Presentation Title Presentation Title by maclaren1


									Universita’ degli Studi di Siena
Debt Capital Markets
Breakdown of European Financial Institutions issuance H107 v H108

Volume issued (original currency bn)     Volume issued ($bn equiv)                 No of issues (>$500m)

350                                      600                                       500
300                                      500                                       400
200                                                                                300
150                                                                                200
                                         100                                       100
  0                                        0                                         0
         EUR         USD           GBP          Total     EUR         USD    GBP          Total     EUR      USD       GBP
                 2007 2008                                2007       2008                           2007    2008

Mix of debt issuance ($bn equiv)         Mix of debt issuance (no)                 Mix of subordinated debt issuance ($bn equiv)

350                                      300                                       60
300                                      250                                       50
                                         200                                       40
                                         150                                       30
                                         100                                       20
 50                                       50                                       10
  0                                        0                                        0
       Covered      Senior         Sub          Covered      Senior         Sub           LT2      UT2     STEP T1   N/S T1
                 2007 2008                                2007 2008                                2007    2008

Debt Capital Markets

                           Large Corporate, Financial
                                Institutions and


 Market Color




                 Traders             Sales

 Market Access


Public Market Debt Products

     Capital structure         Capital qualification    Common Structure

       Secured Debt                   None                     1-10yr

        Senior Debt                   None               2yr, 3yr, 5yr, 10yr

                                                       10NC5, 12NC7 15NC10
  Dated subordinated debt          Lower Tier II
                                                            10yr bullet

      Perpetual/ Dated                                 PerpNC5, PerpNC10,
                                   Upper Tier II
     subordinated debt                                      10yr bullet

  “Preferred securities” and                            PerpNC5, PerpNC10
                                      Tier I
        Convertibles                                      Step, Non-step

      Common equity                   Tier I                 Perpetual

Debt issuance Programmes
                                     1   Typical size: €15bn

 Covered                             2   Documentation (addn to EMTN): Initial structuring phase, rating agency involvement, T&Cs
Prospectus                           3   Expected timing 7-8 wks

                                     4   Public / Private

                                     1   Typical Size: €25bn
                                     2   Documentation: Base Prospectus, business description, dealer and agency agreements
                                     3   Expected timing 5-6 wks.
              Lower Tier
                                     4   Public / Private

                                     1   Standalone Documentation per Issue (depending on jurisdiction)1
             Upper Tier II
                                     2   Disclosure on issuer entity plus issue T&Cs
Prospectus                               Expected timing: 2 wks for docs 3-4 wks for regulatory approval (can be run in parallel)
                 Tier I
                                     4   Public / Private

                                     1   Typical Size $10bn

                                         Documentation (addn to EMTN): More generic business description, Form of Notes, Inc by
   ECP       Commercial              2   reference, unlisted paper
Programme      Paper
                                     3   Expected timing 2-3 wks.

                                     4   Private

             1 Hybrid Terms and Conditions can also be included in the MTN Programme but are generally issued of standalone documentation   4
Execution Procedure

 Step 1 — Origination                      Step 2—Mandate              Step 3—Pre-marketing

   Identify strategic and opportunistic    Mandate Syndicate group    Roadshow and Investor calls
                                            Share underwriting risk    Sales Memo
   Currency
                                            Co-lead manager group      Credit Research
   Size
                                            Fees agreed                Bloomberg presentation
   Maturity
                                            Transaction timetable      Draw relative value
   Structure
                                                                        Soliciting investor feedback
   Debt rank
   Reverse Enquiry
   Tap Opportunity
   Recommendations and pricing

Execution Procedure

  Step 4 — Announcement & bookbuilding   Step 5—Allocation           Step 6 — Hedging & pricing

   Announce to Salesforce                 Reconciliation             Hedge fixed issues by selling
                                                                        governments against
   Solicit feedback                       Allocate dependent on:
                                                                       Price using a dummy bond
   Indications of interest using our       – Size of book
    bookbuilder                             – Type of accounts         Free to trade
   European deals are predominantly        – Roadshow attendees       Settlement
    pot deals                               – Feedback solicited
                                                                       Cover any long/short
   Revisions to guidance                   – Protection
                                                                       Greenshoe option
                                            – Switches
   Launch
                                            – Relationships            Stabilisation
   Subject

What Ratings are assigned?
Rating agencies           What does the Corporate rating reflect?
systematically start by      The Corporate rating assumes that the entire capital and corporate structure of the company is “collapsed”,
                              i.e. that the company is one legal entity with only one class of debt
assigning a corporate
                             As such, the Corporate rating aims to capture the company’s consolidated ability to service its
rating, and then assign       consolidated liabilities
individual debt              Corporate ratings can typically be thought of as representing the company’s default risk
ratings around the
corporate rating          What determines ratings on individual instruments (“notching”)?
                             Notching aims to capture the relative differences in recovery rates for different instruments following a default
                             Notching is therefore a measure of subordination of the relevant debt instruments
                             There are three types of subordination which frequently interact
                              –  structural subordination: for example, debt issued at a holding company can only be paid down after all
                                 the liabilities of the operating companies have been paid down
                              –  effective subordination: even in the absence of structural subordination, secured debt will have better
                                 recovery prospects than unsecured debt by definition, and therefore will be of better credit quality
                              –  contractual subordination: subordination clearly stated in the legal documentation
                                 (e.g. “subordinated notes”)

                          Notching of instruments

                                                        M oody’s                      S&P                           Fitch
                          Covered Bonds                 Aaa                           AAA                           AAA
                          Issuer Corporate Rating       Aa1                           AA                            AA
                          Senior Unsecured              Aa1                           AA                            AA
                          Lower Tier II                 Aa2                           AA-                           AA-
                          Upper Tier II                 Aa3                           A+                            A+
                          Tier I                        A1                            A                             A

Key Pricing Considerations
Pricing (public)

Senior             LT2         UT2          T1
                                     Step        N/Step
   80          130             200   300     250/350

Key Points                                                  CDS levels
  Primary market flow                  Depth of tenor                                              5 year         10 year

  Secondary curve                      Price breaks        Snr                                        70                  80
                                                             Sub                                       115              130
  Peer group analysis                  Reverse enquiry
  Interest rate environment            Competing supply
  Currency basis

Secondary market comparables                                Basis swap moves









                                                               Jul-07             Oct-07              Feb-08       May-08
                                                                        EUR 2yr            GBP 2yr      CHF 2yr   EUR 3yr
                                                                        GBP 3yr            CHF 3yr

Different pricing conventions

Yield curves                                                                  Bond basics
                                                                               Yield (return) inversely related to bond price
             Credit curve       Libor/swap curve       Government curve
                                                                               Price is a function of future cash flows discounted at the
                                                                                bond yield
                                                                                – If Price = Par, then Yield = Coupon
                                                       2                       Longer maturities have higher PVBP—greater risk
                                                                               The swap rate is the fixed interest rate that a trader will pay
                                                                                to receive Libor flat
                                                                               Interpolated spread (i)—Difference between the bond yield
                                                                                and the interpolated swap curve yield = Mid-Swap
 Yield (%)

                                                                               Asset swap spread (ASW)—Spread added to the forward
                                                                                swap curve to make the PV of the swap cash flows equal to
                                                                                the PV of the bond cash flows
                                                                               Z-spread (Z)—The number of basis points by which Libor
                                                                                curve needs to be bumped up across the term structure
                                                                                such that the bond market price equals NPV of bond
                                                                                coupons and principal. Not distorted by bond price like par
                                                                                asset swap packages

                                 M aturity (yrs)

             Credit curve                          1   Spread v. Government
             Libor/swap curve                      2   Spread v. Libor/swap

             Government curve                      3   Swap spread

Relevant Benchmarks
Bond convention

                                                  GBP                             EUR                              Eurodollar
                                  FXD              FRN             FXD              FRN                 FXD             FRN
Trade vs                          Gilts            3m£L            Bunds            3mE                 Treasury        3m$L
Price vs                          Gilts            3m£L            Mid Swaps        3mE                 Treasury        3m$L
Comps vs                          Gilts            3m£L            Z-spread         3mE                 Treasury        3m$L
Day count                         Act/Act          Act/365         Act/Act          Act/360             30/360          Act/360
Coupon freq                       Ann              Qtr             Ann              Qtr                 Ann             Qtr

Government convention
Government bond                             Settlement                                    Coupon freq
Treasuries                                  T+1                                           Semi Annual
Gilts                                       T+1                                           Semi Annual
Bunds                                       T+3                                           Annual

Pricing methodology

 The year of a bond’s maturity dictates which Government reference or swap curve it trades over
 In Euro, we effectively price new issues at the fixed rate yield equivalent to a Euribor spread
 In Euro, bonds trade versus Bunds as traders need to hedge interest rate risk and look to other spreads for comps

Core investors
Product               Currency Investor type                                                   Investor country

Covered Bonds         EUR      Asset Managers, Banks, Insurance, Central Banks

                      USD      Asset Managers, Hedge Funds
                                                                                                    - East and West Coast. Middle East.

Senior          FXD   EUR

                      USD      Asset Managers, Asset Swappers, Central Banks, Pension Funds,
                               Insurance, Hedge Funds


                FRN   EUR

                      USD      Bank Treasuries, Asset Managers, Central Banks


T2                    EUR

                      USD      Asset Managers, Asset Swappers, Central Banks, Pension Funds,
                               Insurance, Hedge Funds


Hybrid                EUR

                      USD      Asset Managers, Asset Swappers, Central Banks, Pension Funds,
                               Insurance, Hedge Funds



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