credit quant sight

Macro Commodities Forex Rates Equity Credit Derivatives

Please see disclaimer and disclosures at the end of the document

15 March 2010

Cross Asset Quant Research Weekly

www.sgresearch.com

Credit QuantSight

Credit back in line with other markets

■ The lack of concrete news on the sovereign front and the

end of the earnings season have brought an end to the

bullish trend on the stock market. However, credit indices

tightened across the board last week (-4bp for the iTraxx

Main, -13bp for the iTraxx X-Over).

■ We see this outperformance as a correction between the

credit and the other markets since our statistical models

had highlighted credit indices as too wide against the

other markets but they are now fair-valued.

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01/10 02/10 03/10

Main Model

ln Main = 15.4 + ln 1yEq.Vol*0.7 + ln EuroSX 50*-1.7 + ln GovYield *-0.1

The iTraxx Mainnis now almost back in line

with its model value

Option volatility decreased but extreme risk remains high

■ In the exotic space, credit implied volatility decreased

sharply last week, especially on short-term expiries (-8%

for April-10 ATM Main volatility).

■ We see this decrease as a correction between implied

and realised volatility. Indeed, the risk premium between

historical and realised volatility was unsustainably high

and is now back to its historical average.

■ However, the volatility skew is still extremely steep. So,

market participants looking for macro-hedges should buy

ATM options while volatility sellers should focus on OTM

options.

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3m Implied Vol 3m Hist Vol Risk premium

Time for negative basis trades

■ The sharp tightening in the past couple of weeks has

pushed the basis between CDS and cash back into

negative territory (-6bp on average in our IG universe).

■ The sectors that offer the best opportunities for negative

basis trades are the sectors that tightened the most last

week: Retailers and Autos companies.

■ For instance, we recommend negative basis trades on

Volvo-14 or Volvo-17 as well as on Casino-13 or Casino-

14.

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Average Basis Average CDS spreadStdev Basis

The basis isback into negative

territory whilethe average size

of decreasedfurther

Contents Analysts Credit indices 2 Marc Teyssier (Credit) [email protected] +33 1 42 13 55 96

The volatility corner 10

The correlation corner 11 Julien Turc (Head) [email protected] +33 1 42 13 40 90

Single-name movements 13 Benjamin Herzog (Top-down) [email protected] +33 1 42 13 67 49

Equity vs. Credit 14 Karsten Hippler (Interest rates) [email protected] +33 1 42 13 93 75

CDS Curves 13

Lorenzo Ravagli (Foreign [email protected] +33 1 42 13 73 76

CDS vs. Cash basis 14 Sandrine Ungari (Interest rates) [email protected] +33 1 42 13 43 02

Trade idea monitor 15

Credit QuantSight

15 March 2010

2

Market comments

Credit back in line with other markets The lack of concrete news on the sovereign front and the end of the earnings season have

brought an end to the bullish trend on the stock market. Stocks ended the week slightly

positive (+0.7% for the EuroStoxx) but equity volatility increased last week (+0.6% for 1y

EuroStoxx 50 VarSwap volatility).

For the past month, we had highlighted credit indices as too wide against other markets.

According to our statistical X-asset model, the rise in equity volatility should have resulted in

wider credit spreads (despite slightly higher stocks), but credit indices actually tightened

across the board (-4bp for the iTraxx Main, -13bp for the iTraxx X-Over). We see this

outperformance as a correction between the credit and the other markets: our statistical

model now highlights credit indices as fairly priced against equity, equity volatility and

government rates.

The iTraxx Main is back in line with other markets Like the Main index, the X-Over is now fair valued

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01/10 02/10 03/10

Main Model


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01/10 02/10 03/10

X-over Model

ln Xover = 11.4 + ln 1yEq.Vol*1.1 + ln EuroSX 50*-1.2 + ln GovYield *0.5

Source: SG Cross Asset Research

Cyclicals and consumers are leading the bullish trend while HY and financials are lagging behind In terms of sector movement, our SHARP model highlights an outperformance of cyclical

companies against non-cyclicals as well as of consumers vs industrials. These movements

reflect the strong performance of Retailers and Autos companies (which are both cyclical and

consumer-related sectors) fuelled by positive macroeconomic figures (euro area industrial

production was up in January and there were gains in US retail sales in February).

Furthermore, financials underperformed non-financials while HY spreads decompressed

against IG. These single-name CDS movements were fairly in line with indices: financial

indices underperformed slightly (+0.8bp for the SenFin against Main) and the X-Over index

widened by 6bp against the Main.

Finally, the outperformance of the US against European companies was brought to a halt as

the CDX IG widened by 3bp against the Main (but it remains almost 10bp too tight against the

Main historically).

Credit QuantSight

15 March 2010 3

The X-Over index widened by 6bp against the Main last week

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Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-1

Alp

ha (b

p)

X-Over = 4.53 x Main + 118.19 R²=93%

+6bp

Relative movements of credit indices

Current alpha 1w mvt 1w (%) 1m mvt 1m (%)

Against Main

X-Over -42.5bp +6.0 +1.5% -12.2 -3.0%

HiVol -31.5bp +3.2 +2.9% +11.4 +10.3%

Sen Fin +17.4bp +0.8 +1.0% -6.1 -7.6%

Sub Fin +26.4bp +0.2 +0.2% -12.4 -9.2%

CDX IG -9.7bp +2.9 +3.4% +3.8 +4.6%

Others

Sub vs. Sen Fin -2.7bp -1.0 -0.7% -0.9 -0.6%

X-Over vs. HiVol +24.8bp -1.3 -0.3% -38.3 -9.3%


Credit volatility plummets but beware of extreme risk In the exotic space, credit implied volatility decreased sharply last week, especially on short-

term expiries (-8% for April-10 ATM Main volatility). We see this decrease as a correction

between implied and realised volatility. The risk premium on credit options � i.e. the difference

between implied and realised volatility � was historically high two weeks ago as market

participants, scared by the sovereign debt crisis, had rushed onto the option market to hedge

their credit exposure. This dislocation was not sustainable and volatility arbitrageurs took

advantage of this by selling volatility.

The risk premium tightened sharply as volatility decreased… … but the volatility smile is historically steep

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0 50 100 150 200 2505y iTraxx Main

Vol 3

m A

TM

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Skew

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(vol

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OTM

- A

TM)

ATMVol Now (vol) Skew Now (skew)


As delta-hedging is less risky on a short-term horizon, the decrease in volatility affected

mostly April-10 expiries. Jun-10 ATM volatility on the Main decreased too but OTM options

remain expensive. In other words, the volatility skew is now historically steep. However, given

the lack of liquidity on options, we do not see this as a relative value opportunity as the trade

potential of a short OTM straddle vs long ATM straddle position would not offset transaction

costs. Nevertheless, this is an interesting signal for volatility players: market participants

looking to buy volatility (e.g. macro-hedgers) should buy short-term ATM options while

volatility sellers (e.g. risk takers) should focus on long-term OTM options.

Credit QuantSight

15 March 2010

4

Correlation: waiting for the roll As indices are due to roll at the end of the week, the correlation market seems to be focused

on technicals and there was therefore no clear movement in the tranche market. Equity pieces

outperformed slightly � especially on the CDX index (-3.8% for a delta-hedged 5y CDX 0-3%

tranche) � driven by the decline in dispersion (-4.6% in the CDX IG S9 dispersion).

In the meantime, super-senior tranches tightened against indices too, especially on 7y and

10y maturities. As a result, value flew from the wings into the belly of the capital structure.

Time for negative basis trades For the past month, we have recommended unwinding negative basis trades as wider CDS

had pushed the basis between CDS and cash into positive territory. The sharp tightening in

the past couple of weeks has moved the basis in the other direction (because cash spreads

have lagged behind the rally in the CDS market) and the basis is now negative: in our

European IG universe, the average basis is trading on average at -6bp, a 2m low. Moreover,

the average potential of basis trades, measured by the standard deviation of basis trades in

our bond universe, is historically tight. This shows that the risk transfer between the CDS and

bond markets is working well. That is why we see the current environment as very attractive

for negative basis trades.

The average basis in Europe is back into negative territory

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Average Basis Average CDS spread Stdev Basis

The basis isback into negative

territory whilethe average size

of basis decreased further


The sectors that offer the best opportunities for negative basis trades are the sectors that

tightened the most last week: Retailers and Autos companies. For instance, we recommend

negative basis trades on Volvo-14 and Volvo-17 as well as on Casino-13 and Casino-14. For

more negative basis opportunities, please refer to our daily Basis Monitor.

Credit QuantSight

15 March 2010 5

Credit indices: iTraxx indices vs other financial markets

Equity and rate marketsCurrent 1w mvt 1w (%) 1m mvt 1m (%)

Equity IndicesEuroStoxx 50 2898 +21 +0.7% +224 +7.7%S&P 500 1150 +11 +1.0% +74 +6.5%

5y Bond yields (%)Bund 2.2% 0.0% +1.4% 0.0% -0.7%T-Bill 2.4% 0.1% 2.8% 0.1% 3.1%

1y Var Swap Vol (%)EuroStoxx 50 26.0 +0.6 +2.2% -3.1 -11.8%S&P 500 23.3 +0.2 +0.7% -2.8 -11.8%

Credit indices

Main X-Over HiVol SubFinMarket 74 410 111 135Last week's close 78 423 116 142Change (bp) -4 -13 -5 -7Change (%) -5.3% -3.0% -4.6% -4.9%

Model 73 412 104 132Change (bp) +0 +9 +3 -2Change (%) +0.6% +2.2% +3.3% -1.2%

Market vs model (%) 1% -1% 7% 2%

Equity vs credit spreads Main vs model

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5,000

Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Euro

Stox

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(€)

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n (b

p)

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10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10

Main Model


Government rates vs credit spreads X-Over vs model

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und

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10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10

X-over Model

ln Xover = 11.4 + ln 1yEq.Vol*1.1 + ln EuroSX 50*-1.2 + ln GovYield *0.5

Equity volatility vs credit spreads HiVol vs model

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10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10

HiVol Model

ln HiVol = 18 + ln 1yEq.Vol*1.2 + ln EuroSX50*-2.2 + ln GovYield *0.8


Models are based on a 1y statistical regression of credit indices of iTraxx indices against other financial markets.

Credit QuantSight

15 March 2010

6

Beta movements – the SHARP model

Risk factor changes (in % spread mvt)

1W mvt 1M mvt 1Y mvt

Market -4.7% -18.4% -91%

Fin. vs. Corp. +0.7% +1.3% +14%

Decompression HY vs. IG +0.5% -1.9% -22%

Cyclicals vs. Non-Cyclicals -0.7% -1.6% -5%

Consum. vs. Indust. -0.7% +0.4% +5%

Insurance +0.1% -0.1% -13%

Weekly index movements: basket vs. model in bp

Mar

ket

Bas

ket

M1

M2

M3

M4

M5

Mo

del

(M6)

Alp

ha

Main -4.3 -4.0 -4 -4 -4 -4 -4 -4.2 +0.2

X-Over -13.0 -16.1 -16 -17 -14 -14 -12 -12.4 -3.6

SnrFin -3.5 -5.3 -6 -5 -5 -5 -5 -4.9 -0.4

HiVol -5.5 -4.6 -5 -6 -6 -6 -6 -6.3 +1.7

First three risk axes (long term) Last three risk axes (short term)

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Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Equi

vale

nt s

prea

d m

ovem

ent

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80%Market (LHS)Fin. vs. Corp. (RHS)Decompression HY vs. IG (RHS)

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Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10

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Market (LHS)Fin. vs. Corp. (RHS)Decompression HY vs. IG (RHS)

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Cyclicals vs. Non-CyclicalsConsum. vs. Indust.Insurance

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Cyclicals vs. Non-CyclicalsConsum. vs. Indust.Insurance


The SHARP model : the six risk axes

This section shows beta movements in the CDS market. Using our Statistical Hedging and Arbitrage for Portfolios (SHARP) model, we found 6 main risk axes which explain more than 60% of weekly spread movements. More details on this methodology are given in our May 08 article “Statistical hedging: a multi-factor model based on PCA”.

Axis movements are given in equivalent percentage spread movements, i.e. a +10% increase of a factor means that the spread of a company with a beta of 100% with respect to this factor increased by 10% (e.g. +10bp for a CDS trading at 100bp).

The top right-hand table highlights each expected index weekly movement given the movements of our 6 risk axes. M1 stands for the expected movement given the first factor only, M2 is the expected movement given the first two factors, and so on. The model column represents the expected index movement given all 6 risk axes.

Credit QuantSight

15 March 2010 7

iTraxx Main corner

iTraxx Main Spread, curves and analytics

Current 1w mvt 1m mvt

Index spread

5y 74bp -4bp -16bp3-5y 23bp +1bp +7bp5-7y 9bp +1bp +4bp5-10y 18bp +1bp +6bp

Basket analytics

Skew 5y 0bp -0bp +1bpSkew 5-10y 2bp +0bp +3bpDispersion 36.2% +0.7% -2.6%

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ad 5

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Skew: basis between index and components Credit spreads: indices, single names and cash

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5y iTraxx MainCash spreads (Main-skew-basis)Single name CDS spread (Main - skew)

iTraxx Main vs CDX IG Best individual performers - Main

1 Next PLC (-15bp @92bp)

2 Volvo (-14bp @188bp)

3 Finmeccanica (-11bp @96bp)

4 Casino (-11bp @86bp)

5 Holcim (-11bp @115bp)

Worst individual performers - Main

1 Arcelor (+30bp @114bp)

2 Telecom Italia (+7bp @148bp)

3 Alstom (+5bp @105bp)

4 Portugal Telecom (+5bp @100bp)

5 OTE (+2bp @96bp)

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Credit QuantSight

15 March 2010

8

iTraxx X-Over corner

iTraxx X-Over Spread, curves and analytics

Current 1w mvt 1m mvt

Index spread

5y 410bp -13bp -85bp3-5y 60bp +4bp -6bp5-7y 14bp +0bp +21bp5-10y 23bp +3bp +10bp

Basket analytics

Skew 5y 1bp +3bp +4bpSkew 5-10y 11bp -0bp -0bpDispersion 67.7% +1.3% +3.2%

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Basis X-Over 5y Basis X-Over 5-10y

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iTraxx X-Over vs iTraxx Main Best individual performers - X-Over

1 ONO (-120bp @969bp)

2 Grohe (-78bp @1045bp)

3 DSG International (-70bp @628bp)

4 Norske Skog (-47bp @1009bp)

5 NXP B.V. (-31bp @1063bp)

Worst individual performers - X-Over

1 Seat Pagine Gialle (+26bp @1465bp)

2 International Power (0bp @201bp)

3 UPC (-5bp @495bp)

4 Smurfit Kappa Funding (-5bp @519bp)

5 Clariant (-5bp @112bp)

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Credit QuantSight

15 March 2010 9

Index relative value

CDX IG vs iTraxx Main Relative movements of credit indices

Current alpha 1w mvt 1w (%) 1m mvt 1m (%)

Against Main

X-Over -42.5bp +6.0 +1.5% -12.2 -3.0%

HiVol -31.5bp +3.2 +2.9% +11.4 +10.3%

Sen Fin +17.4bp +0.8 +1.0% -6.1 -7.6%

Sub Fin +26.4bp +0.2 +0.2% -12.4 -9.2%

CDX IG -9.7bp +2.9 +3.4% +3.8 +4.6%

Others

Sub vs. Sen Fin -2.7bp -1.0 -0.7% -0.9 -0.6%

X-Over vs. HiVol +24.8bp -1.3 -0.3% -38.3 -9.3%

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Alp

ha (b

p)

S7 S8

S9 S10

S11 S12

CDX = 1.2 x Main + 4.33 R²=98%

iTraxx X-Over vs iTraxx Main iTraxx HiVol vs iTraxx Main

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-100

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Jun-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10

Alp

ha (b

p)

S7 S8 S9

S10 S11 S12

X-Over = 4.53 x Main + 118.19 R²=93%

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Jun-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10

Alp

ha (b

p)

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S10 S11 S12

HiVol = 2.07 x Main - 10.29 R²=95%

iTraxx SubFin vs iTraxx SnrFin iTraxx SubFin vs iTraxx Main

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ha (b

p)

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S10 S11 S12

SubFin = 1.75 x SnrFin - 2.54 R²=98%

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ha (b

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S10 S11 S12

SubFin = 1.72 x Main - 18.47 R²=89%


Alpha of regressions and roll-correction

The alpha is the residual error in the regression of the spread of one index against the spread of another reference index. When the alpha is positive, it means that the index we want to regress has underperformed the reference index (is wider than the reference index on a beta-adjusted basis). When it is negative, it means the index has outperformed the reference index.

In order to compare past spreads of credit indices, we need to correct them from the mismatch of composition and maturity so that they reflect where the current series with the current maturity should be trading. For more details on our methodology for roll-correcting spreads, please refer to our August 2007 article “Bridging the gap between series of credit indices”.

Credit QuantSight

15 March 2010

10

The Volatility corner

Historical vs. market implied volatilities iTraxx Main spread options

Current 1w mvt

ATM Apr-10 vol 58% -8.0%

ATM Jun-10 vol 64% -3.5%

3m historical volatilty 45% +0.9%

3m risk premium 18% -5.6%

Index Spread 75bp -5bp

Most likely spread in Apr-10 74bp -3bp

Most likely spread in Jun-10 68bp -2bp

BEV Apr-10 (Rec/Pay) 70/81 -3.4/-7.1

BEV Jun-10 (Rec/Pay) 66/86 -3.9/-7.2

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Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-103m

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Vol

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Ris

k pr

emiu

m (%

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Mar-10 iTraxx Main volatility smile Jun-10 iTraxx Main volatility smile

50%

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85%

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Apr-10 (current week)Apr-10 (last week)

60%

65%

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80%

85%

90%

50 70 90 110 130 150 170 190

Jun-10 (current week)

Jun-10 (last week)

Market implied distributions in Mar-10 Market implied distributions in Jun-10

-10%

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<40 60 80 100 120 140 160 180 200

Apr-10 implied distribution Weekly change

-5%

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<40 60 80 100 120 140 160 180 200

Jun-10 implied distribution Weekly change


The Volatility corner

The implied volatility smile is interpolated using a credit version of the SABR model. More details are available in our paper from March 2007, “Credit options: reading the market’s smile”.

Credit QuantSight

15 March 2010 11

The Correlation corner Correlation market movements

Current 1w mvt 1m mvt5y iTraxx Main S9Ref 70bp -10bp -15bpExpected Loss 2.2% -0.32% -0.5%Upfront 0-3% 26.5% -3.8% -5.3%Correlation 0-3% 40.2% -0.4% -1.0%Basket dispersion 52.5% +1.0% -0.9%Spread 22-100% 13bp -3bp -6bp

5y CDX IG S9Ref 102bp -8bp -25bpExpected Loss 2.7% -0.23% -0.7%Upfront 0-3% 50.3% -3.8% -7.8%Correlation 0-3% 38.8% -3.0% -8.6%Basket dispersion 83.2% -4.6% -7.6%Spread 30-100% 10bp -1bp -6bp

Delta-hedged tranchesCurrent 1w mvt 1m mvt

5y iTraxx Main S90-3% (Upf+500bp) 26.5% -0.94% -1.12%3-6% (Upf+500bp) -4.0% -0.17% +0.34%6-9% (Upf+500bp) -10.3% +0.24% +0.69%9-12% 95bp +2bp +8bp12-22% 37bp +2bp +1bp22-100% 13bp +0bp -1bp

5y CDX IG S90-3% (Upf+500bp) 50.3% -2.37% -3.77%3-7% (Upf+500bp) 7.1% -0.14% -2.28%7-10% (Upf+500bp) -6.7% +0.23% -0.21%10-15% (Upf+100bp) -0.3% +0.08% +0.57%15-30% (Upf+100bp) -2.1% +0.15% +0.43%30-100 (Upf+100bp) -2.5% +0.01% -0.03%

5y Equity correlations Base correlation smile

0%

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Jan-07 Jul-07 Feb-08 Aug-08 Mar-09 Sep-09 Apr-10 Nov-10

iTraxx 5y 0-3% correlation

CDX 5y 0-3% correlation

30%

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0% 5% 10% 15% 20% 25% 30%

iTraxx 5yCDX 5y normalized by ELLast week (iTraxx)Last week (CDX)

iTraxx basket dispersion vs. delta-hedged equity CDX basket dispersion vs. delta-hedged equity

10%

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Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10-40%

-30%

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0%

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iTraxx 5y dispersionDelta-hedged 5y 0-3% iTraxx upfront

55%

65%

75%

85%

95%

105%

115%

125%

Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09-40%

-20%

0%

20%

40%

60%

CDX 5y dispersion5y 0-3% upfront at cst. bench (RHS)

iTraxx basket dispersion vs. delta-hedged equity CDX basket dispersion vs. delta-hedged equity

0%

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3% 6% 9% 12% 22%

5Y

7Y

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3% 7% 10% 15% 30%

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Credit QuantSight

15 March 2010

12

iTraxx Main 5y delta-hedged junior tranches� iTraxx Main 5y delta-hedged senior tranches

-250

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Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10-30%

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Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10-25

-20

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159-12% 12-22% 22-100%

iTraxx 5y expected loss distribution… iTraxx 5y expected loss distribution…

20%

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EL 22-100%EL 12-22%EL 9-12%EL 6-9%EL 3-6%EL 0-3%

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CDX IG 5y delta-hedged junior tranches CDX IG 5y delta-hedged senior tranches

-1000

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Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10-40%

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Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10-20

-10

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4010-15% 15-30% 30-100%

CDX IG 5y expected loss distribution… … and weekly changes

20%

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Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10

EL 30-100%EL 15-30%EL 10-15%EL 7-10%EL 3-7%EL 0-3%

-0.6%

-0.4%

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0-3% 3-7% 7-10% 10-15% 15-30% 30-100%


Credit QuantSight

15 March 2010 13

Issuer-specific monitor

Single-name movements – the SHARP model

Surprise index by sector Spread volatility

Current 1w mvt 3m avg 3m Z-score

Total = Alpha + Beta 49.8% -32.3% 55% -28%

Alpha 26.0% +6.7% 26% 1%

Beta 23.8% -39.0% 29% -21%

1 Market 23.5% -38.1% 28% -18%

2 Financials 0.3% +0.3% 0.3% 2%

3 HY vs IG 0.0% -0.5% 0.3% -147%

4 Cyclicals 0.0% -0.3% 0.3% -66%

5 Consum vs Indus 0.0% -0.2% 0.1% -131%

6 Insurance 0.0% -0.2% 0.1% -83%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

Ave

rage

Alp

ha v

olat

ility

by

sect

or

Autos ConsumersFinancials IndustrialsInsurance TMTUtilities & Energy

Breakdown of weekly volatility Split of weekly variance between alpha and beta

0%

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Wee

kly

vola

tility

Alpha InsuranceConsum. vs. Indust. Cyclicals vs. Non-CyclicalsDecompression HY vs. IG Fin. vs. Corp.Market

0%

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Part

of t

he v

aria

nce

Market Fin. vs. Corp.Decompression HY vs. IG Cyclicals vs. Non-CyclicalsConsum. vs. Indust. InsuranceAlpha

3-month worst alpha performers

Credit opinion Spd mvt Alpha mvt Z-Score

1 Allied Irish Banks Negative +21% +19% +2.5

2 TNT NV No Reco +36% +36% +2.0

3 FCE Bank - +13% +12% +1.9

4 Havas Stable +7% +8% +1.9

5 ABB Stable -18% +12% +1.9

6 Dong Stable -10% +6% +1.9

7 Rexam - +7% +10% +1.8

8 Hanson - +6% +16% +1.8

9 Ericsson Negative +2% +20% +1.8

10 Svenska Cellulosa Stable -1% +4% +1.8

3-month top alpha performers

Credit opinion Spd mvt Alpha mvt Z-Score

1 Japan Tobacco Stable -35% -22% -2.6

2 Lloyds TSB Group Negative -9% -15% -2.5

3 DSM Stable -12% -15% -2.1

4 Endesa Stable -40% -22% -1.8

5 Continental Negative -39% -26% -1.8

6 ISS Holding - -6% -2% -1.7

7 UBS Negative -18% -7% -1.5

8 Lafarge Stable -23% -8% -1.4

9 J Sainsbury Stable -19% -11% -1.4

10 Suez No Reco -21% -18% -1.4


SHARP – single-name spread movements

This section highlights alpha movement – i.e. spread movements stripped from the movement of the six market factors found by our SHARP model.

Credit QuantSight

15 March 2010

14

Capital structure arbitrage – The S2C model

iTraxx Main against EuroStoxx 50… … and against EuroStoxx variance swaps

50

70

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Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Spr

eads

(bp)

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rted

stoc

k pr

ice

Roll-corrected 5y Main EuroStoxx 50 (inverted)

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Jan-08 Jul-08 Jan-09 Jul-09 Jan-10S

prea

ds (b

p)15

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Vol

atilit

y (%

)

Roll-corrected 5y Main EuroStoxx 12m VarSwaps

Model vs market volatility Model vs market CDS spread

Level 3 Comm inc

20%

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0% 20% 40% 60% 80% 100%Market volatility

S2C

vol

atilit

y

American Airlines

Dynegy INC

Ford Motor C dit

MGM Mirage

AK Steel

BMWDynegy

Gecina

MGM Mirage

Hartford Financial

UNISYS CORP

United States Steel

-100

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Market CDS spread

Mod

el C

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spr

ead

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Sinclair Broadcast

The S2C model

The Smile-to-credit model is a relative value framework that analyses CDS curves using equity implied volatility inputs and balance sheet data. We initially calibrate the model to the short-term CDS curve and then compute a theoretical volatility level. This section compares these model volatilities to market ones. A full description of this model is available in our March 2008 paper: “The S2C model: an integrated framework for equity-credit relative value”.

Credit QuantSight

15 March 2010 15

Buy CDS opportunities

Entity Ticker Sector Market CDS

Model CDS

Market Vol

Model Vol CDS change

Stock change

Mkt Vol change

S2C Vol change

M-Real MRLBV FH Industrial & Building Mat 727 2537 47.68% 57.71% -21.0 5.62% 21.74% 29.00%

Volkswagen VOW GR Autos 87 1798 33.37% 35.39% -7.9 5.30% 2.78% -0.05%

Hartford Financial Services HIG US Insurance 181 1437 40.60% 41.98% -12.9 1.46% 6.51% 4.29%

United States Steel X US Industrial & Building Mat 279 1455 46.69% 46.93% -30.8 6.28% 27.48% 23.65%

AK Steel AKS US Industrial & Building Mat 427 1325 48.16% 48.24% -6.3 -4.97% 0.78% -0.31%

Gecina GFC FP Real Estate 192 1050 32.11% 32.19% -24.8 2.51% 3.24% -2.33%

Generali Sub G IM Insurance 105 955 23.42% 31.19% -17.4 3.11% -1.60% -0.92%

AMR AMR US Aerospace, Defense & Airlines 1405 2226 64.31% 74.53% -195.0 7.84% -1.15% 4.17%

Daimler DAI GR Autos 88 908 30.46% 35.80% -7.9 1.77% 0.88% 0.37%

Sinclair Broadcast Sub SBGI US Media 723 1400 56.03% 54.13% 0.0 4.54%

Generali G IM Insurance 70 717 23.42% 31.07% -8.9 3.11%

Wendel Investissement MF FP Industrial & Building Mat 335 821 35.43% 37.14% -24.4 2.05%

Masco MAS US Industrial & Building Mat 199 657 38.80% 41.01% -14.8 5.26% -8.02% -6.19%

Porsche PAH3 GR Autos 105 548 35.21% 38.47% -8.0 6.45% 11.90% 12.99%

Amerada Hess AHC US Media 85 524 60.07% 51.12% 0.0 0.00% -1.45% -0.08%

Scania AB SCVA SS Autos 74 505 30.58% 34.29% -6.9 4.60%

Air France-KLM AF FP Aerospace, Defense & Airlines 319 697 36.68% 40.22% -14.7 2.75% 0.00% 0.24%

Swiss Re Sub RUKN VX Insurance 102 421 28.09% 32.71% -6.0 -0.50% -1.05% -0.59%

Volvo VOLVB SS Autos 189 506 29.72% 35.35% -13.9 6.97% 11.44% 9.46%

Arcelor MT NA Industrial & Building Mat 115 390 36.69% 37.92% 29.8 0.74% -0.32% 0.16%


Sell CDS opportunities

Entity Ticker Sector Market CDS

Model CDS

Market Vol Model Vol CDS change

Stock change

Mkt Vol change

S2C Vol change

Seat Pagine Gialle PG IM Media 1466 447 42.83% 56.20% 25.9 -0.83%

Boyd Gaming BYD US Travel & Leisure 1140 529 52.76% 59.59% -47.0 5.51% -1.62% -1.64%

Norske Skog NSG NO Industrial & Building Mat 1010 474 62.86% 56.14% -47.1 3.38% 39.77% 27.32%

TUI TUI1 GR Travel & Leisure 796 312 46.25% 52.41% -30.4 -0.40% 13.96% 14.96%

DSG International DSGI LN Retailers 629 157 43.92% 46.61% -69.9 2.70% 0.14% -0.76%

Rallye SA RAL FP Retailers 477 44 25.14% 28.99% -14.1 4.70% -2.58% -3.86%

Amkor Technology AMKR US Industrial & Building Mat 548 119 40.96% 46.53% -6.0 3.36% -0.54% -0.04%

Eastman Kodak Co EK US Consumer Goods 806 382 59.66% 62.92% -59.0 0.17% -4.57% -0.37%

Dynegy Holdings DYN US Utilities & Energy 920 522 43.19% 83.34% -22.0 5.48% -1.99% -5.64%

Sol Melia SOL SM Travel & Leisure 490 108 39.72% 45.19% -24.4 7.32%

AES AES US Utilities & Energy 485 114 38.71% 50.65% -25.8 0.69% 0.71% 1.74%

NRG Energy NRG US Utilities & Energy 466 101 33.61% 42.96% -19.2 -2.12%

Community Health Systems CYH US Chemical & Pharma 524 161 33.87% 43.88% -11.2 -4.90% -0.99% -0.54%

Iron Mountain Sub IRM US Services 398 42 26.51% 34.48% -20.3 -0.62%

Sanmina-SCI Sub SANM US Industrial & Building Mat 583 231 51.37% 49.60% -23.0 0.60% -0.91% -3.09%

Level 3 Communications LVLT US Telecom 1119 768 43.98% 69.44% 0.0 3.94%

UPC LBTYA US Utilities & Energy 495 155 34.55% 43.86% -4.8 1.00% 5.65% 10.89%

Polyone POL US Chemical & Pharma 523 187 41.91% 45.80% -21.5 3.99% 4.80% 6.29%

Avis Europe AVE LN Autos 560 236 48.07% 47.84% -30.0 -6.87% -0.83% -0.87%

Tenet Healthcare THC US Chemical & Pharma 567 316 51.38% 62.76% -23.5 -2.98%


Credit QuantSight

15 March 2010

16

CDS curves – EC-hedge model

iTraxx Main Curves and analytics

3-5y (1w mvt) 5-7y (1w mvt) 5-10y (1w mvt)

Average Curves

Main +19.6bp (+1.1) +6.9bp (+0.5) +14.8bp (+0.7)HiVol +25.9bp (+0.4) +9.4bp (+0.4) +19.0bp (+0.4)X-Over +24.2bp (+4.5) +4.3bp (+1.3) +8.7bp (+2.0)Sub Fin +72bp (+3.7) +12bp (+1.4) +16bp (+2.2)

Adj debt growth rate

Main 0.7% (+0.0%) -11.0% (+0.0%) -1.7% (+0.0%)HiVol -0.5% (+0.0%) -9.7% (+0.0%) -1.4% (+0.0%)X-Over -0.5% (+0.2%) -9.3% (+0.0%) -1.1% (+0.1%)Sub Fin -5.6% (+0.1%) -18.1% (+0.1%) -5.0% (+0.0%)

5-10y

3-5y

45

55

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115

3 5 7 9Maturity (years)

Ben

chm

ark

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S C

urve

s

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Deb

t gro

wth

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Last week curve Current curveLast week dgr Current debt growth rate

iTraxx HiVol iTraxx X-Over

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3y-5

y ad

just

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ebt g

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te

X-Over Main HiVol

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5y-1

0y a

djus

ted

debt

gro

wth

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X-Over Main HiVol


SGs CDS curves model: the EC-Hedge model

SG has developed an innovative methodology to analyse CDS curves. It consists of translating CDS curve market data into an implied debt growth rate indicator for each bucket of the curve (1y-3y, 3y-5y, 5y-7y and 7y-10y). This debt growth rate is the market anticipation of the dynamics of a company’s leverage in the future. The higher the debt growth rate, the steeper the curve, according to the model. We therefore usually recommend playing steepeners on curves with a low debt growth rate and flatteners on curves with a high debt growth rate. For more details on our CDS curves methodology, please refer to our articles dated Nov 2004 Introduction to the CDS curves monitor and May 2005 Hedging CDS curve trades: a case study.

Credit QuantSight

15 March 2010 17

CDS vs. cash basis monitor

Adjusted basis against CDS spreads: Inv. Grade Basis movements

Current 1w mvt 1m mvt 3m Z-Score

Avg ASW Spread 77bp +1bp -6bp +0.1

Avg CDS Spread 71bp -4bp -16bp -0.5

Avg Basis -6bp -5bp -10bp -0.7

Stdev Basis 25bp -1bp -4bp -1.8

-130

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Adj

uste

d ba

sis

(bp)

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310

Avg

spr

ead

& S

tdev

Bas

is (b

p)

Average Basis Average CDS spreadStdev Basis

Cash vs. CDS leading/lagging indicator Adjusted basis by vintage

-100%

-75%

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-25%

0%

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100%


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Ave

rage

CD

S sp

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h le

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<2003 2004 2005 20062007 2008 2009

Average adjusted basis by sector Adjusted basis by maturity

Aut

os

Che

mic

al &

Pha

rma

Con

sum

er G

oods

&

Ret

aile

rs

Fina

ncia

ls

Indu

stria

l & B

uild

ing

Insu

ranc

e

TMT

Util

ities

& E

nerg

y

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20This week Last week Movement

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is b

y m

atur

ity (b

p)

This week Last week Movement


Credit QuantSight

15 March 2010

18

Trade ideas monitor

Performance of our CDS curve strategy This section has not been updated.

0 €

500,000 €

1,000,000 €

1,500,000 €

2,000,000 €

2,500,000 €

3,000,000 €

3,500,000 €

4,000,000 €

Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08

Performance of our equity-credit strategy Performance of our basis strategy

-500 000 €

0 €

500 000 €

1 000 000 €

1 500 000 €

2 000 000 €

2 500 000 €

3 000 000 €

3 500 000 €

Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08

-500,000 €

0 €

500,000 €

1,000,000 €

1,500,000 €

2,000,000 €

2,500,000 €

Sep-05 Sep-06 Sep-07 Sep-08 Sep-09

Performance of our hybrid strategy Performance of our index strategy

-200,000 €

0 €

200,000 €

400,000 €

600,000 €

800,000 €

1,000,000 €

1,200,000 €

1,400,000 €

1,600,000 €

Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08

-200,000 €

0 €

200,000 €

400,000 €

600,000 €

800,000 €

1,000,000 €

1,200,000 €

1,400,000 €

1,600,000 €

1,800,000 €

Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09

Source: SG Quantitative Research

Performance calculations

All performances are calculated using mid-market data from SG market makers. They do not include any transaction costs.

Credit QuantSight

15 March 2010 19

Index trades

Trade Entry Date Exit Date Current Perf Min Perf Max Perf Entry Diff Exit Diff Target Stop-loss

short XOver vs. Main S5 22-Jun-06 23-Jun-06 -36,868 € -36,868 € 0 € 259 272 37,500 € -37,500 €

short XOver vs. HiVol S6 06-Nov-06 09-Nov-06 354,775 € 0 € 354,775 € 193 192 325,000 € -325,000 €

Xover flattener vs. HiVol steepener 27-Nov-06 23-Feb-07 333,432 € -29,970 € 333,432 € 32 33 325,000 € -325,000 €

short X-Over vs. HiVol fwd 20-Mar-07 16-Aug-07 400,905 € -24,369 € 475,806 € 102 71 345,000 € -345,000 €

long X-Over vs. Main S7 30-Jul-07 31-Jul-07 554,770 € 0 € 554,770 € 401 353 275,000 € -275,000 €

long X-Over vs. Main S7 13-Aug-07 14-Aug-07 -257,550 € -257,550 € 0 € 284 294 230,000 € -230,000 €

long X-Over vs. Main S8 07-Jan-08 08-Feb-08 -238,957 € -238,957 € 0 € 329 435 200,000 € -200,000 €

Main steepener 21-Jan-08 27-Nov-08 -127,680 € -127,680 € 83,753 € 6 33- 100,000 € -100,000 €

Index barbell 25-Feb-08 13-Mar-08 -165,741 € -165,741 € 2,298 € 381 376 150,000 € -150,000 €

Main vs CDX 10-Mar-08 25-Mar-08 158,640 € -26,041 € 158,640 € 31 35 150,000 € -150,000 €

Cyclical Decompression 14-Nov-08 -79,258 € -87,516 € 197,233 € 175 119 250,000 € -250,000 €

Us-Eur decompression 05-Jan-09 16-Jan-09 120,730 € 0 € 120,730 € 22 53 120,000 € -120,000 €

Sub vs. Senior compression 23-Feb-09 12-Mar-09 -148,466 € -148,466 € 41,756 € 141 207 100,000 € 100,000 €

Steepener S6 vs. Flattener S10 08-Jun-09 18-Aug-09 525,923 € -141,028 € 525,923 € 500,000 € -500,000 €

Bearish Trade CDX vs iTraxx 6-Oct-09 28-Oct-09 236,506 € 73,260 € 236,506 € 250,000 € -250,000 €

Total 1,631,161 € -1,210,926 € 3,085,622 € 2354.54 2406.09 2,137,500 € -2,137,500 €

Source: SG Credit Research

Performance of our index recommendations

Index option trades

Strategy Entry date Exit date Current perf Min perf Max perf Target Stop-loss

Long X-Over vol/Short main vol 24-Oct-05 21-Dec-05 278,496 € -126,944 € 278,496 € 500,000 € -500,000 €

Short ATM /Long out-of-the-money X-Over volatility 05-Dec-05 20-Mar-06 -245,877 € -245,877 € 449,897 € 500,000 € -1,000,000 €

Long 350 X-Over payer/Short 250bp receiver and 300bp payer 09-Oct-06 15-Dec-06 435,636 € 0 € 435,636 € 500,000 € -1,800,000 €

Short X-Over Jun-07 225bp payer vs. 250bp payer 08-Jan-07 22-Feb-07 151,055 € -49 € 151,055 € 140,000 € -250,000 €

Short X-Over Sep-07 175bp payer vs. 225bp payer 23-Apr-07 11-Jul-07 177,152 € -63,995 € 195,871 € 200,000 € -380,000 €

Short X-Over Dec-07 225bp payer vs. 275bp payer 02-Jul-07 27-Jul-07 -185,587 € -185,587 € 0 € 140,000 € -140,000 €

Short HiVol Receiver/Long Main Receiver 24-Sep-07 20-Dec-07 -6,640 € -23,893 € 5,498 € 75,000 € -75,000 €

Long X-Over 275bp payer vs. 450bp payer 01-Oct-07 20-Dec-07 12,892 € -60,022 € 80,892 € 120,000 € -120,000 €

Short €5m Dec-07 X-Over 275bp payers vs. €10m Mar-08 450bp payers 29-Oct-07 20-Dec-07 -74,644 € -77,024 € 0 € 85,000 € -85,000 €

X-over vs Main Bear spread 07-Nov-07 11-Feb-08 -374,787 € -374,787 € 0 € 200,000 € -200,000 €

Total 167,696 € -1,158,178 € 1,597,346 € 2,460,000 € -4,550,000 €


Performance of our index option recommendations

LBO portfolio No open trades.

Credit QuantSight

15 March 2010

20

Equity-credit trades No open trades.

Credit QuantSight

15 March 2010 21

Credit QuantSight

15 March 2010

22

CDS curve trades No open trades.

Issuer Strategy Hedge ratio Entry date Exit date Current perf Min perf Max perf Start curve End curve

Havas 5y-10y steepener 170% 21-Mar-05 10-May-05 143 372 € 0 € 143 372 € 40 60

Fiat 5y-7y flattener 110% 18-Apr-05 20-Jun-05 97 732 € -76 750 € 106 252 € 30 35

Valeo 5y-10y steepener 187% 25-Apr-05 13-Jan-06 80 797 € -58 155 € 80 797 € 38 44

Arcelor 5y-10y steepener 190% 30-May-05 03-Oct-05 37 245 € -453 € 61 688 € 25 27

Linde 5y-10y flattener 230% 30-May-05 03-Oct-05 -57 920 € -57 920 € 25 488 € 30 32

Havas 5y-10y steepener 150% 31-May-05 26-Sep-05 188 570 € -52 140 € 216 345 € 46 72

SeatPagine 5y-10y flattener 131% 31-May-05 12-Jan-06 -169 945 € -169 945 € 100 076 € 75 127

UBM 5y-10y steepener 195% 11-Jul-05 17-Oct-05 61 425 € 0 € 61 425 € 14 15

WPP flattener 5y-10y flattener 260% 11-Jul-05 17-Oct-05 19 288 € -11 192 € 33 700 € 28 29

Continental 5y-10y steepener 245% 18-Jul-05 24-Oct-05 40 688 € 0 € 56 068 € 20 23

Deutsche Telekom 3y-5y flattener 255% 18-Jul-05 24-Oct-05 28 826 € -4 645 € 29 047 € 15 15

Michelin 5y-10y flattener 290% 25-Aug-05 26-Sep-05 50 167 € 0 € 50 167 € 20 26

Peugeot 5y-10y steepener 230% 25-Aug-05 26-Sep-05 24 917 € -28 833 € 25 258 € 25 20

BT 5y-10y flattener 250% 05-Sep-05 01-Dec-05 -46 080 € -46 080 € 0 € 33 37

Ericsson 5y-10y steepener 225% 05-Sep-05 03-Oct-05 36 798 € 0 € 38 608 € 31 33

Portugal Telecom 3y-5y steepener 210% 17-Oct-05 01-Dec-05 27 198 € 0 € 27 198 € 11 14

GUS 5y-10y steepener 218% 31-Oct-05 10-Feb-06 60 731 € -9 332 € 60 731 € 29 35

Thomson 3y-5y steepener 185% 07-Nov-05 16-Nov-05 57 813 € 0 € 57 813 € 17 28

Thyssenkrupp 3y-5y flattener 220% 07-Nov-05 09-May-06 17 810 € -3 406 € 26 594 € 30 21

BA 3y-5y flattener 235% 14-Nov-05 09-Feb-06 -34 031 € -34 031 € 18 646 € 60 64

HeidelbergCement 5y-10y steepener 175% 14-Nov-05 23-Dec-05 70 605 € 0 € 70 605 € 40 48

Kingfisher 5y-10y steepener 170% 28-Nov-05 19-Jan-06 100 605 € -1 047 € 100 605 € 31 43

Average 38 028 € -25 179 € 63 204 € 31 39


Performance of 2005 CDS curve recommendations

Credit QuantSight

15 March 2010 23

Basis trades

Issuer Strategy Entry Date Exit Date Current Perf Min Perf Max Perf Entry spd diff Exit spd diff Target Stop-loss

Finmeccanica 25 Long bond/long 10y CDS 12-Sep-05 09-Dec-05 -101,440 € -110,420 € 60,270 € 33 39 80,000 € -70,000 €

Lafarge 20 Long bond/long 10y CDS 12-Sep-05 18-Oct-05 -79,895 € -79,895 € 24,540 € 18 25 100,000 € -75,000 €

Peugeot 33 Long bond/long 10y CDS 26-Sep-05 02-Nov-05 106,084 € -61,484 € 106,084 € 56 50 85,000 € -85,000 €

Enel 23 Long bond/long 10y CDS 21-Nov-05 09-Dec-05 118,633 € 0 € 169,839 € 24 17 100,000 € -100,000 €

Suez 23 Short bond/short 10y CDS 21-Nov-05 09-Dec-05 45,127 € -45,619 € 45,127 € 9 12 100,000 € -100,000 €

Alstom 10 Long bond/long 3y CDS 09-Jan-06 26-Jan-06 95,964 € 0 € 95,964 € 52 27 75,000 € -75,000 €

Fiat 11 Short bond/short 5y CDS 23-Jan-06 07-Feb-06 62,749 € -42,170 € 62,749 € 56 32 50,000 € -50,000 €

Compass 09 Long bond/long 7y CDS 06-Feb-06 21-Aug-06 -59,604 € -59,604 € 25,270 € 50 13 55,000 € -55,000 €

NGG 20 Long bond/long 5y CDS 13-Feb-06 24-Feb-06 2,245 € -10,547 € 18,962 € 38 46

Suez 23 Long bond/long 5y CDS 13-Feb-06 24-Feb-06 61,544 € -19,702 € 90,599 € 28 38 70,000 € -70,000 €

Kingfisher 10 Long bond/long 10y CDS 20-Feb-06 11-Jan-07 61,651 € -38,929 € 61,651 € 33 44 50,000 € -50,000 €

BAT 11 Long bond/long Jun-11 CDS 06-Mar-06 18-Jan-07 48,492 € -7,468 € 52,987 € 15 6 45,000 € -45,000 €

Autostrade 14 Long bond/long 5y CDS 09-May-06 07-Jul-06 61,665 € -30,360 € 61,665 € 34 25 60,000 € -50,000 €

Rallye 09 Long bond/ long Mar-09 CDS 22-May-06 23-Jun-06 -27,050 € -27,050 € 32,710 € 24 36 50,000 € -50,000 €

Repsol 13 Long bond/ long 10y CDS 22-May-06 20-Jul-07 104,790 € -36,685 € 147,798 € 1 18 90,000 € -90,000 €

Nuon 14 Long bond/long 10y CDS 29-May-06 25-Jul-07 64,544 € -37,188 € 64,544 € 4 15 75,000 € -75,000 €

LVMH 11 Long bond/long 10y CDS 10-Jul-06 10-Nov-06 68,262 € -7,385 € 68,262 € 7 22 50,000 € -50,000 €

Repsol 14 Long bond/long 5y CDS 02-Oct-06 01-Feb-07 58,730 € -19,400 € 58,730 € 27 18 50,000 € -50,000 €

ABB 11 Long bond/long 3y & 10y CDS 30-Oct-06 06-Feb-07 46,165 € -18,319 € 46,165 € 30 17 40,000 € -40,000 €

Ono 14 Short Bond/Long 1y Short 5y CDS 18-Dec-06 14-Feb-07 235,258 € -17,513 € 235,258 € 286 216 200,000 € -200,000 €

Fiat 11 Long bond/long 5y CDS 05-Feb-07 29-Mar-07 40,410 € -45,760 € 44,220 € 14 4 40,000 € -40,000 €

Rallye 11 Short bond/short 5y CDS 05-Feb-07 11-Jul-07 -124,795 € -124,795 € 51,580 € 107 183 100,000 € -100,000 €

Altadis 15 Long bong/long 5Y CDS 12-Feb-07 15-Mar-07 104,900 € 0 € 104,900 € 8 -7 70,000 € -70,000 €

Imperial Tobacco 13 Long bong/long 7Y CDS 12-Feb-07 19-Mar-07 89,900 € -2,250 € 101,300 € 3 18 60,000 € -60,000 €

ISS 10 Long bong/long Sep-10 CDS 12-Mar-07 12-Apr-07 75,260 € 0 € 75,260 € 15 -8 65,000 € -65,000 €

Telefonica 16 Long bond/ long 5y CDS 02-Apr-07 22-May-07 74,550 € -12,756 € 74,550 € 26 17 55,000 € -55,000 €

Fiat 13 Long bond/ long 5y CDS 27-Aug-07 30-Nov-07 -107,510 € -108,980 € 76,150 € 41 66 100,000 € -100,000 €

Portugal Telecom 17 Long bond/ long 10y CDS 27-Aug-07 30-Jan-08 -151,930 € -1,960,070 € 126,000 € 19 40 150,000 € -150,000 €

TKA 13 Long bond/long Sep-13 CDS 03-Sep-07 02-Nov-07 57,580 € -59,710 € 57,580 € 16 5 60,000 € -60,000 €

DT 11 Long bond/long July-11 CDS 17-Sep-07 22-Nov-07 104,050 € -15,289 € 104,050 € 77 53 90,000 € -90,000 €

TI 11 Long bond/long Jun-11 CDS 24-Sep-07 11-Feb-08 130,867 € -62,551 € 130,867 € 27 -2 90,000 € -90,000 €

Schneider 15 Long bond/ long Mar-15 CDS 01-Oct-07 21-Nov-07 172,290 € -7,400 € 172,290 € 24 -4 120,000 € -120,000 €

iTV 11 Long bond/long Dec-11 CDS 08-Oct-07 09-Jan-08 141,970 € -8,820 € 141,970 € 6 -34 110,000 € -110,000 €

Volvo 17 Long bond/long Jun-17 CDS 15-Oct-07 02-Nov-07 119,280 € 0 € 119,280 € 19 3 90,000 € -90,000 €

Bertelsmann 15 Long bond/long 10y CDS 22-Oct-07 05-Dec-07 -63,943 € -63,943 € 48,307 € 5 11 55,000 € -55,000 €

France Telecom 13 Long bond/long 7y CDS 22-Oct-07 30-Nov-07 -58,544 € -58,544 € 34,593 € 10 22 55,000 € -55,000 €

KPN 13 Long bond/long 7y CDS 22-Oct-07 08-Nov-07 -62,940 € -62,940 € 17,303 € 5 17 55,000 € -55,000 €

TI 19 Long bond/long 10y CDS 22-Oct-07 30-Nov-07 -63,619 € -63,619 € 34,083 € 23 37 55,000 € -55,000 €

Nell 15 Long bond/long 5y CDS 19-Nov-07 28-Nov-07 -107,480 € -107,480 € 0 € 43 -5 90,000 € -90,000 €

KPN 15 Long bond/long Jun-15 CDS 26-Nov-07 16-Jan-08 -122,504 € -130,821 € 4,890 € 27 44 120,000 € -120,000 €

Basell 15 Long bond/long 5y CDS 04-Feb-08 17-Sep-08 -198,630 € -198,630 € 135,621 € 92 574 200,000 € -200,000 €

Altadis 15 Long bond/long 5y CDS 11-Feb-08 14-Mar-08 131,083 € -8,001 € 131,083 € 51 4 130,000 € -130,000 €

Grohe 14 Long bond/long 5y CDS 03-Mar-08 15-May-08 139,642 € -133,204 € 332,611 € 108 -21 130,000 € -130,000 €

Schneider 15 Long bond/long 5y CDS 31-Mar-08 05-Aug-08 -256,408 € -256,408 € 48,555 € 9 57 200,000 € -200,000 €

KPN 13 Long bond/long 5y CDS 07-Apr-08 09-Jun-08 249,282 € 0 € 249,282 € 60 7 220,000 € -220,000 €

TI 13 Long bond/long 10y CDS 28-Apr-08 04-Jun-08 176,646 € -7,528 € 176,646 € 31 -10 170,000 € -170,000 €

Basket Telcos Long bond / long 5y cds 19-Sep-08 02-Oct-08 -757,796 € -757,796 € 0 € 96 173 450,000 € -450,000 €

Basket releveraging Long bond / long 5y cds 03-Nov-08 16-Feb-09 451,310 € -93,369 € 451,310 € 149 86 450,000 € -450,000 €

Basket Long Term long bond / long 10y cds 16-Feb-09 13-May-09 589,185 € -341,265 € 589,185 € 128 92 500,000 € -500,000 €

ISS 14 Long bond / long 5y cds 04-Dec-09 22-Jul-10 55,306 € -61,613 € 96,832 € 200,000 € -200,000 €

Sum 1,801,326 € -5,423,278 € 5,259,470 €


Performance of our basis recommendations

Credit QuantSight

15 March 2010

24

Hybrid trades No open trades in this portfolio.

Credit QuantSight

15 March 2010 25

Long/short CDS trades

Trade Hedge ratio Entry Date Exit Date Current Perf Min Perf Max Perf Entry Diff Exit Diff

Short Seat Pagine vs. X-Over 107% 12-Dec-05 01-May-06 -51,545 € -54,816 € 48,190 € 19 39

Short Commerzbank 10y sub vs. Senior 140% 06-Jun-06 01-Feb-07 129,784 € 0 € 134,524 € 25 15

Long BT vs. HiVol S6 125% 09-Oct-06 27-Jul-07 -76,770 € -76,770 € 57,018 € 11 31

Long Ciba vs. HiVol S6 110% 09-Oct-06 27-Jul-07 -26,620 € -26,620 € 48,439 € 14 14

Long iTV vs. HiVol S6 45% 09-Oct-06 27-Jul-07 -90,658 € -90,658 € 148,666 € 60 32

Long KPN vs. HiVol S6 90% 09-Oct-06 27-Jul-07 -93,020 € -93,020 € 57,483 € 4 -21

Long Lanxess vs. HiVol S6 75% 09-Oct-06 04-May-07 48,733 € -17,020 € 48,733 € 15 24

Long Pearson vs. HiVol S6 145% 09-Oct-06 18-Jan-07 197,550 € -10,984 € 197,550 € 18 -16

Long Telia vs. HiVol S6 125% 09-Oct-06 18-Jan-07 49,323 € -70 € 63,930 € 12 1

Long Wolters vs. HiVol S6 120% 09-Oct-06 08-Feb-07 35,884 € -17,152 € 44,266 € 11 2

Long BAE vs Main S6 100% 23-Oct-06 27-Jul-07 -79,750 € -79,750 € 3,740 € 2 22

Long Hanson vs Main S6 60% 23-Oct-06 27-Jul-07 -86,184 € -86,184 € 45,424 € 16 -5

Long Kaupthing 10y vs. SenFin S6 420% 13-Nov-06 07-Mar-07 -53,108 € -98,030 € 96,804 € 41 29

Long Altadis, Gallaher vs BAT 100% 18-Dec-06 15-Mar-07 67,150 € -21,403 € 67,150 € 14 31

Long OTE vs. Telenor 5y protection 90% 21-Mar-07 18-Jan-08 63,784 € -37,614 € 63,784 € 6 29

Short Kabel vs. Ono and Unity Media 100% 21-Mar-07 24-Apr-07 110,271 € 0 € 110,271 € 15 28

Short Safeway vs. Tesco 270% 02-Apr-07 18-Sep-07 106,063 € -79,675 € 106,063 € 44 43

Short Telefonica vs. TI 75% 09-May-07 05-Feb-08 45,653 € -17,365 € 61,348 € 10 10

Short SES vs. BskyB 100% 29-May-07 30-Nov-07 56,280 € -34,290 € 56,280 € 11 -2

Long BA vs Lufthansa 50% 09-Jul-07 23-Jul-07 64,175 € -1,130 € 64,175 € 35 74

Short Arcelor vs. Glencore 60% 20-Aug-07 14-Dec-07 -88,070 € -93,152 € 0 € 36 5

Short Endesa vs. EDP 100% 20-Aug-07 14-Sep-07 51,630 € -4,500 € 51,630 € 16 4

Short Bertelsmann vs. Wolters 95% 27-Aug-07 30-Nov-07 -56,465 € -58,254 € 5,574 € 1 -13

Short Casino vs. Rentokil 120% 14-Jan-08 28-Feb-08 466,144 € 0 € 466,144 € 24 -59

Short Banco Esperito Santo vs. Barclays 120% 04-Feb-08 27-Mar-08 -129,864 € -129,864 € 10,748 € 8 30

Consumer Basket 11-Feb-08 20-Feb-08 -254,616 € -254,616 € 40,384 € 32 31

Thyssen vs. Glencore 61% 17-Mar-08 19-Mar-08 300,320 € 0 € 300,320 € 95 35

Bear Cyclicals 12-May-08 03-Oct-08 -318,576 € -318,576 € 76,450 € 242 242

Inflation Trade 16-Jun-08 16-Sep-08 -126,231 € -126,231 € 64,418 € 27 4

Long Ahold vs Cadbury 04-Aug-08 23-Sep-08 -177,540 € -177,540 € 45,800 € 59 82

Long CapGemini vs Casino 01-Sep-08 03-Oct-08 -135,386 € -135,386 € 40,411 € 20 61

Short Iberdrola vs Edison 12-Sep-08 13-Oct-08 -60,920 € -60,920 € 28,839 € 33 79

Long Volvo vs Short Peugeot 18-Jan-10 22-Jul-10 207,055 € 0 € 207,055 €

Total 94,476 € -2,201,588 € 2,861,610 €


Performance of our long/short CDS recommendations

Credit QuantSight

CROSS ASSET RESEARCH – QUANTITATIVE ANALYSIS GROUP Global Head of Research Head of Macro Strategy

Patrick Legland Benoît Hubaud (33) 1 42 13 97 79 (44) 20 7676 7168

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Marc Teyssier Sandrine Ungari (33) 1 42 13 55 96 (33) 1 42 13 43 02

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