CEE Corporates Amid Economic Turbulence Stabilisation of credit quality during 2010 ICAP, Sofia, December 2010 Petr Vins, Branch Manager, CEE.

CEE Corporates Amid Economic Turbulence Stabilisation of credit quality during 2010

ICAP, Sofia, December 2010Petr Vins, Branch Manager, CEE

CEE Corporates Amid Economic Turbulence 2

Agenda

1. Moody’s Outlook for Corporates in 2010 and towards 2011

2. CEE Region and its Characteristics

3. How Moody’s Assess Corporate Creditworthiness

4. Positioning of CEE Corporates

5. Questions and Answers


Moody’s Outlook for Corporates

in 2010 and towards 2011

(sectors, GRIs)


Moody’s global macroeconomic risk scenarioOn the “Hook” for some time yet

1. Outlook for 2010

A sluggish recovery continues to be the most likely global macro-economic scenario

» No strong rebound of global economy in 2010 and 2011, …

» …but return to trend growth rates, with persistent unemployment and budget deficits

» Many economies will not go back on their previous output path

» Recovery will be fragile because of numerous headwinds (sovereign risk, banking sector)

Global Marco-Economic and Credit Conditions

Source: Moody‘s Investors Service

as per 05/09 as per 09/09 as per 01/10 as per 07/10 as per 01/10 as per 07/10France 0.0 / 1.0 0.5 / 1.5 1.0 / 2.0 1.0 / 2.0 1.5 / 2.5 1.5 / 2.5Germany -0.5 / 0.5 0.5 / 1.5 1.2 / 2.2 1.2 / 2.2 1.5 / 2.5 1.5 / 2.5Italy -0.5 / 0.5 0.0 / 1.0 0.5 / 1.5 0.5 / 1.5 1.0 / 2.0 1.0 / 2.0UK -0.5 / 0.5 0.5 / 1.0 1.0 / 2.0 0.5 / 1.5 2.0 / 3.0 2.0 / 3.0USA 1.0 / 2.0 1.5 / 2.5 2.0 / 3.0 2.5 / 3.5 2.5 / 3.5 2.5 / 3.5Russia 1.5 / 2.5 1.5 / 2.5 2.0 / 3.0 4.0 / 5.0 4.0 / 5.0 4.0 / 5.0China 7.5 / 8.5 8.0 / 9.0 8.5 / 9.5 9.5 / 10.5 8.5 / 9.5 8.5 / 9.5Japan 0.0 / 1.0 0.0 / 1.0 1.0 / 2.0 1.5 / 2.5 1.0 / 2.0 1.5 / 2.5

= upward revision from previous forecast = downward revision from previous forecast

2010 2011

CEE Corporates Amid Economic Turbulence

Negative pressure softened since H2 2009moving towards stabilization

Downward pressure on corporate ratings is gradually easing

5

0

25

50

75

Upgrades Downgrades

Source: Moody‘s Investors ServiceNote: includes multiple actions per issuer

CFG EMEA Quarterly Upgrades and Downgrades


Moody’s Outlook for Key Sectors

Moody’s has stabilised most cyclical industry outlooks over the past few months, but issuers may retain negative outlooks due to specific challenges

Industry Outlook Last Update Comment

Building Materials Negative March 2010 Signs of recovery remain elusive

Pharmaceuticals Negative June 2010 Global pharmaceuticals: approaching patent cliff set to dampen revenues and margins

Auto Parts Suppliers Stable September 2010

Adjusted Cost Bases And Solid Exports Offset Risk From Temporary Volume Drop

Auto Manufacturers Positive May 2010 Demand, pricing trends drive recovery, but speed bumps could lie ahead

Airlines Stable June 2010 Global airline sector stable on expectations of passenger, yield growth

Chemicals Stable May 2010 Industrial demand strengthens

Paper and Forest Stable March 2010 Product demand stable but subdued as challenges continue

Steel Producers Stable June 2010 Recovery on track but demand remains fragile

Shipping Stable February 2010 No longer off course, but oversupply will continue to hamper full recovery

Oil & Gas Stable June 2010 Global Integrated Oil Stable but Gulf Spill and Weak Natural Gas Add to Pressure

Telecoms & Cable Stable November 2009 Resilient, but revenue pressures persist

Retail Stable March 2010 Demand expected to remain subdued in 2010

6


0%

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Au

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Europe Actual Europe Baseline Forecast

Europe Pessimistic Forecast Europe Optimistic Forecast

7

Significant reduction of defaults expected in 2010

» Only 3 EMEA rated corporates defaulted in 2010

» Default rates in this downturn well below 2002 peak: no challenge to business models, corporates reacted quickly on capex and costs, refinancing needs were moderate.

» Default rate expected by model to go below 2% by year-end in Europe.

» Moody’s ratings have performed well while market-implied ratings overestimated defaults.

European HY 12 Months Default Rates (August / 2010)

CFG EMEA Corporates: Ratings of B1 and Below (August / 2010)


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B1 B2 B3 Caa1 Caa2 Caa3 Ca C

Total Number of Issuers Issuers with Neg Outlook / UR Down / No Outlook


7


Expectations for growth and output levels

Significant upward/downward risk stemming from economic rebound in markets

– GRIs are more exposed to sovereign credit…

– But public policies (spending, taxes, etc ) might affect corporates

– …Large multinationals benefit from geographic diversification

» Growth has direct impact on rating prospects of issuers active in these countries

» Issuers also indirectly impacted as sovereign risk may increase:


8


» Easing of negative pressure on GRIs in H2 but remaining challenges

– Negative pressure on some sovereign ratings

– Reassessment of some support assumptions (primarily Dubai and some others…)

Moody’s has adjusted a number of ratings due to revised support assumptions and sovereign downgrades

Government Related Issuers (GRI)

Number of Downgrades in EMEA


0102030405060708090

1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010

GRI Non-GRI

July & August 2010

9


Impact of Sovereign Weakness on EMEA Corporate Landscape

While market access has improved significantly, sovereign weakness could spill-over to corporates, restrict access to funding


I mpact of Sover ei gn Weakness on Eur opean Cor por at es

SHORT TERM I MPACT MEDI UM TERM I MPACT LONG TERM I MPACT

Vol at i l i t y

Reduct i on of t he gr owt h t r aj ect or y

Depr essed consumer confi dence Gover nment expendi t ur e cut s

Tax i ncr eases

Access t o Fundi ng

Corporates that need short-term access to Capi tal

Markets and Bank Fundi ng

Tel ecommuni cati on Servi ces Provi dersUti l i t i esAutomoti ve

Al cohol i c Beverages and Tobacco

Al l I ndustri es

10


Decreasing Borrowing Costs, but Investors Perception Evolves

Source: Moody‘s Economy.com

Capital market borrowing costs fall sharply (CFG sector) as financial conditions improve. We expect corporate bond yields to continue falling in 2011 as investors move out of low-return cash deposits and into higher-yielding corporate bonds

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Jun07 Sep07 Dec07 Mar08 Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10

Banking Corporate Sovereign

Data as of 9/1/2010


Refunding needs are significant over the intermediate term

European corporate funding needs coincide with a substantial increase in debt issuance by European sovereigns and banks

» Increasing competition for credit and higher volatility in funding costs

» Sovereign advantage to gradually return for nearly all countries, supported by an eventual recovery

2009 European Corporate Funding Needs (USD, billion)


13

Western European Bond Issuance

» Issuance activity down in Q2 with investors being very selective

» Investors looking for yield, solid corporate business model, want to avoid exposure to challenged sovereign risks

» IG financing needs remain modest with recovered free cash-flow, reduced share buy-back activity, limited M&A and cautious capex programs

Issuance Volumes in Western European Bond Market Investment Grade in USD bn

Issuance Volumes in Western European Bond Market Speculative Grade in USD bn

Source: Moody‘s Economy.com

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Quarterly Breakdown

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Quarterly Breakdown

13


CEE Region and its

Characteristics


CEE: Convergence Revisited

» CEE region was particularly hit by the global crisis – due to its export-led, investment-led growth model.

» In 2009 however, CEE countries showed an impressive macroeconomic flexibility – both with respect to public finances and balance of payments.

» Many CEE countries have restored their competitiveness and are now in a favorable position to benefit from a global economic recovery.

» Overall, we have a constructive view on the region. We expect a resumption of convergence in most countries in 2010/ 2011.

» That said, the recovery in some countries is still fragile and to a large extent dependent on a supportive global environment.


Economic Strength: Industrial Production

Industrial Production – Manufacturing (Index 2000=100), SA, Jan 2005 – Feb 2010

Source: Eurostat

70

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90

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140

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160

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Bulgaria Czech Republic Estonia Latvia Lithuania

Hungary Poland Romania Slovakia Croatia


CEE (I)

Slovenia (Aa2/STA): Debt Trajectories, 2007-13

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Debt/GDP (%)

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adverse scenario baseline scenario benign scenario

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20122013

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Estonia (A1/NEG): Debt Trajectories, 2007-13

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Latvia (Baa3/STA): Debt Trajectories, 2007-13

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Poland (A2/STA): Debt Trajectories, 2007-13

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men

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20092010

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20132007

17


CEE (II)

Bulgaria (Baa3/POS): Debt Trajectories, 2007-13

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20112011

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Russia (Baa1/STA): Debt Trajectories, 2007-13

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Ukraine (B2/NEG): Debt Trajectories, 2007-13

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Romania (Baa3/STA): Debt Trajectories, 2007-13

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18


CEE: Convergence Revisited

Accession countries and new EU members´ income catch-up, 1997 - 2008

Source: Eurostat

1997 2000 2003 2006 2007 2008

EU-27 100.0 100.0 100.0 100.0 100.0 100.0

Czech Republic 72.9 68.5 73.4 77.4 80.2 80.1

Hungary 51.5 56.0 63.2 63.5 62.6 62.8

Poland 46.8 48.2 48.9 52.3 53.8 57.6

Slovakia 51.3 50.1 55.5 63.5 67.1 71.8

Turkey 32.1 39.9 33.9 42.6 44.9 45.7

Bulgaria 26.4 27.8 32.5 36.6 37.5 40.5

Croatia 52.0 49.2 54.3 58.4 61.1 63.1

Romania n.a. 26.1 31.3 38.3 42.4 45.8

Portugal 76.1 78.3 77.0 76.3 76.1 75.5

GDP per capita at PPP (EU-27 = 100)


Sovereign rating list – Selection, Investment Grade

Bulgaria – the only country with positive outlook in CEE

20


Examples of Moody’s rated entities in CEE

Quality of credit Moody's Example Gilt-edged Aaa Aa1 Very high Aa2 Slovenia, SID Banka Aa3 M6 Duna

INVESTMENT A1 Czech Rep., Slovakia, Estonia, Prague

GRADE Upper-medium A2 Poland, CEZ, PKO BP, Tatrabanka, Warsaw

A3 NLB, PGE, Telek. Polska, Abanka, Tallinn

Baa1Hungary, Lithuania, Abanka, Telco Slovenije, OTP

Medium grade Baa2 BVS, BPH Bank, MKB Bank, Bank Millennium

Baa3 Bulgaria, Croatia, Latvia, Romania,

Latvenergo, Transelectrica, Raiffeisen BG Ba1 MAV, PKN Orlen, Zagrebacka Banka

SPECULATIVE Questionable Ba2 MKB Unionbank

GRADE Ba3 Montenegro, RCS&RDS, Corp. Com. Bank

B1 Albania, CEDC, NWR, Norvik Banka, Veles

Poor quality B2 Bosnia, Agrokor, CME, Credins Bank, Privatbank

B3 Baltic Int. Bank, Trasta Komercbanka Caa1 Very poor or Caa2 in default Caa3 Petrol BG, Zlomrex Ca C

* As of November 2010

21


How Moody’s Assess Corporates

Creditworthiness


Moody’s Approach to Rate Corporates

3. Challenges/risks for corporate issuers going into 2010

Transparent methodology is key for Moody’s ratings

» Transparent methodologies

» Individual scorecards per industry employed

» Understandable for both issuers and investors

» But not the final rating

» See examples for Automotive Suppliers (next slide) and for Regulated Utilities (over next slide)

» For government related issuers (GRI) - so called Joint-Defauls-Analysis (JDA) in place


Moody’s Approach to Rate Corporates – Auto suppliers (I)





Moody’s Approach to Rate Corporates – Auto suppliers (II)





Moody’s Approach to Rate Corporates – Regulated Utilities





Government Related Issuer Ratings Inputs

BASELINE CREDIT

ASSESSMENT

SOVEREIGN DEFAULT

RISK

DEFAULT DEPENDENCE

LIKELIHOOD OF

GOVERNMENT SUPPORT

CREDIT

RATING

27


Joint Default Analysis (“JDA”) – Example CEZ

BCA(*)

of CEZ:

7 (i.e. A3)

Likelihood of Support from State:

Medium (31-70%)

Local Currency Rating

of Czech Republic:

A1

Default Dependence between CEZ and Government:

Medium (31-70%)

Rating of CEZ:

A2 stable

(*)Baseline Credit Assessment


Positioning of CEE Corporates


Distribution of CEE Corporate Ratings

The proportion of issuers in the investment

grade (IG) range (Aaa-Baa) decreased from 54%

down to 45% as the economic recession

impacted also more stable utility industries

Most of CEE IG companies are state owned –

government ratings add rating volatility

High proportion of Caa-C ratings compared to

EMEA rating distribution suggests larger

proportion of potential defaulters in CEE rated

universe

30

Investment Grade – delayed impact of adverse economic developmentSpeculative Grade – stabilised but still vulnerable due to high proportion of Caa-C ratings

012345678

Aaa Aa A Baa Ba B Caa-C

CEE Corporate Rating Distribution

Dec-08 Jan-10

0%

10%

20%

30%

40%


CEE versus EMEA Corporate Ratings Distribution

CEE EMEA


Government Related Issuers (GRIs)Important Part of CEE Corporate Ratings

In many CEE markets, ratings and capital market

issuance driven by state sector in search of capital

(energy, railways, oil & gas...) – CEZ (CR), Eesti

Energia (EST)

High share of GRIs show importance of state and

limited preparedness of other players in tapping

capital markets

Regulatory environment and state support plays a

significant role in influencing financial profile of IG

issuers

For 40% of CEE government-related issuers, a

downgrade of the government rating would result in

GRI downgrade

31

GRIs represent 54% of overall CEE corporate rating universe and over 90% of investment-grade issuers

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GRIs in CEE Rating Universe (as of January 2010)

GRI non GRI

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GRIs versus Private Companies - Rating Distribution(as of January 2010)

non GRI GRI


EMEA

» Downgrades for Western European issuers outpaced upgrades since Q1 2008

» Sharp increase in downgrades from end 2008/beginning 2009 decelerated over H2 2009 and 2010

CEE

» 3 downgrades in CEE over 1998-2007

» 28 downgrades since Jan 2008

» 1 default (Kremikovtzi) and 1 filing for protection (Belvedere)

32

CFG EMEA Quarterly Upgrades and Downgrades

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Upgrades Downgrades

2004 2005 2006 2007 2008 2009 9M 20100

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25CEE Corporates: Up/Downgrades

UPGRADE DOWNGRADE

Downward pressure on corporate ratings is gradually easing


Negative Outlooks Decreased but Positive News still to Come

» The proportion of CEE ratings with negative outlook decreased from 46% to 32% over 2010 reflecting stabilisation and easing of pressure on credit quality

» …while positive pressure remains uncertain as only 1 of CEE ratings is expected to face upward pressure (positive outlook)

33

0% 20% 40% 60% 80% 100%

CFG CEE Outlooks, October 2010

Stable Negative RUR D Positive

0% 20% 40% 60% 80% 100%

CFG CEE Outlooks, January 2010

Stable Negative RUR D Positive


Major Drivers Influencing CEE Corporates

Large proportion of CEE corporates are GRIs – sensitive to sovereign ratings Expected negative development as 5 CEE countries have negative outlook on their

government rating

Impact of Sovereign Ratings Development

Reassessment of Business Plans to Preserve Liquidity Adaptation to changing environment – lower demand, weaker cash flows Readjustment of Capex plans, operational efficiencies, strengthening of capital

structure

Currency Volatility

Regulation and Government

Significant FX risk exposure due to high proportion of export Large foreign currency denominated debts creating significant FX exposure

Financial position dependent on high proportion of regulated income Governments as owners influence strategic decisions


Q & A

© 2009 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling.

Moody’s Investors Service, Inc. (“MIS”), a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

Contact details:

Petr Vins

Head of CEE Branch

[email protected]

Central + (420) 224 222 929

Direct + (420) 221 666 312

CEE Corporates Amid Economic Turbulence Stabilisation of credit quality during 2010 ICAP, Sofia, December 2010 Petr Vins, Branch Manager, CEE.

Documents

cee slide

positioning of cee corporates

moodys ratings

moodys investors service

global pharmaceuticals

key sectors moodys

gris slide

economic turbulence2