)

CDX.NA.IG (83 bp)


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Asia Relative to the World (Continued)

SovX Asia vs SovX CEEMEA

Source: EPFR, RBS

SovX Asia vs SovX CEEMEA

Source: EPFR, RBS

SovX Asia vs CDX EM

Source: EPFR, RBS

SovX Asia vs CDX EM

Source: EPFR, RBS

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(bp)SovX CEEM EA - SovX ASIA (98 bp)

ITRX.SOVX.CEEM EA (199 bp)

ITRX.SOVX.ASIA (101 bp)

y = 0.6683x - 32.869R2 = 0.8426

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ITRX SOVX CEEM EA (bp)

ITRX SOVX ASIA (bp)

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300(bp)CDX EM - SovX Asia (94 bp)

CDX.EM (195 bp)ITRX.SOVX.ASIA (101 bp)

y = 0.4846x + 2.2062R2 = 0.8255

5060708090

100110120130140150

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CDX EM (bp)

ITRX SovX Asia (bp)

C urrent

Liquid Bond Issuances Overview

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IG HY NR

Asian Credit Market – Liquid Bond Issuances Overview

The liquid bond issuances in Asia is overwhelmingly Investment Grade.

High Yield Bonds provide a significant yield pickup in the 0Y to 5Y bucket.

Total Amount Issued by Rating

Source: RBS, Bloomberg as of 29th November 2010

Total Amount Issued by Industry


Average Asset Swap Spread by Maturity


Total Amount Issued by Maturity


-100

200

300400

500600

700

800900

IG HY NR

Total Issued Amount (USDbn) 2010 Issued Amount (USDbn)

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Banks Sovereigns Corporates

Total Issued Amount (USDbn) 2010 Issued Amount (USDbn)

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IG HY NR

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Asian Credit Market – Liquid Bond Issuances Overview

High Yield liquid bond issuances in Asia benefit from a high average rating of BB-.

Liquid Corporate and Sovereign Bond Issuances in Asia by Rating

IG HY NR AllNo. of Bond Issuances 660 69 52 781

Total Issued Amount (USDbn) $848.3 $64.6 $30.7 $943.6

Average Size (USDm) $1,285 $936 $591 $1,208

2010 Issued Amount (USDbn) $176.9 $12.1 $21.0 $210

Average Rating AA- BB- NR A+

2010 Issuances Average Rating A+ BB- NR A+

Source: Bloomberg as of 29th November 2010, Excluding Japanese Government Bonds, Excluding Inflation Linked Bonds

Liquid Corporate and Sovereign Bond Issuances in Asia by Industry

Banks Sovereigns Corporates AllNo. of Bond Issuances 372 230 179 781

Total Issued Amount (USDbn) $333.9 $500.5 $109.3 $943.6

Average Size (USDm) $897 $2,176 $610 $1,208

2010 Issued Amount (USDbn) $98.5 $93.0 $30.1 $210

Average Rating AA- AA- A- A+

2010 Issuances Average Rating AA- AA BBB+ A+

Source: Bloomberg as of 29th November 2010, Excluding Japanese Government Bonds, Excluding Inflation Linked Bonds

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AAA AA A+ A- BBB BB+ BB- B

0-200 200-400 400-600 600-800 800-1000

20102016

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AAAAA-

A-BBB-

BB-B-

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Liquid Bond Issuances and Yield to Maturity by Ratings and Maturity

Count of Bond Issuances by Rating and Maturity

Source: Bloomberg as of 29th November 2010

Asset Swap Spread by Rating and Maturity (bps)

Source: Bloomberg as of 29th November 2010

HY liquid bond issuances in Asia are positioned closely to the IG space, while delivering significant yield pickup.

Credit Linked Notes

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Credit-Linked Notes - Introduction

Introduction• A CLN is a note or an obligation of an issuer, subscribed to by an investor, where the note carries an embedded

credit derivative, whereby the amount payable on the Note – that is, principal, coupon or both – may be written down, based on the protection payments required under the credit derivatives.

Distinctive Features• Funding: CLNs are funded instruments as the possible protection payments from the investor to the protection

buyer have already been prepaid.• Coupons: Investors benefit from the synthetic exposure in the Reference Entity and the cash exposure in the

issuer of the CLN in the form of a funding premium.• Tradable: CLNs impart tradability to a credit derivative by mounting up a credit derivative on a capital market

instrument.

Investment Rational• Provides a funded credit derivative investment opportunity which may be used by investors who may not be

authorized to invest directly into credit derivatives.• Provides a yield pickup to other securities issued by the reference entity.• Provides customized maturity structures and credit features that are not otherwise available in the cash

market.• Provides exposure to Reference Entities that trade in the CDS market who haven't issued bonds.

CLNs can provide enhanced yields versus outright bonds and allow for client customization.

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Credit-Linked Notes - Overview

• In the event that the Reference Entity defaults, the underlying collateral is liquidated and the investor receives the proceeds only after the Credit Swap counterparty is paid the Contingent Payment.

• If the underlying collateral defaults, the investor is exposed to its recovery regardless of the performance of the Reference Entity. This additional risk is recognized by the fact that the yield on the Credit-Linked Note is higher than that of the underlying collateral and the premium on the Credit Swap individually.

• In order to tailor the cash flows of the Credit-Linked Note it may be necessary to make use of an interest rate or cross-currency swap. At inception, this swap would be on-market, but as markets move, the swap may move into or out of the money. The investor takes the swap counterparty credit risk accordingly.

Credit-Linked Note Diagram

RBS(Issuer)

Funding Instrument / CollateralInvestor

Notional

Funding

Coupon

Notional

100% Redemption at Maturity or Recovery Value following a Credit Event

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Credit-Linked Notes - Indicative Levels

1 Year 3 Year 5 Year

Reference Entity

Floating over 3mL Fixed Floating

over 3mL Fixed Floating over 3mL Fixed

China / Hong Kong

China 50 0.98% 195 3.35% 272 5.05%

PCCW 58 1.05% 220 3.60% 306 5.40%

SunHun 35 0.84% 178 3.20% 269 5.00%

BOC 56 1.05% 228 3.70% 329 5.60%

BCOM 65 1.15% 229 3.70% 320 5.50%

Wharf 78 1.25% 245 3.85% 326 5.60%

Korea

Korea 65 1.15% 217 3.60% 296 5.30%

Samsung 40 0.89% 189 3.30% 265 4.95%

KDB 86 1.35% 238 3.80% 314 5.45%

Kexim 86 1.35% 238 3.80% 314 5.45%

Woori Sen 104 1.55% 254 3.95% 335 5.70%

Woori Sub 147 1.95% 299 4.40% 376 6.10%

South-East Asia

Philippines 57 1.05% 203 3.45% 336 5.70%

Indonesia 63 1.10% 243 3.85% 348 5.80%

Thailand 66 1.15% 222 3.60% 299 5.30%

Source: RBS as of 24h of January 2011


Reference Entity

Floating over 3mL Fixed Floating

over 3mL Fixed Floating over 3mL Fixed

India

SBI 78 1.25% 277 4.20% 368 6.00%

ICICI 135 1.85% 319 4.60% 413 6.50%

RILIN 57 1.05% 254 3.95% 340 5.75%

VED 438 4.90% 640 7.90% 721 9.60%

Middle East

Dubai 313 3.65% 480 6.25% 566 8.05%

Qatar 51 1.00% 203 3.45% 274 5.05%

Abu Dhabi 46 0.95% 221 3.60% 286 5.20%


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Quanto Credit-Linked Notes - Indicative Levels

3 Year 5 Year

Reference Entity Floating 6M SORFloor Floater

Max (Fixed, 3M Sor)

Singapore

CapitaLand 220bps 4.10%


• Quanto CLNs are denominated in local currency, e.g. SGD.• The mechanism and risks of Quanto CLN are the similar to

those for plain vanilla CLN, but all cash flows are in local currency.

• Other local currencies may be available upon request

Quanto Credit-Linked Note Diagram

RBS(Issuer)

Funding Instrument /

CollateralInvestor

Notional in SGD

Funding in SGD

Coupon in SGD

Notional in SGD

100% Redemption in SGDat Maturity or

Recovery Value in SGDfollowing a Credit Event

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2010 2015 2020 2026 2031 2037

Maturity

Ass

et S

wap

Spr

ead

ASIA RBS CLNs Poly. (ASIA) Poly. (RBS CLNs)

RBS Credit-Linked Notes Compared

The RBS Credit Linked Notes allow for a significant yield pick-up compared to the majority of the Asian liquid bond issuances.

Asian Asset Swap Spreads by Maturity and RBS CLN Spreads over 3m Libor

Source: RBS as of 29th November 2010

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Inverse Floaters Credit-Linked Notes - Indicative Levels


Reference Entity Fixed Coupon (% p.a.)

Fixed Coupon (% p.a.)


Korea

Korea 1.43% 4.61% 7.14%

KDB 1.64% 4.83% 7.33%

Woori Sen 1.83% 4.99% 7.54%

Hana Sub 1.59% 4.98% 7.59%

China / Hong Kong

China 1.26% 4.42% 6.94%

PCCW 1.37% 4.69% 7.32%

Swire 1.14% 4.28% 6.97%

BOC 1.33% 4.77% 7.51%

BCOM 1.43% 4.78% 7.45%

South East Asia

Philippines 1.28% 4.51% 7.56%

Indonesia 1.31% 4.82% 7.65%

Thailand 1.44% 4.66% 7.17%

India

SBI 1.58% 5.29% 7.97%

ICICI 2.17% 5.73% 8.44%


Fixed coupon

3mLibor

Payoff

One minute Rationale• Payoff of Inverse Floater CLN is defined as :

MAX [Coupon – 3mLibor ; 0%]• Inverse Floaters are suitable for investors with a view that

short-term rates might stay low for a period of time. • The lower the short-term rates (subject to a floor of 0%), the

higher the payoffs.• Indicative prices for various reference entities are in the table

on the right hand side.• Transactions can be tailored to meet client requirements.

Product payoff

Payoff = MAX [Coupon – 3mLibor ; 0%]

Fixed coupon

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Floored Floaters Credit-Linked Notes - Indicative Levels





Korea

Korea 0.98% 3.25% 4.83%

KDB 1.20% 3.47% 5.03%

Woori Sen 1.39% 3.65% 5.26%

Hana Sub 1.15% 3.63% 5.30%

China / Hong Kong

China 0.82% 3.01% 4.55%

PCCW 0.91% 3.28% 4.94%

Swire 0.69% 2.87% 4.58%

BOC 0.89% 3.37% 5.15%

BCOM 0.98% 3.38% 5.10%

South East Asia

Philippines 0.90% 3.09% 5.27%

Indonesia 0.96% 3.53% 5.40%

Thailand 0.99% 3.30% 4.86%

India

SBI 1.12% 3.89% 5.62%

ICICI 1.70% 4.33% 6.10%



MAX [3mLibor ; Coupon]• Floored Floaters are suitable for investors with a view that

short-term rates might increase in the future, with yield enhancement in the short-term before rates rise.

• Unlimited upside: the higher the short-term rates, the higher the payoffs.

• Downside protection: the floor in the structure provides the downside protection, should rates stay low.

• Indicative prices for various reference entities are in the table on the right hand side.

• Transactions can be tailored to meet client requirements.

Fixed coupon

3mLibor

Payoff

Product payoff

Payoff = MAX [3mLibor ; Coupon]

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Collared Floaters Credit-Linked Notes - Indicative Levels

3 Year


Singapore

CapitaLand Cap at 5.50%; Floor at 2.15%



MIN [MAX [3mLibor ; Floor] ; Cap]• Collared Floaters are suitable for investors with a view that

short-term rates might increase in the future but are willing to forfeit some upside potential in order to increase the yield in the short-term before rates rise.

• Limited upside: the higher the short-term rates, the higher the payoffs, subject to the cap.

• Enhanced downside protection: the floor provides downside protection, should rates stay low.

• Indicative prices for various reference entities are in the table on the right hand side.

• Transactions can be tailored to meet client requirements.

Floor

3mLibor

Payoff

Cap

Product payoff

Payoff = MIN [MAX [3mLibor ; Floor] ; Cap]

IP Renminbi Credit Fund

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Executive Summary

The Income Partners RMB Credit Fund• Income Partners, one of the longest established fixed income managers in Asia has launched the RMB Credit

Fund (the “Fund”), a pioneering credit focused Renminbi fund.• The Fund invests in a portfolio of Renminbi denominated fixed income instruments including bonds, notes and

CDs issued by investment grade rated issuers from Asia, OECD Markets and Supranationals.

RBS Role• RBS is the sole Placing Agent of the Fund and one of six the Originating Dealers.• By partnering with key market participants the Income Partners benefits from very wide access to Renminbi

investments and secondary liquidity.

Facts and Figures• The Fund was launched on 15 December 2010, and the current AUM is approx. USD 90M. The Fund is over

80% invested, which distinguishes it from other CNH funds.

Attractive Returns• The fund targets to capitalize on attractive yields offered in Renminbi fixed income markets, medium term

appreciation potential of the currency and strong credit fundamentals in Asia.

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Development of the CNH Bond Market

Source: Income Partners as of January 2011

2007 2008 2009 2010

Milestones • China Development Bank Launches first CNH bond in Hong Kong to tap retail CNY deposits.

• EXIM and BOC also sell CNH bonds.

• Bocom, CCB and BOC sell CNH further developing the market.

• HSBC becomes first local bank to issue a CNH bond in Hong Kong, followed by BEA.

• Ministry of Finance launches first sovereign CNH bond in Hong Kong.

• Hopewell Infrastructure launches the first CNH corporate bond in Hong Kong.

• Citic Bank launches the first CNH CD in Hong Kong.

• McDonalds launches the first foreign corporate to tap the CNH market in Hong Kong.

•China Ministry of Finance (MOF) issued CNY 8bln bonds in 2y, 3y, 5y and 10y to show its strong support on the CNH market and made corporate pricing on a full yield curve possible.

•Galaxy launches the first CNH high yield bond in Hong Kong

Total Issuance (CNY bn) 10.0 12.0 16.0 44.4

Rapid Growth in Issuance – CAGR = 64%

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CNH Bond Market to Grow Exponentially

Growth of CNY liquidity in Hong Kong• Mainland importers paying CNY for trade settlements.• (Starting June 2009 PBoC launched a pilot program for CNY settlements between

selected onshore cities and Hong Kong).• Mainland tourist and other visitors spending CNY in Hong Kong.

Leads to Increased Demand for CNH bonds• Increased CNY deposits in Hong Kong will lead to increased demand for offshore

CNY investments.• Key among this will be CNH bonds.• The availability of such products will also increase the willingness of exporters to

accept CNY – creating a self re- enforcing cycle.

Access to Onshore Bond Market Still Restricted• In August 2010 PBoC allowed qualified financial institutions to repatriate offshore

CNY into the domestic bond market.• Importantly access is restricted only to central banks and CNY clearing banks.• Thus other participants with offshore CNY will still look at opportunities in the CNH

market.• Moreover the fact that CNY clearing banks can invest in the onshore market can

actually aide the development of the CNH market as it will provide a degree of linkage between the onshore and offshore markets.

Source: Income Partners as of September 2010

Expected CNH Deposit Growth (USD bn)

Source: Standard Chartered Bank

CNH Self Re-enforcing Cycle

-50

100150200250

300350400450500

2010 2011 2012 2013 2014 2015

Increased offshore CNY investment opportunities

More CNY liquidity in Hong Kong

More demand for offshore

CNY investment products

More incentive for exporters in

to China to accept CNY for

trade settlements

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Eligible Investment Universe

Source: Income Partners as of January 2011

Issue Date Issuer Size (CNY mn)

Maturity Tenor (years)

Coupon (%) Type

2010/08/17 HSBC 114 2011/02/17 0.1 2.00 CD2010/11/19 HSBC 90 2011/05/19 0.3 1.80 CD2009/07/13 HSBC (China) 1,000 2011/07/13 0.5 SHIBOR+38 Bond2010/07/20 CITIC Bank International 500 2011/07/20 0.5 2.68 CD2009/07/23 Bank of East Asia (China) 4,000 2011/07/23 0.5 2.80 Bond2009/08/20 China Development Bank 1,000 2011/08/20 0.6 SHIBOR+30 Bond2009/08/20 China Development Bank 2,000 2011/08/22 0.6 2.45 Bond2008/09/04 Export-Import Bank of China 3,000 2011/09/04 0.6 3.40 Bond2010/09/10 China Development Bank 100 2011/09/12 0.7 1.95 CD2009/09/14 HSBC (China) 2,000 2011/09/14 0.7 2.60 Bond2008/09/22 Bank of China 1,000 2011/09/22 0.7 3.40 Bond2010/09/24 Tokyo-Misubishi UFJ 20 2011/09/26 0.7 1.98 CD2009/10/27 China Ministry of Finance 3,000 2011/10/27 0.8 2.25 Bond2010/12/23 Agriculture Bank of China 500 2011/12/23 0.9 1.20 CD2010/07/13 Hopewell Highway Infrastructure 1,380 2012/07/13 1.5 2.98 Bond2010/09/13 China Development Bank 1,500 2012/09/13 1.7 2.10 CD2010/09/24 ICBC Asia 2,000 2012/09/24 1.7 2.25 CD2010/09/28 Deutsche Bank AG 200 2012/09/28 1.7 2.00 CD2010/09/30 Bank of China 2,200 2012/09/30 1.7 2.65 Bond2010/10/22 ICBC Asia 117 2012/10/22 1.8 2.30 CD2009/10/27 China Ministry of Finance 2,500 2012/10/27 1.8 2.70 Bond2010/10/29 Sinotruk Hong Kong 2,700 2012/10/29 1.8 2.95 Bond2010/11/22 UBS 200 2012/11/22 1.8 2.50 Bond2010/12/01 Caterpillar 1,000 2012/12/01 1.9 2.00 Bond2010/12/02 Export-Import Bank of China 1,000 2012/12/02 1.9 1.95 Bond2010/12/23 Agriculture Bank of China 500 2012/12/23 1.9 1.40 CD2011/01/10 Bank of Communication 500 2013/01/10 2.0 1.40 CD2011/01/14 World Bank 500 2013/01/14 2.0 0.95 Bond2010/09/16 McDonald's 200 2013/09/16 2.7 3.00 Bond2010/09/30 Bank of China 2,800 2013/09/30 2.7 2.90 Bond2010/10/14 China Development Bank 2,000 2013/10/14 2.7 SHIBOR+10 Bond2010/10/22 ICBC Asia 47 2013/10/22 2.8 2.65 CD2010/11/11 China Development Bank 3,000 2013/11/11 2.8 2.70 Bond2010/11/12 China Resources Power 1,000 2013/11/12 2.8 2.90 Bond2010/11/19 China Merchants Holding 700 2013/11/19 2.8 2.90 Bond2010/12/01 China Ministry of Finance 2,000 2013/12/01 2.9 1.00 Bond2010/12/23 VTB Capital SA 1,000 2013/12/23 2.9 2.95 Bond2010/12/24 ANZ 200 2013/12/24 2.9 1.45 Bond2011/01/20 RBS 100 2014/01/20 3.0 1.80 Bond2009/10/27 China Ministry of Finance 500 2014/10/27 3.8 3.30 Bond2010/11/12 China Resources Power 1,000 2015/11/12 4.8 3.75 Bond2010/12/01 China Ministry of Finance 2,000 2015/12/01 4.9 1.80 Bond2010/12/23 China Power International 800 2015/12/23 4.9 3.20 Bond2010/10/21 Asian Development Bank 1,200 2020/10/21 9.8 2.85 Bond2010/12/01 China Ministry of Finance 1,000 2020/12/01 9.9 2.48 Bond

Total 54,169

• In 2010 the total amount of CNH Bond & CD issuances was over RMB 44 billion.

• And issuances are accelerating. The total amount of issuances inJanuary 2011 has exceeded RMB 15 billion already.

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The RBS plc Inaugural CNH100 Million 3 Year Transaction

Deal information / Deal Highlights

Transaction Highlights• The Royal Bank of Scotland plc successfully executed its inaugural offshore RMB transaction,

pricing CNH 100m 3 year Senior Notes due 2014 at 1.80%.• Strong interest in the RMB bond market and RBS credit supporting the deal resulted in an

oversubscribed orderbook filled with real money accounts, providing favourable pricing dynamics.• The transaction is also RBS’ inaugural CNH deal as a bookrunner.• RBS is committed to bringing more issuers to the CNH market and becoming one of the top

players in this fast-growing market.

Deal Process• We have received strong reverse enquiries from key accounts on RBS CNH. After announcing the

deal, the orderbook grew very fast and was covered and closed within 3 hours leaving behind a number of disappointed investors. The final book constitutes several very key players in CNH bond market from fund managers, commercial banks, insurance companies and private banks.

• The success of the transaction can be attributed to investors demand for high quality RBS papers and the abundance of offshore RMB. As a result, RBS attained a very attractive level in the CNH bond compared to its other European bank peers that issued in the same market recently.

Distribution• Income Partners, the premier Asia-based fund manager, was an anchor investor in this

transaction. Income Partners is one of the first fund managers to set up a CNH credit fund and are now one of the most active players in the CNH bond market. RBS have a close working relationship with Income partners acting as their sole placing agent and lead originating dealer in their CNH credit fund. This is their first private placement deal since they launched their fund late last year and they will continue to source private placement opportunities together with RBS.

• The high quality combined book saw Fund Managers take 76%, Private Banks 11%, Commercial Banks 10% and Insurance Companies 3%.

• Geographically, the orderbook was mainly allocated to domestic accounts with HK representing 88% and Singapore 12%.

Allocation Breakdown by Investors

Allocation Breakdown by Geography

Key Terms

Issuer RBS plc

Issuer RatingsMoody’s Aa3S&P A+Fitch AA-

Pricing Date 4/01/2011

Amount CNH 100m

Maturity 20/01/2014

Price 100%

Coupon 1.80% p.a.

Reoffer Yield 1.80%

Issue Type MTN

RBS Role Sole Bookrunner

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The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc (“RBS”) will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed.

Where the document is connected to Over The Counter (“OTC”) financial instruments you should be aware that OTC derivatives (“OTC Derivatives”) can provide significant benefits but may also involve a variety of significant risks. All OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore you should also determine whether the OTC transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances.

RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein. RBS is authorised and regulated in the UK by the Financial Services Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the US Securities Act of 1933. Dubai International Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed at “Professional Clients” as defined by the Dubai Financial Services Authority (DFSA). No other person should act upon it. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a "Professional Client”. This Document has not been reviewed or approved by the DFSA. Qatar Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed solely at persons who are not “Retail Customer” as defined by the Qatar Financial Centre Regulatory Authority. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a "Business Customer” or "Market Counterparty".

The Royal Bank of Scotland plc acts in certain jurisdictions as the authorised agent of The Royal Bank of Scotland N.V.

The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB.

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