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June 2009Swiss Institutional Credit Research

Swiss Corporate Credit HandbookRatings � sector trends � market outlook

Head ofGlobal Fixed Income and Credit ResearchDr. Nannette Hechler-Fayd�herbe, Managing DirectorPhone + 41 44 333 17 06nannette.hechler-fayd�[email protected]

Information about other Swiss InstitutionalCredit Research publicationsSwiss Cantons Credit HandbookSwiss Utilities Credit HandbookInstitutional Research Flash � Credit Update Switzerland

Credit Suisse, Global ResearchP.O. Box 300, CH-8070 Zurich

Imprint

Swiss Institutional Credit ResearchThis material is directed at Credit Suisse�s market professionals and institutional clients. Recipients who are not market professionals or institutional clients of CreditSuisse should, before entering into any transactions, consider the suitability of the transaction to individual circumstances and objectives.

Head of Swiss Institutional Credit ResearchJohn M. Feigl, CFA, DirectorPhone +41 44 333 13 [email protected]: Chemicals, pharmaceuticals,building, food

Swiss Institutional Credit ResearchMichael Gähler, CFA, VPPhone +41 44 333 51 [email protected]: Industrials, utilities, media

Swiss Institutional Credit ResearchFabian KellerPhone +41 44 333 13 [email protected]

Swiss Institutional Credit ResearchDaniel Rupli, VPPhone +41 44 333 13 [email protected]: Financials, retail, real estate, public sector

[email protected]

Internetwww.credit-suisse.com/research

Intranet (for employees only)http://research.csintra.net/institutional

Editorial deadline22 May 2009

Picture sourcesMartin Stollenwerk / Nicholas Rigg, Getty Images / Jonathan Kitchen, GettyImages / Photodisc / Geberit AG / Rieter AG

Credit Suisse | June 2009 2

Swiss Corporate Credit Handbook


Credit Suisse I June 2009 3

Table of contents

Imprint 2 ABB (CS: Low A, Stable) 40Summary 4 Adecco (CS: Mid BBB, Stable) 42White Papers: 9 AFG (CS: Low BBB, Negative) 44 When the VCP Mix starts falling apart 9 Alpiq (CS: High A, Stable) 46 Everything comes to those who can wait 12 Axpo (CS: Low AA, Stable) 48 Cash is king: The need and ability to refinance 16 Bâloise (CS: Low A, Stable) 50 Impairments: Goodwill under pressure 19 BKW (CS: Low AA, Stable) 52 Dwindling economy weighs on pension fund deficits 21 Bobst Group (CS: Mid BBB, Negative) 54 To notch or not to notch? 23 Bucher Industries (CS: High BBB, Stable) 56The Swiss franc bond market 25 CKW (CS: High A, Stable) 58Credit Suisse rating methodology 27 Clariant (CS: High BB, Stable) 60Trends by sector 29 Coop (CS: Low A, Stable) 62 Banking 29 Edipresse (CS: Low BBB, Stable) 64 Building Materials 30 EGL (CS: Mid A, Negative) 66 Chemicals 31 EMS Chemie (CS: Low A, Negative) 68 Electrical Utilities 32 Energiedienst (CS: Low A, Stable) 70 Food 33 EOS (CS: Mid A, Stable) 72 Industrials 34 Forbo (CS: Mid BBB, Stable) 74 Insurance 35 Geberit (CS: High BBB, Stable) 76 Pharmaceuticals 36 Georg Fischer (CS: High BBB, Negative) 78 Real Estate 37 Givaudan (CS: High BBB, Under Review) 80 Retailing 38 Glencore International (CS: Mid BBB, Stable) 82Glossary 134 Hilti (CS: High A, Stable) 84Disclaimer/Disclosures 135 Holcim (CS: Mid BBB, Under Review) 86 Jelmoli (CS: Mid BBB, Stable) 88 Lindt & Sprüngli (CS: High A, Stable) 90 Lonza (CS: Mid BBB, Stable) 92 Migros (CS: High A, Stable) 94 Nestlé (CS: Mid AA, Stable) 96 NOK (CS: Low AA, Stable) 98 Novartis (CS: Mid AA, Stable) 100 PSP Swiss Property (CS: Low A, Negative) 102 Raiffeisen Switzerland (CS: Low AA, Stable) 104 Rieter (CS: Low BBB, Negative) 106 Roche (CS: Low AA, Stable) 108 Schindler (CS: High A, Stable) 110 Sika (CS: Low A, Stable) 112 Skyguide (CS: AAA, Stable) 114 SRG SSR idée suisse (CS: Mid A, Stable) 116 Swisscom (CS: Mid A, Stable) 118 Swiss Life (CS: High BBB, Stable) 120 Swiss Re (CS: Low AA, Negative) 122 Syngenta (CS: Mid A, Stable) 124 UBS (CS: High A, Stable) 126 Unique Flughafen Zurich (CS: Mid BBB, Stable) 128 Valora (CS: Low BBB, Stable) 130 Zurich Insurance (CS: High A, Stable) 132



Aim of the Swiss Corporate Credit Handbook We are pleased to present this new edition of the Swiss Corporate Credit Handbook. This study examines the creditworthiness of the largest Swiss corporate bond issuers on the capital market. It also encompasses a range of borrowers that are not covered by the international credit rating agencies. Using a standardized methodology, we assess the business profile, financial profile and the outlook for each company and assign each one a credit rating. We also examine the characteristics, market trends and prospects for selected industries. The Credit Handbook additionally provides general facts and figures about the Swiss bond market, with a particular focus on the market for Swiss corporate bonds. For the first time, we have also included "White Papers" discussing topics such as refinancing, volume-cost-price mix, impairments, structural subordination, and mergers & acquisitions, in order to provide the reader with a deeper insight into selected subjects within the corporate finance world.

The goal of the Credit Handbook is to shed light on the credit standings of Swiss issuers in the CHF capital market through structured assessments of individual companies and sectors. The Credit Handbook is thus aimed at all investors and financial market participants who desire detailed information regarding the current state and development of Swiss capital market borrowers� creditworthiness.

This edition of the Swiss Corporate Credit Handbook features credit profiles for 47 companies. The comprehensive credit analysis of each company is primarily based on financial statements for FY 2008 and, where available, for the first quarter of 2009.

Global corporate credit quality is deteriorating at a high pace Whereas corporate credit quality profited in recent years from a sound economic environment, resulting in an improvement in the credit quality of a variety of corporates all over the world across almost all sectors, momentum has changed and credit quality is deteriorating. This was also reflected in the significant widening of credit spreads in all sectors as a result of the lower credit quality. CDS reached the highest level in the fourth quarter of FY 2008 as a result of Lehman's collapse and the further deterioration of credit quality, as well as a dramatic reduction in trading volumes. However, differences among industries were recognized, with cyclical sectors such as financials,

building materials or automotives suffering the most. Recent turmoil in the financial market has not only resulted in the need for banks to raise capital and to a larger extent seek bailouts from governments, but also in a sharp deterioration of credit quality around the globe.

In 2008, 125 companies under the coverage of S&P defaulted, representing 1.7% of total issuers compared to 0.4% a year before, thereby affecting debt worth USD 430 billion (see Figure 1). This reflects a significant increase over the 24 issuers who defaulted in 2007, affecting only a total of USD 8 billion in debt. Of the aforementioned 125 defaults, 24 were rated investment-grade and 101 speculative grade. The total amount of debt affected was USD 144 billion due to Lehman's collapse, which is the highest figure ever. S&P expects this number to increase in 2009, given the economic recession and, as a result, the further weakening credit metrics of corporate issuers. The US speculative-grade default rate is expected to rise to an all-time high of 14.3% by March 2010. Back in 1991, the rate stood at 12.5%. A first insight into the continuation of the worsening credit quality was seen in the further acceleration of the corporate default rate. Through mid-April 2009, 92 companies defaulted, affecting debt worth USD 244 billion and representing three-quarters of the 125 defaults recorded throughout 2008.

With regard to rating changes, Moody's revealed a similar trend in terms of corporate credit quality with downgrades and negative outlooks surpassing upgrades and positive outlooks by far. In 2008, only 3.9% of companies were upgraded by Moody's whereas 16.7% were revised downward. While the upgrade ratio was clearly below the long-term average of 8.3%, the downgrade ratio in 2008 surpassed the long-term average of 12.3%, which underpinned the negative trend. From a rating-class point of view, investment-grade issuers were slightly more resilient against negative rating pressure than speculative-grade issuers throughout 2008 but they, too, experienced an overall deterioration in their ratings and/or outlook. The bottom was reached in Q4 2008, when the upgrade-downgrade ratio hit a record low of 0.07, which reflects just how badly the quarter was in terms of corporate credit quality.

Summary

Figure 1

S&P historical default statistics

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Total debt (r.h.s.) Default rateIG default rate SG default rate

Source: S&P, Credit Suisse

Figure 2

Rating changes over the last 12 months

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-9

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6

2006/2007 2007/2008 2008/2009

Upgrades Downgrades

Source: Credit Suisse



Taking a closer look at our coverage universe over the last 12 months, we see that 11 companies were downgraded by at least one notch, while no companies were upgraded (see Figure 2) � a trend we have never observed before. The unfavorable development reflects the aforementioned rapid deterioration of the global business environment. The downgrades were primarily the result of a weaker business performance with a negative impact on cash flow generation, indebtedness and thus credit metrics.

Table 1 displays a rating overview of the Swiss companies analyzed, indicating the CS credit ratings and, where applicable, the current ratings by S&P and Moody�s.

How the financial turmoil ended in a global recession and impacted Swiss corporates, particularly in Q4 2008 In summer 2007, the first signs of a potential subprime crisis occurred, with some hedge funds and banks indicating an ease in demand for securitized and subprime-related products. Whereas Freddie Mac already reported writedowns related to subprime exposure in H1 2007, many banks revealed large losses on mortgage-related products in the second half of 2007. January 2008 was dominated by investment banks reporting large losses related to their trading activities in securitized products and highlighting the increasing market pressure, as well as the first signs of tighter lending in the interbank market. Hence, the Fed addressed the issue with an emergency rate cut of 75 basis points and another 50 basis points to 3.0% within just a week. JP Morgan took over Bear Stearns in March 2008 as a result of the latter's large trading losses and inability to raise enough external capital. This was followed by another rate cut by the Fed. The financial crisis spread increasingly to Europe, with several large banks being affected. Iceland received an emergency loan facility from Nordic central banks to shore up the krona and avert an economic collapse after the currency tumbled as much as 26% against the Euro within less than 5 months. In the summer, Ireland faced the first recession since 25 years and the UK reported the highest unemployment rate since 1992. The peak of the crisis was reached when Lehman declared bankruptcy in September and the Fed took control of AIG through an USD 85 billion bailout. The easing in trading activities was reflected in a drop in volume of credit derivatives, (which had skyrocketed in previous years), together with significantly wider credit spreads and a drying up of bank lending activities. Within a short time, earlier inflation fears were swept off the table and the Fed, together with the ECB and other central banks, addressed the crisis with another coordinated rate cut. The SNB reacted to the global crisis, which also started to affect the domestic economy, with four rate cuts in Q4 2008 to a target range of 0.0%�1.0%. In October 2008, the US senate approved the USD 700 billion financial rescue legislation and doubled cash sales to USD 900 billion, together with further plans to unfreeze short-term lending markets as

the credit crunch deepened. In line with the US governmental aid, the European nations committed EUR 960 billion to bail out banks. In mid-October 2008, the three largest banks of Iceland, which had twelve times as much debt as the size of Iceland's economy, were nationalized resulting in a 77% plunge of the national stock market after a three-day suspension. UBS, the largest Swiss bank was bailed out by the government through a USD 59 billion rescue package. As a result of the global financial crisis, the economy entered the deepest recession since the Great Depression. In November 2008, Europe fell into the first recession in 15 years, while the last month of the year was dominated by a coordinated rating downgrade by S&P affecting 12 large banks. GM and Chrysler were the first big corporates to receive governmental aid through multibillion dollar loans. At the beginning of 2009, US manufacturing figures dropped at the fastest pace since 1980 and European manufacturing slumped at the highest level ever, thus signaling a deepening recession. When the first companies started to report their FY or Q4 2008 results, it was clear how hard the financial turmoil and the recession had hit global corporates around the globe. Jobless rates in the US rose to a 16-year high in February 2009, followed by the highest rate in 25 years the month after. In the meantime, the US government launched an economic stimulus package totaling USD 838 billion. At the beginning of May 2009, losses related to the subprime crisis totaled USD 1,400 billion followed by capital increases of USD 1,131 billion, and caused a total of approximately 310,000 job cuts. It should be noted that this only includes financial companies, and that the current recession has already caused job cuts and losses across the entire corporate sector, as reflected in the deteriorating credit quality.

Taking a closer look at Switzerland, nearly all sectors were negatively affected by the rapid deterioration of the global economy, primarily in Q4 2008. As a result of the increasingly challenging economic conditions, most companies have focused on cost savings and restructuring programs in order to adjust capacities to the lower level of demand. Furthermore, most corporates increased their focus on liquidity.

In the industrial sector, most companies, particularly those linked to the global automotive industry (e.g. Rieter and Georg Fischer) faced a severe drop in demand in Q4 2008 and thereafter, which resulted in substantial overcapacities. Accordingly, sales, profitability and cash flow generation deteriorated significantly, thereby putting pressure on credit metrics and ratings. Despite the initiation of several restructuring and liquidity protection measures, there are currently no signs of a recovery in FY 2009. As a result, the sector has faced several negative rating actions: Rieter was downgraded by 3 notches to Low BBB with a Negative outlook while the outlook for both Georg Fischer and Bobst was changed from Stable to Negative.

Figure 3

Financial turmoil � historical timeline

Merrill reports USD9.4bnwrite-down

JPM reports USD9.4bn write-down

Citi reports USD9.8bn loss

Merrill reports USD18.0bn write-down

Fed cuts rate by 75bp


Citi reports USD13.9bn write-down


SEC bans naked short selling


Lehman declares bankruptcy

Fed to control AIG in USD85bnbailout

Goldman and GE raise USD10bn and USD15bn

Iceland stock -77% after 3-days halt

Rate cut by Fed, ECB, central banks

UBS bailout USD59bn

Europe falls in first recession in 15yrs

Fed commits USD800bn to unfreeze lending

12 banks lowered by S&P

Chrysler and GMget USD13.4bnloans

US Manuf. shrinks fastest since 1980

Euro Manuf. shrinks fastest pace ever

BoE cuts rate the lowest since 1694

UK economy shrinks most since 1980

GM seeks USD16.6bn aid, 47k jobs cut

Highest US unemployment rate in 25 yrs

UK economy contract most since 1979

ASM in bps

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Merrill reports USD9.4bnwrite-down

JPM reports USD9.4bn write-down

Citi reports USD9.8bn loss

Merrill reports USD18.0bn write-down





SEC bans naked short selling


Lehman declares bankruptcy

Fed to control AIG in USD85bnbailout

Goldman and GE raise USD10bn and USD15bn

Iceland stock -77% after 3-days halt

Rate cut by Fed, ECB, central banks

UBS bailout USD59bn

Europe falls in first recession in 15yrs

Fed commits USD800bn to unfreeze lending

12 banks lowered by S&P

Chrysler and GMget USD13.4bnloans

US Manuf. shrinks fastest since 1980

Euro Manuf. shrinks fastest pace ever

BoE cuts rate the lowest since 1694

UK economy shrinks most since 1980

GM seeks USD16.6bn aid, 47k jobs cut

Highest US unemployment rate in 25 yrs

UK economy contract most since 1979

ASM in bps

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Source: Bloomberg, Credit Suisse



In line with the aforementioned slump in demand � particularly in

the fourth quarter � the building products sector was heavily affected by the global recession as seen with the increased market challenges in 2008. We have seen companies entering the market turmoil with relatively high debt levels after recent acquisitions and an extensive CAPEX program, thus posing increasing rating challenges, given the expected near-term deterioration of cash flow generation capacities. While AFG has already issued new equity to somewhat stabilize its credit metrics, we could see Holcim being exposed to similar challenges owing to its large amount of debt in combination with a decreasing cash flow generation capacity.

Although organic growth held up quite well throughout the year in the food industry, many branded food companies were exposed to declining demand in the second half of 2008, combined with a high level of commodity prices. Nestlé benefited from price increases implemented throughout the year, while we have seen Lindt & Sprüngli reporting lower profitability margins than in the previous year due to lower volumes and high commodity prices.

The retail industry benefited from an ongoing sound demand, which, however, flattened out in Q4 2008. Given the intensifying competition, Coop and Migros both reported negative inflation on its sale prices, but were able to offset this through efficiency gains and higher volumes.

The financial turmoil dramatically impacted the worldwide banking industry, resulting in deteriorating financial profiles. UBS was bailed out by the SNB in October 2008 and the weakening financial profile, in combination with record net new money outflows, resulted in a lower rating. In contrast, Raiffeisen Switzerland expanded its market share in the domestic residential mortgage and savings business, but also experienced weaker profitability margins.

Whereas North America and some countries in Europe were exposed to a large depreciation in real estate prices, Switzerland's real estate industry braved the headwind and reported an unchanged solid demand, not only for retailing but also for office rentals. However, revaluation gains were smaller than in previous years, showing a first indication of an ease in demand, which we expect to last through the year. In particular, pressure on office rentals could increase. The global financial crisis not only affected the banking industry, but tumbling equity and credit markets also impacted the insurance sector through the performance in their investment portfolios. Across the board, equity was negatively impacted by unrealized mark-to-market losses, but there were differences among Swiss insurers. Swiss Re was particularly negatively affected due to its large exposure to securitized products, resulting in a rating downgrade and a negative outlook. It should be noted that Swiss insurers were largely able to maintain their existing good market position and revealed a relatively stable trend within their core businesses.

Both Novartis and Roche reported a strong set of FY 2008

results, which surpassed an already solid worldwide pharmaceutical market growth rate of around 5%. However, rating downgrades resulted from M&A activities, with Novartis acquiring 25% of Alcon with the intention of further acquiring the remaining 52% from Nestlé for a total of USD 37 billion, and Roche finally completing the Genentech acquisition for USD 47 billion earlier this year.

In the specialty chemicals sector, we have seen large volatilities and the companies we cover experienced a very double-edged 2008. In particular, the automotive, construction, textile, leather, paper, and electronic sectors confronted the industry with the most challenging environment since more than thirty years, which negatively affected not only Clariant, as seen in the first downgrade to sub-investment-grade within our coverage universe, but also Ciba, EMS Chemie and Sika within our coverage universe. Syngenta in contrast benefited from an ongoing sound demand in the agrochemical sector.

In contrast to more cyclical sectors, electrical utilities proved their rather limited vulnerability to economic conditions. The companies' cash flow generation capacity remained sound and most issuers continued to enjoy healthy balance sheets and strong liquidity positions. The slow but continuous consolidation of the sector continued, with the merger of Atel and EOS to Alpiq and the acquisition of EnAlpin by Energiedienst.

Rating outlook As of end-May 2009, 36 of the 47 companies covered in the Swiss Corporate Credit Handbook have a Stable rating outlook, while seven have a Negative outlook and two companies are Under Review (with negative implications). There are no issuers with Positive rating outlooks (see Figure 5).

Most of the Negative rating outlooks are associated with the industrial, chemical and building materials sectors, where most of the downgrades during the last 12 months also occurred. The Negative outlook for Rieter and Georg Fischer primarily reflects the severe drop in demand in the global automotive industry and the related overcapacities, pressure on margins, lower cash flow generation, the need for restructuring measures and the resulting pressure on their credit profiles. The Negative outlook for Bobst reflects the drop in global demand in the packaging industry and the related subdued profitability and cash flow generation capacity. The same applies for EMS Chemie. The Negative rating outlook for EGL mainly reflects the company�s financing requirements for its expansion into Italy. We have a Negative outlook for PSP Swiss Property due to the relatively high vacancy rate and its exposure to office rentals in the current economic environment. Swiss Re's Negative outlook is due to the group's still large exposure to securitized products and the related highly volatile markets.

Figure 4

Rating distribution for companies covered by Credit Suisse

Number

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AAA High AA Mid AA Low AA High A Mid A Low A High BBB Mid BBB Low BBB High BB

2007 2008 2009




We have placed the ratings of Holcim and Givaudan Under Review, given the continued deterioration of credit metrics and subdued cash flow generation capacity, which is projected to continue in FY 2009, thereby raising the question whether the companies will be able to improve their credit metrics over the cycle to defend their ratings.

Looking ahead, we expect to see continued pressure on the ratings of several companies, resulting in further negative rating actions. At the same time, we do not foresee a substantial improvement in corporate credit profiles and hence rating upgrades within the next months.

The unfavorable trend in global economic conditions is likely to persist for the time being, thus pressuring global demand and negatively affecting corporate revenues, profitability, cash flow generation, capital structure and credit ratings. Given the different exposures to the trend in global economy, we expect a divergent development of the sectors. While utilities, pharmaceuticals and the food industry (including food-linked retailers) should be able to maintain their overall solid credit metrics, we believe industrials, chemicals and the building materials sectors are likely to continue suffering. In addition, as a result of the historically low market capitalization of equity markets, acquisitions can no longer be ruled out. However, we believe that, in most cases, such acquisitions will be financed in a way that will only marginally impact corporate creditworthiness.

Michael Gähler, Daniel Rupli

Figure 5

Rating outlook 2%

79%

15%

4%

Positive Stable Negative Under Review




Table 1: Rating overview of Swiss issuers

Company CS rating CS outlook Changes since June 2008 S&P Moody's

ABB Low A Stable A�, Stable A3, Stable

Adecco Mid BBB Stable BBB, Negative Baa2, Negative

Arbonia Forster Group Low BBB Negative n.r. n.r.

Alpiq High A Stable Former Atel n.r. n.r.

Axpo Low AA Stable n.r. n.r.

Bâloise1 Low A Stable A�, Stable n.r.

BKW Low AA Stable n.r. n.r.

Bobst Group Mid BBB Negative Outlook changed from Stable to Negative n.r. n.r.

Bucher Industries High BBB Stable n.r. n.r.

CKW High A Stable n.r. n.r.

Clariant High BB Stable �1 notch BBB�, Negative Ba1, Stable

Coop Low A Stable n.r. n.r.

Edipresse Low BBB Stable �1 notch, outlook changed from Negative to Stable n.r. n.r.

EGL Mid A Negative n.r. n.r.

EMS Chemie Low A Negative �1 notch, outlook changed from Stable to Negative n.r. n.r.

Energiedienst Low A Stable n.r. n.r.

EOS Mid A Stable n.r. n.r.

Forbo Mid BBB Stable n.r. n.r.

Geberit High BBB Stable BBB+, Stable n.r.

Georg Fischer High BBB Negative Outlook changed from Stable to Negative n.r. n.r.

Givaudan High BBB Under Review Rating placed under review n.r. n.r.

Glencore International Mid BBB Stable BBB�, Stable Baa2, Negative

Hilti High A Stable n.r. n.r.

Holcim Mid BBB Under Review �1 notch, rating placed Under Review BBB, Stable Baa2, Stable

Jelmoli Mid BBB Stable Rating affirmed n.r. n.r.

Lindt & Sprüngli High A Stable n.r. n.r.

Lonza Mid BBB Stable n.r. n.r.

Migros High A Stable A, Stable n.r.

Nestlé Mid AA Stable AA, Stable Aa1, Stable

NOK Low AA Stable n.r. n.r.

Novartis Mid AA Stable AA�, Stable Aa2, Stable

PSP Swiss Property Low A Negative n.r. n.r.

Raiffeisen Switzerland Low AA Stable n.r. Aa1, Stable

Rieter Low BBB Negative �3 notches n.r. n.r.

Roche Low AA Stable �2 notches AA�, Stable A2, Stable

Schindler High A Stable n.r. n.r.

Sika Low A Stable �1 notch A�, Stable n.r.

Skyguide AAA Stable n.r. n.r.

SRG SSR ideé suisse Mid A Stable n.r. n.r.

Swiss Life2 High BBB Stable �1 notch BBB+, Stable n.r.

Swiss Re Low AA Negative �1 notch, outlook changed from Stable to Negative A+, Stable A1, Negative

Swisscom Mid A Stable A�, Stable A2, Stable

Syngenta Mid A Stable A, Stable A2, Stable

UBS High A Stable �1 notch, outlook changed from Negative to Stable A+, Stable Aa2, Stable

Unique Flughafen ZH Mid BBB Stable Outlook changed from Positive to Stable BBB+, Stable n.r.

Valora Low BBB Stable n.r. n.r.

Zurich Insurance3 Low A Stable �2 notches AA�, Negative A1, Stable

n.r. = not rated 1Insurance Financial Strength (IFS) rating. This implies a BBB+ rating for senior bonds issued by Bâloise (note: the bonds are not rated by S&P) 2Insurance Financial Strength (IFS) rating. Swiss Life Holding rated BBB�, Stable 3Insurance Financial Strength (IFS) rating. Senior debt ratings one notch lower (i.e. A+, Stable at S&P and A2, Stable at Moody's) to reflect subordination of senior debt holders to policyholders. Source: S&P, Moody�s, Credit Suisse



Who's stolen the margins? The continued deterioration in macroeconomic conditions over the past couple of months has started to put a tremendous squeeze on the margins of many companies, this holding especially true for Q4 2008 results. After several years of good demand and overall solid margins that found good support from price increases in the face of challenging raw material costs, markets have started to change the rule of the game. Between 2003 and the beginning of 2008, companies set their focus on increasing prices to offset the negative impact of raw material prices, and hence managed to offset the negative margin impact pretty well in most cases. Volume growth was good on average, driven by global economic growth and widespread demand for a wide range of products and services. The question management was facing related to how much volume decline they would give up in favor of increasing prices � a measure companies had implemented to pass on substantially risen raw material prices and input costs. During this period, companies were able to record improving margins, and hence strengthen cash flow generation capacities. In line with this development, many companies were able to build substantial amounts of liquidity on their balance sheet, recovering from the challenging market environment experienced between 1999 and 2002 that resulted in softened capital structures, pressured credit profiles, and in some cases, rating downgrades. However, the strengthened capital structures and the abundance of liquidity available at low interest rates and virtually any amount, prompted many companies to change the financial policy they had chosen following the challenging period between 1999 and 2002. Expansion investments, acquisitions, dividend payments and share repurchases offered ways to steer through the relatively comfortable growth period between 2003 and the beginning of 2008. However, and this came as a surprise to nearly all management teams, investors and other market participants, the environment changed its face a lot sooner and more negative than expected and caught companies on the wrong foot that worked on assumptions of an ongoing good economic environment and hence did not prepare for a downturn early enough by ensuring sufficient financial flexibility to their balance sheet. This said, companies with a high operating leverage will likely not find themselves in a position to strengthen their credit profile fast enough as their margins, and therefore the cash flow generation capacity,

were shaken to bits faster and a lot more severe than anticipated despite ongoing price increases implemented during 2008.

Based on the developments seen in the specialty chemicals sector, in particular Clariant (Low BBB, Neg), we will explain why margins deteriorated the way they did in Q4 2008, what to expect for 2009 and why the implemented price increases are not sufficient to offset the margin crunch, and hence slump in their cash flow generation capacity and credit profiles. We note that the chosen sector is by far not the only industry experiencing the same margin deterioration and operational challenges but rather offers an excellent example, in our view.

The Volume / Cost base / Pricing Mix (VCP Mix) � The impact of operational leverage� When looking at the cost structure of a company, we differentiate between the cost of goods sold (COGS) that reflect that directly allocable product costs and the operating cost base that is necessary to run operations such as R&D, marketing, wages, SG&A and other operating costs.

While the former is pretty much driven by demand, and hence tends to be quite volatile depending on the economic environment, the latter is a fingerprint of the company�s strategy, and hence tends to be relatively sticky, or plainly said, fixed. The aim of every company is thus to increase the gap between its sales and the overall costs consisting of direct product costs and the operating cost base, the result being EBITDA. The wider the gap, the more profitable a company operates, as shown in Figures 2 and 3 where the sensitivity of volume and price changes can be seen impacting the EBITDA margin. The operating Cost base (or fixed cost base) is set to cope with a certain amount of sales volumes and growth, expressed as capacity (in line with production facilities recorded under the property, plant and equipment on the balance sheet). The aim of a company therefore is to maximize capacity utilization with high sales thereby exceeding its operating cost base by as much as possible. As companies� sales grow and they gain market share, they grow their operating cost base and production, sales, R&D and marketing capacity accordingly. While management often initiates cost reduction and efficiency enhancement programs to try to optimize their operating cost base, these moves tend to be very limited in terms of the overall incurred costs, underpinning the sticky nature of the cost

When the VCP Mix starts falling apart

Figure 1 VCP Mix

Pricing

OperatingCost Base

Volumes

VCP Mix

Volumes as a function of demand and capacity (PP&E)

Pricing as a function of pricing power and input costs

Strategy driven

Capacity utilizationvs.

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Figure 2 Analyzing the breakeven EBITDA margin

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Margin increase due to:- Higher volumes- Higher sales prices- Lower input costs- Reduced operating costs

Sales

Positive EBITDA margin

Negative EBITDA margin

Total costs

Operating cost base

0

2000

4000

6000

8000

10000

12000

14000

0

100

200

300

400

500

600

700

800

900

1000

1100

1200

1300

1400

1500

Sales volumes

CHF

m

0%

5%

10%

15%

20%

25%

30%

EBIT

DA m

argi

n

EBITDA Margin with 5% sales price increase (r.h.s.) EBITDA Margin with 10% raw material price increase (r.h.s.)Sales Total costsOperating cost base EBITDA Margin (r.h.s.))

Margin decline due to:- Lower volumes- Lower sales prices- Higher input costs- Increased operating costs

Margin increase due to:- Higher volumes- Higher sales prices- Lower input costs- Reduced operating costs

Sales

Positive EBITDA margin

Negative EBITDA margin

Total costs

Operating cost base




structure that remains very much in place with relatively limited changes (R&D cuts, headcount adjustments, marketing and sales scaling, etc.) independent of the economic environment.

Volumes: Contrary to this, volumes of purchased raw material and input costs vary with demand development, and thus are very sensitive to economic growth, or in the less favorable case, collapsing demand. As demand rises, so does the overall sales volume. The higher the volume turnover or sales, the more unadjusted gross profit is generated. This, as outlined above, is needed to drive the coverage of the operating cost base, and hence maximize the resulting unadjusted EBITDA. In times of heavy market deteriorations as seen in Q4 2008 and very likely to be witnessed thereafter, volumes collapse and hence so does the unadjusted EBITDA, given an ongoing high and sticky operating cost base. Pricing: In times of stable raw material prices and input costs, the unadjusted gross margin remains flat in the absence of efficiency gains or direct cost structure changes. However, in times where raw materials and input costs are high, and thus result in higher prices for the same volumes as was the case between 2005 and 2008, the unadjusted gross margin can be squeezed considerably, and hence pose a major challenge to a company.

In the case of specialty chemicals companies like Clariant, raw material price levels rose by as much as 9% and more in a quarter compared to a year earlier. Assuming that these raw material costs account for some 50% of sales, a 10% increase results in a 5% decline of the unadjusted gross margin in the absence of any sales price increase that could help to offset this negative impact. Companies affected by these raw material challenges and pressured margins, targeted to implement several price increases during 2005 and 2008 with the aim to offset the negative margin pressure. While a couple of companies were able to undertake this step without any volume trade-in due to their excellent market position, others had to carefully weigh the benefits of price increases and the potential impact on lower volumes arising from clients not willing to incur higher prices and thus switching to other suppliers with no or lower price increases. In the example above where raw material prices increased by 10%, the company would have to implement a 5% price increase to fully offset the negative margin pressure.

The VCP Mix in the case of Clariant Clariant chose to counter fight its raw material price challenge by favoring higher prices instead of volume growth at any cost � a strategy the company named �Price over Volume�. In Figure 4, the development of its price and volume growth development is presented between 2003 and 2008. At the end of 2003 and well into 2004, the sales price development was negative while volumes were very good as a result of overall good growth in the global economy. While the unadjusted gross profit benefited from this strong volume growth, it

suffered from rather weak and negative pricing. As raw material prices started their staggering rally, with crude oil climbing from one high to the next, Clariant was not able to afford to follow its volume strategy any longer if it wanted to stabilize its margins. Between 2004 and 2005, Clariant undertook some efforts to implement price improvements at the cost of lower, in some quarters even negative, volume growth. Following this, period volume growth improved again, supported by ongoing good demand and economic growth. Pricing, however, was flat during the same period, and hence the company was not able to pass on its higher costs to customers but rather had to try and find other cost saving measures to shelter its margins as good as possible at a time when raw material prices proved to be a real challenge. In November 2006, Clariant announced an overall strategy change, declaring its focus on price implementation combined with an ongoing focus on increasing its operating efficiency and cost structure, a strategy named �Price over Volume�. The result was pretty much a reversal of what Clariant had seen at the end of 2003 and the whole of 2004. While prices were increased very slowly and modestly in 2007, the pace increased in 2008, with Q4 2008 being the quarter with the highest increase. On the other hand, volumes declined at the same time, turning negative for the whole of 2008. While part of the volume decline can undoubtedly be attributed to the weakening of the overall demand in H2 2008, this does not explain the whole volume decline.

Clariant hit the peak in Q4 2008, a quarter recording the highest price increase, on the one hand, while experiencing what nobody had anticipated to materialize at this speed and vigor on the other, a collapse of volumes by 20%. Q1 2009 proved to be even more disastrous, with pricing only increasing by some 6%, while volumes literally collapsed by 25% YoY with a severe decline of its unadjusted EBITDA margin as shown in Figure 4. What are the implications in the case of Clariant? The VCP Mix Clariant had tilted in favor of pricing (P) to offset high raw material prices while accepting lower volume (V) growth. At the same time, the company fostered a continued operating cost base (C) improvement by measures such as head count reduction to align it with sales and operating capacity. In times of high raw material prices and overall solid economic growth with according demand, the VPC Mix Clariant chose was the right one to choose, in our view. Margins potentially could have benefited from flat or slightly positive volume growth, while giving in with a somewhat softer pricing stance. While one could argue that raw material prices recorded substantially lower levels in H2 2008 with a positive impact on companies like Clariant, one ought to keep in mind that this reduced cost pressure takes some 90 days on average until it shows a positive effect on margins. Hence, the last quarter of 2008 continued to record negative margin pressures from high raw material prices.

Figure 3 Margins (M) = Volumes (V) + Cost Base (C) + Pricing (P)

-10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10%

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gin

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e cha

nge

Margin negativeMargin positive

Margin posit

ive

Margin neg

ative

-10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10%

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-10%

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Margin negativeMargin positive

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Table 1: VCP Mix illustration

Case Flat Volume Price Cost savings

Raw material

Stress

Sales 100.0 105.0 105.0 100.0 100.0 79.5

Volume 5% -25%

Price 5% 6%

COGS 50.0 52.5 50.0 50.0 52.5 41.6

Price 5% 11%

Gross Profit 50.0 52.5 55.0 50.0 47.5 37.9

Margin 50% 50% 52% 50% 48% 48%

Operating cost base

35.0 35.0 35.0 33.3 35.0 34.7

Cost savings 5% 1%

EBITDA 15.0 17.5 20.0 16.8 12.5 3.2

Margin 15% 17% 19% 17% 13% 4%




However, and this is crucial in our view, the sooner and heavier-

than-expected slump in the global economy and demand hit volumes far worse than imagined. In the face of the more favorable raw material cost environment and the negative volume development, we expect Clariant to announce a major shift of its strategy in favor of volume growth gains, while giving in on pricing. Failure to regain volumes would, and this is expected for H1 2009, result in an insufficient coverage of its operating cost base that cannot be adjusted to lower volume levels soon enough, in our view. We do not see any real opportunity for Clariant to continue with its pricing strategy as this would have to reach substantial levels to compensate for the threatening loss of volumes. We therefore expect Clariant to announce, as it already did at the end of January 2009, an increased focus on adjusting its capacity levels and operating cost structure in a phase of dwindling economic growth and demand, while tilting its VCP Mix in favor of volume and, to a far lesser extent, pricing. As this takes time, we expect EBITDA margins to suffer considerably in H1 2009 and possible even longer, thus reducing its cash flow generation capacity and in effect facing continued rating pressure.

Conclusion After a period of good growth driven by solid economic market developments, on the one hand, and high raw material prices, on the other, where companies had to place their focus on implementing price increases to offset the negative margin impact of higher raw material costs while enjoying good volume growth, markets are now facing a ferocious, faster than expected and extremely challenging change in structure. While the right VCP Mix was relatively easy to assess during 2003 and the beginning of 2008, management teams were taken by surprise in Q4 2008 when volumes evaporated, resulting in devastating declines, resulting in unadjusted gross profits that fell short of covering the operating cost base despite a continued sales price increase. With Q4 2008 a new era has started, in which companies will have to find and implement a new VCP Mix to weather their margins as good as possible in a storm that is likely to prove heftier and potentially longer than anticipated. Implementing a wrong VCP Mix, taking too long to implement or ignoring the market development and capacity needs will cause an unseen level of credit profile deterioration and with this not only heavy rating downgrades, but in some cases might also trigger defaults.

John Feigl

Figure 4 Price / Volume development Clariant

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

31.3

.200

330

.6.2

003

30.9

.200

331

.12.

2003

31.3

.200

430

.6.2

004

30.9

.200

431

.12.

2004

31.3

.200

530

.6.2

005

30.9

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531

.12.

2005

31.3

.200

630

.6.2

006

30.9

.200

631

.12.

2006

31.3

.200

730

.6.2

007

30.9

.200

731

.12.

2007

31.3

.200

830

.6.2

008

30.9

.200

831

.12.

2008

-150

-100

-50

0

50

100

150

USD

/bbl

Price development Volume development Unadj. EBITDA marginGlobal real GDP (change YoY) Crude oil (r.h.s)

Source: Bloomberg, Company data, Credit Suisse



When M&A is luring, despite market twists and gloomy outlooks Undoubtedly, the current market conditions are harsh and the outlook is very gloomy. While the financial crisis, starting well into 2007, seemed to have been decoupled from any spillover into the real economy for some time, reality caught up with these beliefs sooner and more severely than the market anticipated. The speed and extent to which demand and orders shrunk were not only unforeseen, but also unthinkable up to this point. The increasing uncertainties related to the US housing market and the mounting pressure on financials caused global indices and thus the market capitalization of companies to plummet to lows, bond spreads and CDS to reach extremely high levels, and investors to pull out of the financial markets, where possible, to forego further losses. With economic growth dwindling and comparisons being made to past downmarkets, Q4 2008 was clearly one of the harshest market environments for companies, with sales volumes literally breaking away and idle production capacities mounting across most sectors. As a result of these developments, and more and more company results being released showing the impact Q4 2008 had on the FY 2008 results, the capital markets are adjusting their view on companies' value, and hence multiples, thereby reflecting a considerably lower growth outlook.

Having a closer look at the global merger and acquisition (M&A) market, with highs seen during 2006, 2007 and the beginning of 2008, the question will now be how companies will react in these uncertain and highly challenging markets. While many companies sailed into the market storm with high debt levels built up from an aggressive shareholder policy, high investments, substantial working capital volumes and, last but not least, heavy footprints from past acquisitions that are now turning out to have been very pricy, some companies have entered the door to the considerably harsher market environment with very comfortable balance sheets and ample liquidity.

As shown in Figure 1, the M&A market has been very active over the past few years, with global M&A volumes reaching a record level in 2000, seeing global transaction amounts reach USD 3,833 bn and even topping this level in 2007 with some USD 4,800 bn, following years of lower volumes. Despite the increasingly difficult market conditions and the rapid rise in uncertainty during 2008, global M&A volumes reached a very strong USD 3,355 bn. What caused M&A volumes to reach such extraordinary heights before literally collapsing

in the last quarter of 2008? While we clearly recognize the very good overall environment of the global economy during 2003 and the beginning of 2008, which turned companies very optimistic and hence prompted them to take a more aggressive financial policy by fueling their top-line growth through acquisitions, this does not tell the full story. In our view the huge growth in M&A was especially driven by: 1) unseen levels of funding available at very attractive interest costs, and 2) financial investors (e.g. private equity) joining strategic investors to boost the number of acquired companies across sectors, as well as the transaction size and, last but not least, the multiples paid. Figure 1 shows the percentage of global M&A transaction volume driven by private equity houses. In 2001, for example, the overall percentage of private equity deals amounted to 2% of the global M&A volume. This figure increased substantially in 2006 when the share reached 15% and peaked in 2007 when private equity transactions accounted for nearly 20% of the global M&A volume, equivalent to some USD 894 bn. Cheap funding was available in nearly unlimited amounts and dazzling leverage, which allowed private equity investors to leverage their equity multiple fold. The active and very often very aggressive offers made by the private equity investors caused transaction multiples, on top of already high trading multiples, to skyrocket. Acquisition premiums reached up to 100% of the market capitalization in some cases. Compared to the past, strategic investors often found themselves confronted with either having to withdraw from bidding or to pay substantially higher prices and multiples than initially intended. In the latter case, this quite often caused companies to stretch their balance sheets and face negative rating actions. This development continued up to the last quarter of 2008, when M&A volumes dropped considerably despite far lower market capitalizations prompted by plummeting investors' expectations for corporate earnings. Vanishing trust and increasing uncertainty not only caused stock markets to collapse, but also cut the funding stream as the financial system threatened to fall apart. This completely new environment reshaped the M&A market by fueling activity through restructuring transactions on the back of the crisis, such as government-funded transactions related to financials. The question following the turbulent developments towards the end of 2008 and beginning of 2009 is how will the M&A market continue given the gloomy outlook of the global economy, the substantially lower availability of funding, and last but not least, the continued low market capitalizations reflecting the immense uncertainties?

Everything comes to those who can wait

Figure 1 Global M&A volumes

in USD bn

0

1000

2000

3000

4000

5000

6000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Apr2009

0%

4%

8%

12%

16%

20%

24%

Total volume Private equity buyout volume


Figure 2 Softening multiples across the landscape (P/E)

0x

5x

10x

15x

20x

25x

30x

35x

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E

Chemicals Building materials & CementIndustrials Pharmaceutical

0x

5x

10x

15x

20x

25x

30x

35x

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E

Chemicals Building materials & CementIndustrials Pharmaceutical

Source: Datastream Credit Suisse



Just a short stop or heading into retirement? After M&A activity fell to a low in 2003 and climbed to a stunning high in 2007, followed by a decline in 2008, it is impossible to judge where the global M&A market will head in the short term, a pick-up to past levels however not being considered. In our view, there are some strong factors that deviate from past ones, resulting in a considerably better base for the global M&A market than was the case in the past and hence could well help to drive M&A growth, despite a continued gloomy economic outlook. We believe this growth will, however, be very different to what we have been seeing in the last couple of years. The number of companies turning into acquisition targets will very likely increase substantially, in our view, due to 1) a dramatically increasing amount of companies facing severe financial challenges questioning their future in the worst case 2) the need to divest non-core assets that were held on to during times of good economic growth 3) the need to adjust production capacities 4) the increasing globalization that allows for considerably more cross-border transactions and, last but not least, 5) substantially lower and attractive market capitalizations of most companies. Considering the aforementioned factors it is very difficult to assess the size of transactions we are likely to see going forward. While there will very likely be a large number of small-to-medium-scale transactions, we would be very surprised not to see a vast amount of large to mega-sized deals, such as the ones witnessed in 2008 when several deals were announced relating to restructurings in the financial sector. Before that, megadeals were mostly driven by the market's confidence and the continued trend towards industry concentration. While the downturn in 2001 and 2002 did not put many large-scale companies into financial distress, the current downturn will very likely result in some large-scale industry-shaping transactions.

While, in our view, the number of likely acquisition targets will increase as elaborated above, we do not expect the number of potential acquirers to show similar growth due to 1) the massive reduction in transaction funding, both in terms of volume and costs (a key driver during the period of 2004 to the beginning of 2008); 2) many potential acquirers being involved in steering their own businesses through the challenging market environment and hence refraining from undertaking any transaction that could turn out to be too big a burden; 3) the inherent uncertainties relating to the business model of the acquisition target in the market environment and its outlook; 4) the fact that private equity investors have been hit and are facing further hits from their past acquisitions or are unable to obtain the same funding volumes as in the past when they were even able to announce large-scale deals with only limited equity content. Why if, on the one hand, we expect the number of acquisition targets to increase and, on the other hand, we expect the number of acquirers to decrease, do we nevertheless expect to see continued

growth in the global M&A market? Does any one specific factor support this expectation? Adding together the reasons outlined for the supply of acquisition targets while, on the other hand, assuming a reduced number of acquirers joining in the heated bidding process will result in exactly one thing: lower bid premiums and hence modest multiples that go hand in hand with the overall weakened market capitalizations. In our view, this is the turning point for some companies that refrained from participating in any bidding process during the last couple of years when multiples were sky high and the risk of overpaying was latent in many transactions. These companies maintained a very conservative financial policy by retaining cash, reducing debt, focusing on efficient production processes and ensuring back-up funding and thus impressive financial headroom and acquisition power when needed. For this group of companies, a new phase in the M&A market has started, where multiples and thus transaction prices tend to reflect the underlying value to a larger extent, in our view, thereby reducing the risk of overpaying and hence, subsequent impairments.

When prudence starts paying off and opportunities are queuing up� In times when liquidity was abundant and companies did not have to worry about how to fund their operational and strategic decisions, some companies remained very prudent, in our view. Despite having ample opportunities to participate in a bidding process for acquisitions, they avoided doing so when the transaction amounts and hence multiples were considered too high. These strategic buyers did not lose sight of the underlying value and followed their own acquisition guidelines in a highly disciplined manner. Instead of fueling growth both organically and externally, these companies ploughed back their generated cash flows, thereby increasing their financial headroom and flexibility under their assigned ratings. When capital markets started to collapse and worries arose concerning market liquidity and funding availability, these companies were prepared to weather the storm by being able to access necessary debt funding through credit facilities and their cash cushions, while enjoying ample firing power for interesting opportunities. Contrary to other companies, the more prudent stance of these companies allows them to take a different approach in the increasingly challenging market environment. They view a downturn as a phase to increase their market share and thus differentiate themselves from their peers by undertaking acquisitions at a later stage. They shift into "acquisition mode" by reaping the benefits the market environment has to offer. As the number of acquisition targets increases due to the ongoing economic development and more difficult financing and refinancing challenges, as well as a likely increase in assets being put up for fire sales, previous prudence is starting to increase the firing power, with lower bids being able to acquire more in the current markets with lower

Figure 3 Changing M&A landscape

Market capitalizations

Funding costs

Private Equity investors

Credit Profiles

Funding availability

Economic environment ++ --

++ ---

+++ ---

++ --

+++ --

+ --

Economy

Funding

Companies

Pre 2009 Post 2009

M&A landscape change

Increasing opportunities

Market capitalizations

Funding costs

Private Equity investors

Credit Profiles

Funding availability

Economic environment ++ --

++ ---

+++ ---

++ --

+++ --

+ --

Economy

Funding

Companies

Pre 2009 Post 2009

M&A landscape change

Increasing opportunities


Figure 4 Syngenta: Building and maintaining financial flexibility

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005 2006 2007 2008

0

1,000

2,000

3,000

4,000

5,000

US

D m

Adj. net debt (r.h.s.)Adj. FFO / Net debtThreshold adj. FFO / Net debt

Financial headroom

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005 2006 2007 2008

0

1,000

2,000

3,000

4,000

5,000

US

D m

Adj. net debt (r.h.s.)Adj. FFO / Net debtThreshold adj. FFO / Net debt

Financial headroom

Source: Company data, Credit Suisse



capitalizations. Companies we view as showing strong prudence during the last M&A phase include ABB (Low A, Stable), Syngenta (Mid A, Stable), Geberit (High BBB, Pos), Schindler (High A, Stable), Nestlé (Mid AA, Stable � after having the rating cut from AAA to Mid AA, we think the company has very prudently managed its financial flexibility to maintain shareholder focus, M&A capacity and ample cash headway), just to name a view. Given the demonstrated prudence of these companies and the fact that acquisition opportunities are likely to increase in the near future, we expect to see some transaction announcements going forward at substantially lower multiples than in the last couple of years and with a lower risk of impairment charges.

Prerequisites for the new M&A environment � the SSS M&A triangle While we do not expect the key fundamental drivers of the M&A market to change substantially, we believe that the approach companies are taking when screening the market for acquisition opportunities has and will continue to change to a large degree. Undertaking acquisitions in a good market environment with good investor sentiment and ample access to funding is very different from undertaking acquisitions in a downmarket, when opportunities arise sooner than expected, capital markets do not offer ample funding any longer, and decisions have to be taken rapidly. We believe the following factors differentiate the current M&A cycle from previous ones. Companies wanting to undertake successful acquisitions in the current downmarket must ensure that the following key points are considered in particular (see Figure 5): ! Speed: While the timespan between announcing and closing

transactions used to take some 130 days between 1995 and 2007, the time duration fell drastically to about 70 in H1 2008 and down to a record 30 days in H2 2008, according to Dealogic. Corporates have realized that successful deal closure requires even more speed in harsh and volatile markets. This means fast decisions, thorough and targeted due diligence on key issues in addition to warranties that are used to cover minor issues.

! Stakeholder management: Given the previous strategic discussions to prepare for potential transactions that match a company's criteria. In particular, management needs to form realistic projections and expectations regarding the growth and margin potential, and guide the board of directors accordingly. In many cases, management will have a tough time convincing the board of directors in terms of the altered financial outlook in a market environment like the current one. Expectations have to be managed. This will take on completely different dimensions

compared to the last couple of years, when expectations regarding revenue growth and profitability were sky high and thus drove valuations at times to unhealthy levels. Given these inherent uncertainties regarding acquisitions and the considerably reduced external funding availability, a larger proportion of deals are likely to be financed through equity. This, however, only further underlines the importance of investor and board of director support for mostly very short time periods where acquisition opportunities arise and in some cases the very limited time to react (fire sale of assets, etc) a company will be facing a lost cause if it does not have the backing of its key stakeholders to undertake an acquisition. In such a market environment, there is little time to build an internal consensus among the board of directors. This should rather take place in:

! Surveillance: While the current market environment is clearly

very harsh and challenging for many companies and their management teams, it also offers an unseen source of opportunities and considerable value in the form of assets of distressed company portfolios or even fire sales of entire companies. The successful companies in this environment will be the ones that have already identified which assets / companies they consider an ideal fit and therefore worthwhile bidding for. The question will not be how to approach an acquisition target or detect signs of willingness to divest, but rather which companies are likely to face difficulties that they cannot handle without undertaking a portfolio reshuffle or even company sale. These opportunities could arise sooner than expected and hence need to be addressed well beforehand by asking which companies will likely encounter difficulties and hence will be forced to take action? Which assets of these companies are of interest and meet the set acquisition criteria? How can management structure a transaction that is attractive and offers fast handling, thereby unleashing the full value offered by the situation?

Conclusion With the beginning of the current downturn, the face of M&A has changed considerably compared to the period from 2003 to the beginning of 2008. While not only the global economy and market capitalizations have suffered considerably in the last couple of months, with no immediate relief in sight, so has the availability and costs of funding. As a result of the gloomy economic development and slowing top-line growth and market outlook, many corporates are witnessing pressure on their ratings, while private equity investors who actively participated in the M&A market during 2004 and 2007 are virtually unable to do so any longer due to dried up funding sources. Despite this harsh environment, we expect the global M&A market to experience sound transaction volumes, both in terms of number and size, given that a number of companies have entered the downturn market well prepared and with ample financial headroom. These companies have chosen to refrain from undertaking acquisitions in the past when valuation multiples were high. In their view, the current market environment offers them what they have been looking for at considerably lower prices and hence more value for money, and with less competitive bidding in the absence of both private equity investors and significantly fewer strategic buyers. In many cases, their conservative financial policies and financial headroom allows them to grasp acquisition opportunities arising from the challenging market environment in the form of fire sales of assets or even companies. The companies who have entered the current down market with ample financial headroom will have to adjust to the speed required to grasp such market driven acquisition opportunities and line up stakeholder support and backing when opportunities materialize, as this might require additional financing through equity. In addition, potential acquisitions require an ongoing and very diligent surveillance

Figure 5 Drivers of M&A success in a down market

M&A success

drivers in a down market

Speed Stakeholder Management

Opportunity Surveillance

Financial Headroom

Financial Headroom

M&A success

drivers in a down market

Speed Stakeholder Management

Opportunity Surveillance

Financial Headroom

Financial Headroom




of opportunities beforehand to identify which companies and assets could encounter challenges and be put up for sale. Finally, management must be prepared with the necessary deal structure and options in such circumstances. In our view M&A will not suffer from the current market environment, but rather experience a completely new change of face, with opportunities often arising sooner than expected.

John Feigl



The need for refinancing Liquidity is the key factor in the daily operations of companies. Whereas profitability and capitalization might show strong metrics, the ability to generate enough cash to meet short-term obligations, such as working capital requirements, maintenance capital expenditure and maturing short-term debt, is crucial to run the business. It is important for companies to address their liquidity and, as such, their financing situation and different funding options well in advance, and that their debt maturity profiles are well diversified over the cycle. The risk of being exposed to a substantial amount of maturing debt can cause considerable difficulties and limit funding sources. Particularly due to the difficult environment, such as the current recession in combination with deteriorating credit quality and a cautious outlook, the need for refinancing and, hence, the ability to generate sufficient cash either through operating activities or through refinancing activities require highest attention.

The need for refinancing can be derived from various areas, such as working capital requirements, upcoming debt maturities, shareholder focus, capital expenditures and merger-and-acquisition (M&A) activities. While companies have the ability to delay M&A activities, capital expenditure and, to some extent shareholder programs, the need to meet financial obligations and working capital needs in the short run is a key factor.

On the other hand, companies also have different possibilities or sources for raising cash. Cash and cash equivalents on hand, cash generation through operating activities and the ability to draw committed unused credit lines are the easiest ways to gain access to cash. In addition, companies can also generate cash through the disposal of assets, through capital increases or debt issuances. Over the past few months, we have seen many companies using a variety of the aforementioned instruments to meet their refinancing needs, which we will highlight in this report.

The impact on refinancing in a weakening economic environment with deteriorating credit quality The currently deteriorating economic trend and, as such, the weakening trend of corporate credit quality is returning the refinancing theme into focus. The major concern of debt investors is that companies will not be able to meet their debt obligations � in particular interest payments and repayments of the principal. The downward spiral starts turning as a weakening credit trend generally leads to pressure on corporate credit quality. The worse the credit quality becomes, the more risk adverse investors will behave or the greater the risk premium they will request. The higher the risk premium, the more expensive the refinancing will be.

The sentiment has changed over the last few months and a booming economy has turned into a global recession. Where companies surfed on the expansion wave, the focus has now returned to profitability measures, efficiency gains and cost-saving programs. As already seen with the publication of the FY 2008 financial results, most of the companies were unable to repeat the strong results seen over the last few years. In particular, the fourth quarter of 2008 has proved to be one of the most difficult in recent years. Not only was the deterioration very fast, but also very hard. Some of the companies exposed to more cyclical industries such as Automotives, Basic Materials and Chemicals, lost more than 20% of the previous year's volumes and revenues in Q4 2008 versus the prior year. Given the difficult environment and volatile commodity prices, many companies experienced difficulties finding the perfect match for their VCP mix (volume, cost, price mix). A lot of firms were unable to address cost

cuts and efficiency measures fast enough, which resulted in weaker credit metrics and a deteriorating credit quality. Hence, many companies experienced operating losses, negative operating cash flow generation, rating downgrades and or changes in the outlook.

The aforementioned need for refinancing in combination with the deteriorating credit quality will make it more difficult for companies to get access to capital. Investors are requesting a higher risk premium for the increase in associated risk. The risk is a combination of the currently weaker credit quality and the expectation of a further deteriorating trend. However, recent refinancing activities in the capital markets, as seen with many companies in our coverage universe (e.g. Roche, Nestle, Swisscom, Hilti, Coop, etc.) have shown that well-rated companies with strong business and financial profiles are able to refinance through external sources as investor demand remains at a relatively sound level.

In addition, central banks across the globe have taken dramatic actions and reduced interest rates to a record low level over the last few months. As such, the total refinancing costs for companies could have been somewhat cushioned. However, the lower the corporate credit rating and the more cyclical the industry, the more expensive the refinancing will be. Credit spreads hiked over-proportionally in more cyclical sectors and lower rating categories than in more stable industries and/or higher rating categories (see Figure 1).

The crux of the matter is that, given the current economic downturn, companies not only face the problem of maintaining revenues and profitability at a satisfying level, but also the increased difficulty of refinancing.

The dynamic square of refinancing To best address the refinancing issue, companies have to take a closer look at their ability to generate cash and to refinance. Management has to decide what the best allocation within the dynamic square of refinancing will be (see Figure 2).

Cash and cash equivalents on hand in combination with cash flow generated from operating activities clearly shows the most preferred possibility of refinancing by the company, as well as by the investors, as this reflects the ability of a company not to rely on external sources. The ability of self supply also has mostly a positive impact on the company's credit rating and is also the cheapest way of refinancing. Many companies currently carry large cash positions on their balance sheets as they were either able to pre-finance upcoming

Cash is king: The need and ability to refinance

Figure 1 Historical credit spreads

ASW spreads in bps

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Bank Insurance ChemicalPharma Retail Utility




maturities or were able to profit from the booming economy over the recent years and as such have built on cash reserves. If, however, a company needs its existing cash position to finance potential negative free cash flow, this will most likely weaken its net debt position and thus its credit metrics.

Another source of refinancing is the issuance of new debt. We have seen a couple of sizable refinancing activities in the corporate sector, indicating that companies are still able to access the credit market despite the current difficult economic environment and the financial crisis, which also resulted in a drying up of liquidity in the entire banking system. However, the new issuances came mainly from higher-rated companies in more defensive sectors and at substantially wider spreads than seen in previous years. Even in the investment-grade universe, we have seen companies having to pay credit spread premiums of up to 600 basis points and more for new issuances. This was due to the coincidence of the pressure of liquidity preservation in combination with a deteriorating outlook as a result of being exposed to a cyclical industry. We do not expect risk premiums to decrease over the upcoming months as we think corporate credit quality is more likely to deteriorate further. As such, access to capital markets will remain difficult as companies tend to face further rating downgrades, which increases the difficulty of refinancing in 2009 and also potentially in 2010.

Over the last few years, many companies have renewed their committed credit lines. Not only were they able to extend the maturity of the line, which is usually 5 years for a committed syndicated revolving credit facility, but companies were also often able to increase the total amount and to loosen or even remove financial covenants. As such, many companies still have a cushion left today for potential liquidity squeezes due to debt maturities, existing commitments under capital expenditure or shareholder programs. However, if companies start to draw on their existing credit lines, the liquidity buffer decreases which will not only affect credit quality but also hamper the confidence of investors in terms of future refinancing ability. In addition, banks are operating with harsher lending criteria going into a recession to optimize their exposure to weak credits, which will potentially affect weaker-rated companies with upcoming committed credit line maturities. We expect companies to start drawing more often on existing credit lines, as these often offer cheaper funding possibilities as a result of the dislocated credit markets. However, the companies have to find the right balance between maintaining a liquidity buffer for emergency scenarios and cheap refinancing.

To strengthen credit metrics and capitalization, another source of refinancing is the issuance of equity capital. During the boom phase, companies initiated large share buyback programs to optimize capitalization and to increase shareholder returns. The firms were able

to profit from a sound environment, which allowed them to use their existing cash and free cash flow to increase shareholder focus. Going into a weaker economy and given the expected deterioration of corporate credit quality, these companies now have to rethink their focus on shareholders. Many companies have already suspended their existing buyback programs to either strengthen or at least not weaken the capitalization. Dividend payments have been reduced or even cancelled due to lower earnings and a cautious outlook. This will optimize free cash flow generation and, as such, will help to address the issue of refinancing. We have also seen many companies issue new shareholder capital to improve their capitalization. In FY 2008, this was largely done in the banking and to some extent in the insurance sector as a result of the turbulences in the financial markets and the need to maintain capitalization, which is a leading indicator of investors' confidence. In recent weeks, we have also seen corporates increase capital, which has helped to rebalance credit metrics. As a result, the companies were either able to maintain their existing credit ratings or improve the outlook, which generally increases the confidence of investors. This could be a disadvantage for the shareholders in the short run, but should benefit all investors in the long run.

If a company's credit quality weakens in such a way that there is not enough cash or operating cash flow generation in the short run, and equity and debt issuance are not possible or just too expensive, its last source of refinancing is the disposal of assets. If firms have the ability to dispose of non-core assets which do not fit perfectly into their current business profile, they can generate cash and improve their credit metrics and capitalization, and can also simultaneously improve their business profile. In some cases, companies might even consider selling a core and profitable business unit to generate enough cash to reshape the remaining units and bring them back on track.

Most of the corporates in our coverage universe have addressed their refinancing needs well In our coverage universe, we have seen various companies meeting their refinancing needs by using a variety of the previously highlighted options of the dynamic refinancing square over the last few months.

Roche finally managed to acquire Genentech for a total amount of USD 46.8 bn in March 2009. Operating in a less cyclical industry and having maintained a strong credit quality in the past, Roche was able to fully refinance this acquisition through a combination of existing cash on hand and the issuance of debt. A record total issuance volume of approximately CHF 44.0 bn proved that the demand for high credit ratings and stable industries still exists. Roche did not have to rely on credit facilities provided through banks, which is usually the case for large transactions, and which further underpins the company's good credit quality and, hence, its access to the capital

Figure 2

The dynamic square of refinancing

Cash on hand

Equity issuance

Asset disposal

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Figure 3

Refinancing sources in the economic cycle

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market. However, owing to the weakening credit metrics, which resulted in rating downgrades from the public agencies, the credit spreads widened compared to prior years.

One example of a classic refinancing of upcoming maturities was Swisscom, which issued a record CHF 1.25 bn bond maturing in 2014. This issuance partially refinances the CHF 2.75 bn term loan maturity due in 2011. Hence, the company benefits from the still sound demand for quality issuers in the domestic bond market. The five-year tenor also reflects a maturity bracket which is quite well demanded by investors and, as such, the spread premium was relatively moderate but significantly higher than the bonds issued in FY 2007, despite the unchanged solid financial and business profile of Swisscom.

Nestle recently increased its leverage as a result of a large CHF 25.0 bn share buyback program. Although the company issued some smaller longer-dated bonds, the bulk of the company's debt maturity profile is exposed to short-term financing. Although this does not currently reflect the diversification investors are looking for, Nestle proved to be able to roll over its short-term maturities or repay them to some extent, due to its strong credit quality in the less cyclical food industry. In addition, the company reduced its indebtedness by disposing of 25% of its Alcon stake to Novartis for CHF 4 bn.

In contrast, Swiss Re came under immense rating pressure as a result of the weaker credit metrics driven by the extensive losses occurred in investments. The loss of investor's confidence was reflected in a significant drop in the share price and largely widened credit spreads. Swiss Re was downgraded and the outlook for the company and sector has turned negative due to its still significant exposure to volatile financial markets as a result of risky investments. To win back investors' confidence and to maintain its current credit ratings, the company issued equity capital to improve capitalization ratios. This should help to regain investors' confidence and keep current ratings at a relatively good level, which should then help to maintain the ability to access the capital market and to potentially refinance upcoming bond maturities at relatively fair-priced levels.

ABB, on the other hand, has continuously improved its financial profile over the past few years, resulting in a strong net cash position. As such, ABB is in a strong position to pay back maturing debt with cash on hand to further optimize its interest costs as potential debt issuance might be costly, despite the solid rating, as the company is subject to late cyclical end-markets. We highlight, however, that ABB could be dependent on the capital markets if the company decides to target acquisitions as communicated earlier, but we do not see any large acquisition materializing in the short run, given the weak economic conditions and the company's primary focus on maintaining its own strengths rather than exposing the group to unnecessary expansion risk in an economic downturn.

In the White Paper we published separately on 14/04/2009, we provided an overview of the current refinancing situation for the companies under our coverage. We have listed the refinancing needs resulting from upcoming debt maturities for this year and for 2010, the capital expenditure program for this year, the expected dividend payouts and potential share buybacks in FY 2009, expected M&A activities for the current year and other financing needs (i.e. restructuring related costs not covered under operating cash flow). The sum of the listed refinancing needs for this year is compared with the financing sources such as cash on hand and committed unused credit lines at end-December 2008, expected operating cash flow generation for FY 2009, and refinancing activities already accomplished YTD. Hence, the difference of the needs and the sources shows whether the company is subject to any refinancing needs this year. We also acknowledge that some companies could still access the debt capital market although our calculation does not show immediate refinancing needs, as they are certainly maintaining a given amount of operating cash, as well as a liquidity cushion under the existing credit lines. The overview revealed that most of the companies in our coverage universe are still in good shape and are not subject to immediate refinancing needs. However, the longer the

recession holds, the more important it will be for companies to address potential upcoming refinancing needs at a very early stage and possibly take proactive steps to either refinance early or even issue equity to improve credit metrics and to win lasting investor confidence. Lower-rated companies tend to be more exposed to refinancing risk given their limited financial flexibility. This could cause a potential liquidity squeeze in combination with being in a lower rating category and exposed to cyclical end-market in a economic downturn, which could result in a loss of investors' confidence and/or even higher credit spreads as seen today. Some companies might even be dependent on a capital increase to rebalance credit metrics, as we have already seen with Rieter, for instance.

Another company which could sell assets is Clariant, which recently announced the split of its Textile, Leather and Paper segment (TLP) into three independent profit centers. Hence, the former TLP segment is structured in such a way that Clariant will be able to dispose of one or more of the three profit centers, which could optimize the company's liquidity situation and thus its capitalization and credit metrics. Having three separate units clearly makes the single unit more attractive for potential buyers, in our view.

Conclusion The right balance of companies' refinancing activities will be crucial going into an expected long and deep recession. As we have seen, there are various possibilities to refinance, which all have different impacts on a company's liquidity situation and its credit metrics and, as such, its credit ratings. A well-balanced debt maturity profile should help to avoid exposure to concentration risks. Credit lending standards tend be stricter than in previous years, as the banks are also trying to optimize their credit risk exposures. As such, the companies exposed to volatile and cyclical end-markets or firms with weaker credit metrics and credit ratings will be more exposed to the difficulty of refinancing. Higher-rated companies in more stable end-markets still seem to have good access to capital markets, as we have seen over the last few months via some large debt issuances. Carrying a good amount of cash on the balance sheet not only helps to maintain investors' confidence, but also helps firms to be in a flexible position in terms of refinancing. If the company already has the cash on hand, it is least dependent on the other four sources of refinancing, especially in the short run. Once again cash proves to be king � particularly in a difficult economic environment.

Daniel Rupli



Unfavorable market environment Over the past few years, the global M&A market was in very good shape stemming from the favorable economic environment as well as the high levels of liquidity supported by very low funding costs. This development led to a sharp increase in transaction sizes and prices followed by high goodwill positions on the acquirer's balance sheet (e.g. Swisscom due to the acquisition of Fastweb or Givaudan following the acquisition of Quest in 2007).1 However, the ongoing dwindling economy combined with the softened growth perspective resulted in a decrease in many companies' market value. If this unfavorable market environment remains at a persistently low level, goodwill impairments are likely going forward and will likely weaken companies' income statement. Nonetheless, impairment bookings are non cash items; driven by lower net results, they negatively affect a company's capital structure, which leads to a decline in equity, which, ceteris paribus, results in an increase of leverage. However, even more important are the negative implications for future growth expectations and particularly lower cash flow generation capacity of the respective cash generating unit (CGU). Additionally, impairments also signal management's ability to efficiently allocate the company's resources. Overall, impairment charges negatively affect a company's credit profile and therefore the goodwill position must be closely monitored, especially in an unfavorable economic environment.

Growth expectations � an important goodwill driver As mentioned above, the favorable market environment led to higher transaction prices and thus increased goodwill positions on the acquirer's balance sheet. Apart from low funding costs or a shortage of asset sellers on the market, the acquirer's growth expectation for the target company is one of the most important transaction price drivers. This does not come as a surprise as many expansion strategies are growth-driven, particularly at companies operating in mature markets, which continuously have to look for new growth opportunities. In a favor-able market environment or trend-driven markets (e.g. dotcom bubble in 2001), growth rates tend to be overestimated, which leads to higher transaction prices, resulting in increased good-will positions. Therefore, growth assumptions are very important in a transaction evaluation process as well as in the different valuation methods, especially the popular discounted cash flow method (DCF).

Impairment methodology Since 2005, the accounting principle IFRS prohibits the amortization of goodwill but requires at least an annual impairment test. The companies are free to choose any testing date during the year and must calculate the impairment value at this specific date for the respective CGU in the future. Nevertheless, the occurrence of a triggering event may call for an impairment charge during the year. Generally, impairment charges are booked in the income statement if the carrying value is higher than the according fair value. The accounting standard allows companies to choose between the "Value in Use" or the "Fair Value less Costs to Sell" valuation method for determining the according fair value; however, the higher of each valuation method must be used for the impairment test. Under the "Value in Use" method, the reporting standard requires using the DCF method for calculating fair value based on management cash flow estimates for a maximum of five years. In contrast, the "Fair Value less Costs to Sell" approach is based on

1 See "Everything comes to those who can wait" on page 12.

market valuation methods such as multiples of comparable transactions; however, due to the lack of specific market data, the accounting standard allows the DCF method, where a sale to a third party is assumed.

Not surprisingly, many companies applied the "Value in use" approach in 2008 which relies on management's own assumptions, whereas the "Fair Value less Costs to Sell" method is driven by the market, and would therefore likely lead to lower valuations due to the financial market deterioration.

Sensitivity of impairment valuation methods Both impairment valuation methods are highly sensitive to the assumptions incorporated when calculating the appropriate fair value, particularly when using the DCF method (see Figure 1). Firstly, growth rates play an important role in this annuity calculation method, specifically when calculating the terminal value. In light of this high leverage potential of growth rates, the standard requires that the indefinite growth rate should not exceed the average market growth rate or the expected inflation rate of the specific country, whereby the accounting principle suggests either a constant or declining growth rate (within our coverage, the reported growth rate assumptions in 2008 stood between 1% and 3%). Secondly, the company's weighted cost of capital (WACC), especially the cost of equity, is another important variable in the DCF calculation (for the "Value in Use" method, a pre-tax WACC should be used). For instance, a higher weighted cost of capital following the in-crease in market risk premiums due to market deterioration will result, ceteris paribus, in a lower fair value of the specific as-set. However, market risk premiums and cost of equity are normally derived from long-term historical values and therefore short-term volatility is smoothed out. Nevertheless, an increase in the weighted cost of capital could also appear from higher financial costs resulting from increased refinancing costs, assuming a constant tax effect, leverage and cost of equity.

Impact on credit metrics As illustrated in Figure 2, impairment charges negatively influence the company's income statement, resulting in a softened equity position and therefore higher leverage. For example, Ciba's H1 2008 result was affected mainly by goodwill impairments for its Water & Paper Treatment segment of CHF 595 m due to the considerably changed

Impairments: Goodwill under pressure

Figure 1 Impairment testing

Higher of�Fair Value

less Costs to Sell�and �Value in Use�Book Value

Goodwill

Goodwill impairmentcharged over IS

Fair Value less Costs to Sell Value in Use

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� Market driven� Multiples or comparable trans.� DCF method allowed

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market dynamics and expected growth outlook for the paper business. Overall, Ciba's accumulated goodwill on the balance sheet declined from CHF 1.5 bn to CHF 799 m, leading to deterioration in Ciba's equity. This negative development combined with an increase in unadjusted net debt due to insufficient cash flow generation, resulted in higher unadjusted leverage of 48.7% (FY 2007: 36.7%). As a consequence, the company evaluated strategic options for the paper chemical business. Al-though impairment charges are non-cash items and therefore do not directly influence cash flow generation capacity, they provide a clear indication about management's future cash flow generation expectation, and thus negatively influence the company's credit profile. Furthermore, the aforementioned increase in leverage and softened capital structure may breach existing covenants or pressure refinancing conditions which could be very painful, particularly in such an unfavorable mar-ket environment. Especially companies with a high goodwill to equity ratio are extremely sensitive to potential impairment charges. As shown in Figure 3, it is interesting to see that for some companies in our coverage, the goodwill position accounts for more than 50% of adjusted equity, whereby Swiss-com's goodwill position even exceed its adjusted equity. This illustrates that the company's stakeholders are mainly invested in intangible assets which could, in a worse case scenario, turning out to be worthless. Furthermore, it highlights how vulnerable the company's capital structure would be in case of a full impairment of goodwill and therefore shows the importance of the future development of the according asset.

Conclusion Goodwill accounting changed considerably following the dot-com bubble in order to prevent companies from blowing up their balance sheet with huge intangible positions and smoothing their income statement with the linear amortization of goodwill. Despite the positive effects of the amendments to accounting principles, they simultaneously increased the volatility in companies' financial figures due to unexpected year-over-year impairment charges.

We expect the ongoing deteriorating economy and the cur-rent unfavorable economical outlook to likely lead to further impairment charges in the future. Nevertheless, we suppose that many companies have already incorporated the aforementioned effects, such as a lower indefinite growth rate or lower cash flow generation capacity, into their impairment valuation to some extent. Additionally, the aforementioned changes in goodwill accounting and the attendant sensibility for this topic likely led to a more conservative asset valuation not only by the specific company but also by the auditors. Furthermore, the deterioration in fair value must be considered to be sustainable as the appropriate impairment valuation is calculated by the DCF method over a three to five-year period and this smoothes or even ignores short-term market volatility. Nevertheless, impairment

charges are strong signals for a decline in the future cash flow generation capacity which negatively affects the company's credit metrics. Additionally, it immediately softens the company's capital structure and this could potentially breach some covenants related to credit lines and debt instruments, among others, which could have severe negative impacts on the company's debt refinancing situation, particularly in the current market environment where refinancing conditions are highly unfavorable for most issuers. Moreover, companies with a significant goodwill to equity ratio face ongoing future downside potential, particularly if expected growth and cash flow generation capacity do not materialize in the future, resulting in substantial impairments. Therefore, goodwill accounting must be incorporated in a company's credit analysis, especially when these intangible positions entail a high impairment risk, and particularly when other factors also pres-sure a company's credit profile. At this stage, we did not re-cord substantial goodwill impairments in our coverage; hence, reported impairments compared to overall goodwill amounted to around 1.5% in 2008. However, we cannot exclude that, during FY 2009, some companies will have to revise the assumptions incorporated in their goodwill valuation. Considering the persisting unfavorable economic environment an increase in impairment charges is likely in 2009, resulting in additional pressures on ratings.

Fabian Keller, John Feigl

Figure 2 Figure 3 Sensitivity of impairment valuation Goodwill to adj. equity ratio in 2008

Base Impairment TestGrowth 6.0% 3.0%Indefinite growth 3.0% 2.0%WACC 8.5% 9.0%

2008 2009 2010 2011 2012 2013 ResidualFCF-Base 100 106 112 119 126 134Residual value 2,506DCF-Base 100 98 95 93 91 89 1,667DCF-Impairment 95 90 85 80 76 72 1,043

Base Impairment Test DCF Value 2,233 1,540MV Debt 500 500Equity Value 1,733 1,040Book Value o f Equ 1,000 1,000Goodwill 733 40 -693

Results:� Lower equity� Lower asset base� Increase in leverage from 33%

to 62%

GoodwillGoodwill

Debt

Equity

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Goodwill impairment CHF 693 mrecorded in income statement Balance Sheet

Change in Goodwillafter impairment test

Base Impairment TestGrowth 6.0% 3.0%Indefinite growth 3.0% 2.0%WACC 8.5% 9.0%

2008 2009 2010 2011 2012 2013 ResidualFCF-Base 100 106 112 119 126 134Residual value 2,506DCF-Base 100 98 95 93 91 89 1,667DCF-Impairment 95 90 85 80 76 72 1,043

Base Impairment Test DCF Value 2,233 1,540MV Debt 500 500Equity Value 1,733 1,040Book Value o f Equ 1,000 1,000Goodwill 733 40 -693

Results:� Lower equity� Lower asset base� Increase in leverage from 33%

to 62%

GoodwillGoodwill

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Goodwill impairment CHF 693 mrecorded in income statement Balance Sheet

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Swissco m A decco Givaudan Nestlé Geberit





Introduction In light of the deepening financial market crisis and the low interest rate level, net pension debt accelerated substantially in 2008 from CHF 3.2 billion to CHF 8.2 billion. Accordingly, some companies recorded a net pension deficit that accounted for more than 10% of their adjusted gross debt. This was a result of the higher proportion of pension liabilities on companies' balance sheets, mainly due to the sharp decline in pension assets which suffered considerably as the financial market crisis worsened, particularly in H2 2008. In addition to the volatility of fund assets, pension funds are faced with the problem of the duration gap between assets and liabilities. This means that fund assets, which generally have a shorter duration than the pension liabilities, react less strongly to interest-rate changes than pension liabilities. As a result, pension liabilities increase at a faster pace as interest rates fall, thereby widening any existing deficit. The higher pension liability burden clearly negatively affected the companies' credit profiles. This negative development, in combination with other unfavorable factors, such as the harsh slowdown in the global economy, weighed on companies' credit metrics.

Our findings are based on data from companies within our coverage, which all have an investment-grade rating. The data have been compiled from the companies� published annual reports; all of the companies report in Swiss francs and in accordance with IFRS accounting standards.

When comparing credit profiles on an international basis, we adjust companies' financial statements for accounting differences, thus allowing us to gain a clearer peer-group picture within a specific industry. Pension debt considerations tend to have a material impact on companies' credit metrics, mainly depending on the service costs, the interest costs, the actual return on assets, the employer's and employees' contribution payments and the effective funding gap.

Pension fund deficit trend In recent years, the reduction in pension fund deficits was mainly driven by the favorable trend in the financial markets. In 2008, the net pension debt more than doubled from around CHF 3.2 billion to CHF 8.2 billion, driven by the aforementioned slump in pension fund assets. This negative impact was only partially offset by the slight increase in discount rates, leading to lower pension liabilities. Within the analyzed sample, most companies recorded a net pension debt portion of above 5% of adjusted gross debt for FY 2008, whereas for some companies, pension liabilities can reach up to more than 10% of adjusted gross debt (see Figure 1). Not surprisingly, many companies suddenly faced a net pension debt in 2008 compared to last year's net pension surplus, such as Migros, which recorded a net pension deficit of CHF 942 million, accounting for around 15% of adjusted gross debt, compared with last year's net pension surplus. This illustrates the significance of net pension debts on the financial profiles of companies, particularly considering the ongoing unfavorable economic development especially in Q4 2008.

The actual performance of the current pension fund assets sharply declined from an average of 6% in 2007 to �12% in 2008, mainly driven by the dwindling financial markets, particularly in H2 2008 (see Figure 2). This negative performance contrasts with a more or less constant average expected return on plan assets of 5%. However, the performance decline corresponds with the corresponding benchmark ("Credit Suisse Swiss Pension Fund Index"), which dropped by around 13% in 2008. That said, the impact of the financial market downturn mainly depends on the asset allocation of the specific pension fund.

Generally, only few changes were observed in the allocation of pension fund assets in recent years, primarily as a result of companies� risk management approaches, long-term investment horizons and the regulatory environment. Nevertheless, in 2008, the volume of invested assets declined by 22% to CHF 72 billion due to the worsening of the financial market crisis. Accordingly, investments were reallocated from equities into more risk less assets such as bonds, cash or real estate. Hence bonds became the major asset class in 2008 at around 40%, followed by equity (31%), real estate (13%) and other investments, namely cash, (16%). Nevertheless, the various pension funds pursue a diverse range of investment strategies, a fact reflected in the asset allocation. Given the huge valuation adjustments in the financial markets in 2008, pension funds declined sharply in value, particularly those with a high equity exposure. Similar to last year, Lindt & Sprüngli exhibited the most aggressive strategy in 2008, with an equity component of 78% (2007: 87%). Not surprisingly the company's actual return in 2008 deteriorated from 27% to �38%. In contrast, AFG's equity position accounted for only around 13% of plan assets (2007: 16%), and is mainly invested in bonds 53% and real estate 30%, resulting in an actual performance of �2% (Last year: 2%).

Dwindling economy weighs on pension deficits

Figure 1

Net pension debt vs. adjusted gross debt in 2008

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Impact on credit profile The acceleration of net pension deficits softens a company's credit profile in different ways. First, its debt burden will increase due to the higher net pension deficit and thereby negatively impact leverage. If we only focus on the effect of the net pension debt adjustment, we observe that the corresponding adjusted leverage is higher than on an unadjusted basis. However, owing to the reduction of the pension fund deficit and the decline in net pension debt, on an aggregated basis, a convergence between the adjusted and unadjusted leverage has been discernible in recent years. As illustrated in Figure 3, the increase in net pension liabilities in 2008 resulted in a divergence of the corresponding leverage ratios. Second, the unrealized gains and losses due to the discrepancies between actual and expected returns on plan assets, which do not automatically affect the income statement, negatively impact the companies' equity. For example, Edipresse adjusted net leverage increased from 38% to 45%, mainly driven by the recognition of pension liabilities of CHF 37 million (compared to last year's pension surplus) as well as pension adjustments of CHF 83 million in its equity, mainly due to actual losses on its pension assets. This negative impact on equity can be smoothed to some extent if the company optionally applies the corridor test, which aims for an amortization of the net amount of unrecognized actuarial gains and losses if they exceed 10% of the company's pension benefit obligation (PBO) or market-related value of plan assets. Although, under this accounting principle, prior unrecognized gains could offset current unrecognized losses to some extent, this is likely to result in an amortization of unrecognized losses in the future if the specific corridor is breached, thus increasing net pension expenses. Third, the overall decrease in pension liabilities also hampered the solvency ratio of many pension funds. According to the Swiss regulator, a solvency ratio of 90% or less must be declared and necessary steps taken to overcome the shortage. This may lead to substantial cash contributions and therefore weigh on the company's future cash flow generation capacity.

Conclusion In light of the deepening financial market crisis and the low interest rate level, the net pension debt for most companies accelerated substantially in 2008, mainly driven by the harsh deterioration in pension fund assets, which suffered considerably under the ongoing financial market crisis. The higher net pension debt softened the company's capital structure, not only by hampering the adjusted net debt but also by reducing the corresponding adjusted equity. Although this negative impact might be smoothed to some extent when applying the corridor test by amortizing the net amount of unrecognized actuarial gains and losses over the income statement, our analysis adjusts for such effects on operating performance and only considers the relevant service costs. Moreover, a company could

be forced by the regulator to overcome underfunded pension plans by initiating restructuring measures, which normally include higher contribution payments. This would weigh on the company's future cash flow generation capacity. So far, only one company within our coverage has announced restructuring measures to overcome its current pension fund deficit. However, if current market circumstances persist, other companies could follow. Overall, substantial changes in pension accounting could severely affect the company's credit metrics, particularly the company's operating performance, capital structure and cash flow generation capacity. The aforementioned increase in leverage and softened capital may breach existing covenants or pressure refinancing conditions, which could prove to be quite harmful, particularly in such a market environment. However, the impact of pension accounting should not be underestimated when assessing a company's credit profile, especially considering the current challenging market environment, where a company's credit metrics not only suffer from the subdued business environment but also from higher pension liabilities. Although, we do not expect to experience the same material increase in pension deficits in 2009 as in 2008, we cannot exclude the possibility that some companies will have to restructure their already underfunded pension funds, thereby pressuring their cash generation capacity.

Fabian Keller, John Feigl

Figure 3

Capital structure development (2002-08)

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Net pension debt Adj. net debtAdj. equity Pension adj. leverageUnadj. leverage




Notching for structural subordination Creditors of a holding company suffer a disadvantage because they are further away from the operating (cash generating) assets under the legal structure of a holding group. This problem is commonly known as �structural subordination� (see Figure 1) and takes into account that creditors of the operating subsidiaries have first claim to the subsidiaries� assets in the event that the whole group suffers financial stress. In contrast, the claims of holding company creditors are limited to the residual values of the subsidiaries after the subsidiaries� direct liabilities have been satisfied. As a result, the credit rating of the holding company may be lower compared to the whole group�s credit rating to reflect the subordination and the correspondingly lower expected recovery rate at the holding level.

Therefore, assigning a credit rating for a holding group structure also includes an assessment of whether the actual situation makes it necessary to notch down the holding company due to structural subordination. In case of a material disadvantage (resulting in clearly lower recovery prospects) of debt issued by the holding company compared with debt issued at the subsidiary level, liabilities are rated below the consolidated group�s credit rating (�notched down�) in order to address the aforementioned disadvantage for creditors of the holding company.

The framework used to assess structural subordination is explained in detail in the following paragraphs.

Decision framework Whether a notching for structural subordination is justified or not is determined by using a structured assessment framework (see Figure 2). Basically, the decision method takes into account the current group structure (in particular the dispersion of third-party liabilities within the whole group), anticipates future changes in the group structure, and considers potential mitigating factors, as well as the credit rating of the entire group.

Composition of capital structure is key The first step in the process is to assess the capital structure of the entire group. The key question to be answered is whether a significant portion of total third-party liabilities is located at the subsidiary level. A general threshold we use in our framework is 20% across all industries (excluding financials). Thus, if less than 20% of the entire

group�s third-party liabilities are located at the subsidiary level, we do not consider the amount of privileged debt to be material. Accordingly, notching for structural subordination is generally not applied.

However, where the debt portion is higher than 20% at the subsidiary level, we see structural subordination as a potential issue, making further investigation necessary.

Mitigating factors may help to avoid notching The second step is to look for and assess potential mitigating factors that could offset or at least mitigate the disadvantage of structural subordination. This step aims to judge whether there are some reasonable arguments for not applying notching (despite a high indebtedness at the subsidiary level). The assessment of potential mitigating factors is qualitative and there is no mechanical formula for considering them � not least because the mitigation effect can vary according to specific legal and regulatory situations. Potential key mitigating factors include (fore more details see Table 1):

! Operating assets at the holding level. ! Business diversification at the holding level. ! Guarantees by subsidiaries for holding level debt.

To notch or not to notch?

Figure 2

Notching for structural subordination framework Holding structure present

Debt at subsidiaries <20%

of group debt?

No notching

Mitigation factors

present ?

No

Yes

No

Factors sufficient to

avoid notching?

Yes

No

Notching

Yes

Group rating > Mid BBB ?

Holding rating 1 notch below group rating

Holding rating 1-3 notches below group rating

No

Yes

Whether? How much?

Holding structure present

Debt at subsidiaries <20%

of group debt?

No notching

Mitigation factors

present ?

No

Yes

No

Factors sufficient to

avoid notching?

Yes

No

Notching

Yes

Group rating > Mid BBB ?

Holding rating 1 notch below group rating

Holding rating 1-3 notches below group rating

No

Yes

Whether? How much?


Figure 1

Holding group structure

Holding Company

HoldCo Debt

Operating Company

OpCo Debt

Operating Company

OpCo Debt

Operating Company

OpCo Debt

Potentially

subordinated

debt

Group

Exp. residual value > 0 Exp. residual value = 0 Exp. residual value > 0

Exp. upstream Exp. upstream

Holding Company

HoldCo Debt

Operating Company

OpCo Debt

Operating Company

OpCo Debt

Operating Company

OpCo Debt

Potentially

subordinated

debt

Group

Exp. residual value > 0 Exp. residual value = 0 Exp. residual value > 0

Exp. upstream Exp. upstream




! Concentration of debt at one subsidiary. ! Downstream loans (pari passu). ! Anticipated refinancing of group debt. ! Group credit rating at a very high level. ! Access to earnings, cash flows and assets. ! Cash cushion at the holding level.

If it turns out that the mitigating factors (either one strong single factor or a combination of several factors) are sufficient to alleviate the structural disadvantage for creditors at the holding company level, notching down the holding rating is not applied and the process comes to an end.

However, if mitigating factors are not found or are insufficient to offset the aforementioned disadvantage, in our view, the holding company will be notched down to reflect structural subordination.

Credit rating of entire group determines amount of notches If the need to notch down the holding company is justified, the amount of downward notches has to be determined. Generally speaking, the higher the credit rating of the whole group, the fewer downward notches are applied. This is because the higher the group�s credit rating, the lower the probability that the group will suffer financial stress in the future. Hence, the disadvantage of being further away from the assets becomes less relevant the better the financial situation of the whole group is.

Given a group credit rating of above Mid BBB, the holding company�s rating would be one notch below the group�s credit rating. However, if the group�s credit rating is equal or below Mid BBB, the holding company�s rating can be two or more notches below the group�s rating (in particular for sub-investment grade companies), in order to reflect structural subordination and the higher likelihood of it coming into play. Whether two ore more notches are justified depends primarily on the expected recovery value of each subsidiary and the corresponding anticipated residual value for the holding company (see Figure 1).

Relevance for fixed income asset management Notching is an especially important theme with regard to Swiss electrical utilities. This is because large Swiss electrical utility groups (such as Atel or Axpo) use a holding structure, whereas the holding company acts as a financing source for the entire group. Mitigating factors like diversification, anticipated refinancing, good access to cash flows and assets combined with the high credit quality of these groups help to avoid notching for structural subordination, despite substantial debt at subsidiary level in some cases.

Structural subordination can also be an issue in other sectors. The analysis is especially of value with regard to issuers positioned at the lower end of the investment grade universe. For instance, if a group�s credit rating is Low BBB, issues of the holding company could be potentially classified as sub-investment grade. This can be a problem, especially for regulated institutional investors who are not allowed to invest in sub-investment grade issues.

Furthermore, if an issuer�s entire group credit rating is continuously deteriorating, structural subordination can become more and more a concern. As a result of the decreasing credit quality of the group (resulting in a higher probability of default), the disadvantage of being structurally subordinated also increases. The likelihood of holding debt being notched down increases accordingly. Therefore, the debt issued at the holding level could suffer from both the deteriorating financial profile and structural subordination, and be downgraded by several notches. Such considerations are particularly important with regard to Ciba, for example, where the debt portion at subsidiary level is still substantial. Given the continuously deteriorating credit profile of the group, structural subordination is more and more a concern for creditors at the holding level. If the group�s credit profile deteriorates further without any reasonable mitigating factors, there is a greater likelihood that bonds issued at the holding level would be rated as sub-investment grade.

Thus, notching for structural subordination is a key issue to be considered in the process of managing fixed income assets.

Michael Gähler

Table 1: Mitigation factors which may avoid notching

Mitigating factor Explanation Examples

Presence of operating assets at the holding level

In case the holding company also directly owns some operating assets, the holding�s creditors enjoy a priority claim on these assets. This partially offsets the disadvantage of structural subordination for the holding company�s creditors.

Good business diversification at the holding level

If the holding company owns several operating subsidiaries, this may lead to a well-diversified business and asset mix, which may partially mitigate the disadvantage of the structural subordination for the holding company�s creditors.

ABB, Axpo

Guarantees by the subsidiaries for holding level debt

Structural subordination may be mitigated via guarantees by the subsidiaries, which place the claims of holding company�s creditors pari passu with liabilities of operating company creditors. The extent of the mitigation effect is strongly linked to the related legal analysis (assessing whether the guarantees are enforceable).

ZFS

Concentration of debt at one subsidiary Given that a holding company owns several operating subsidiaries, but the majority of third party liabilities are concentrated in one (ore two) of these, this can increase the likelihood that the holding company receives recoveries from its less-leveraged subsidiaries.

ABB

Downstream loans (pari passu) With the presence of downstream senior loans within the group structure, the holding company complements residual claims with (potentially pari passu) debt claims, which in turn enhances the position of holding company creditors. The extent of mitigation is influenced by the legal situation and the ranking of the loan(s) within the group structure.

ABB

Anticipated refinancing of group debt If the group refinances subsidiary-level debt with holding-level debt, the relative disadvantage of holding creditors is increasingly reduced as time passes. The shorter the timeframe and the greater the likelihood that the refinancing will take place successfully, the better the mitigation effect.

Alpiq, Ciba

Group credit rating at a very high level The higher the group rating, the lower the probability of a default of the whole group and therefore the lower the likelihood that the disadvantage of structural subordination will come into play.

Alpiq, Axpo

Good access to earnings, cash flows and assets

The stronger the holding company controls its subsidiaries and the better the access to cash flows, dividends and assets, the lower the disadvantage of the structural subordination.

Alpiq, Axpo, Nestlé

Sound cash cushion at holding level A good cash cushion at the holding level (e.g. as a result of constant sound cash flows from subsidiaries to the holding company, thus leading to a concentration of cash at the holding level) could mitigate the structural subordination because cash generated by assets was already transferred to the holding company.

ABB, Nestlé




Overview CHF bond market The CHF bond market had a total market value of around CHF 527 billion at the end of April 2009. Between 2000 and 2008, it has expanded at an annual rate of about 3%, thereby increasing by about 27% over that time period. Compared to the end of 2008, the share of domestic bonds on the CHF bond market decreased to around 46% or CHF 241 m (down 2%) whereas the share of the foreign segment increased by 7% to CHF 285 billion. This was mainly due to the higher issuance of foreign bonds. The structure of the domestic segment clearly differs from that of the foreign segment (see Figures 1 and 2). On the domestic side, Swiss government bonds (�Eidgenossen�) account for the lion�s share of this segment with 39% of total par value outstanding, followed by covered bonds ("Pfandbriefbank": 11% / �Pfandbriefzentrale�: 10%) and banks (15%). The foreign segment, in contrast, is clearly dominated by banks, which account for about 58% of the total par value. As interest rate sensitive issuers, banks have been attracted by the low interest rate environment in the past few years. However, the bank sector showed lower issuance activity due the ongoing financial market crisis. Corporates/others are the second-largest issuers in the foreign segment, with a share of about 29% of total par value outstanding.

Issuance activity New issuance decreased from CHF 78 billion in 2007 to CHF 72 billion (excluding Swiss government bonds) in 2008, fuelled by the financial market crisis which resulted in a strong increase in investors� risk aversion and thus a very challenging market environment. The slight increase in gross issuance of domestic bonds of 4% to CHF 19 billion was more than offset by higher redemptions resulting in a net redemption of CHF 3 billion (excluding �Eidgenossen�). Issuance activity in the foreign segment was down by 11% at CHF 52 billion whereas net new issuances decreased to CHF 8 billion (down 65%) mainly due to lower new issuances by the financial segment. During 2008, several trends were observed, such as an ongoing flight to quality due to reduced investor risk appetite resulting in an unfavorable issuance environment particularly for the BBB segment. Additionally, a concentration on short and intermediate maturities was experienced, with an accumulation of the short-term maturity issuance in H2 2008.

Looking at the domestic segment in more detail, issuance by financials (23%), corporates (17%) and utilities (1%) accounted for 41% of issuance volume in 2008 and covered bonds (�Pfandbriefe�) for 40%, reducing the share of the Swiss government to 10%. In the

foreign segment, corporates increased to 25% from 18% the previous year, while financials declined from 48% in 2007 to 25% in 2008 due to the tremendous increase in the perceived inherent issuer risk of banks and other financials.

However, overall issuance activity showed a favorable development starting into 2009, thus increasing the net new issuance level. In the domestic segment, net new issuance rose to CHF 3 billion, mainly driven by corporates, which accounted for 43% of total domestic issuances. This was strongly supported by benchmark issues such as Roche's CHF 1.5 bn 4.5% 2017 or Swisscom's CHF 1.3 bn 3.5% 2014. In the foreign segment, net new issuance activity amounted to CHF 21 billion and thus rebounded to levels already seen in at the end of 2007. Despite the ongoing dwindling economy, higher levels of issuance activities were mainly supported by current refinancing needs, as well as for some issuers attractive financing costs due to the low CHF interest rate levels. Nevertheless, considerably higher risk premiums were demanded by the market, including issuers with solid fundamental profiles, as illustrated by Swisscom (CHF 4% 2015), which issued a bond in September 2008 with an ASW spread of +80 basis points compared to +170 basis points for Swisscom�s issuance (CHF 3.5% 2014) in April 2009. Also, Syngenta's bond (CHF 3.375% 2013) issued in August 2008 was priced with an ASW spread of +61 basis points compared to +180 basis points of its issuance (CHF 3.5% 2012) in December 2008. Furthermore, Hilti issued a bond (CHF 3.5% 2013) in April 2008 with an ASW spread of 29 basis points, while its issuance (CHF 3.25% 2014) in March 2009 had an ASW spread of 152 basis points.

Secondary market After several years of declining volumes, the turnover in the CHF bond market increased by 24% to CHF 190 billion in 2008, mainly supported by higher trading volumes in Swiss government bonds, especially since September 2008, due to the increased demand for risk-free investments after the accentuation of the financial crisis and its spillover effects on the global economy. As a result, investors avoided lower-rated and higher-yielding non-government issuers. Trading volumes started somewhat slower into 2009 compared to last year. The turnover in the CHF bond market decreased by 13% to CHF 58 billion in April 2009, mainly driven by lower trading volumes in Swiss government bonds and banks.

The Swiss franc bond market

Figure 1 Figure 2 CHF domestic bond market share CHF foreign bond market share

Pfandbriefbank11%

Issuing agencies1%

Banks15%

Cities3%

Eidgenossen39%

Pfandbriefzentrale10%

Cantons6%

Insurances2%

Other sectors13%

Insurances1%

Corporates / Others29%

Banks58%

Regions, Cantons, Provinces, etc.

4%Mortgage institutes

2%

Countries5%

Source: SIX Monthly Report April 2009, Credit Suisse Source: SIX Monthly Report April 2009, Credit Suisse



Further widening expected due to the ongoing risk aversion and market volatility In 2008, all Liquid Swiss Index (LSI) rating categories experienced a significant spread widening due to the worsening of the financial market crisis (particularly in September 2008) and its spillover effects on the global economy. Turning to the domestic segment of the LSI, the BBB rating suffered the most (widening from 61 basis points as of 3 January 2008 to 288 basis points on 31 December 2008). This trend was primarily attributable to the unfavorable spread development of the corporates (which are typically positioned in the BBB rating category). The foreign segment of the LSI experienced a higher spread widening than the domestic segment, particularly in the BBB rating bucket (widening by 970 basis points to 1062 basis points in 2008 which was dominated by Kaupthing Bank). Unlike the domestic segment, the BBB bucket of the foreign segment also contains Eastern European issuers that were significantly hit by the worsening of the financial market crisis in September 2008.

In light of the generally less volatile market environment in 2009 to date, the credit spreads tightened to some extent, while still remaining on high levels compared to recent years. Going forward, we expect the CHF bond market to be shaped by continued risk aversion and uncertainty about the duration and severity of the global economic downturn, resulting in persistent market volatility. With regard to supply, the bond market will remain an important liquidity source for many companies within the different sectors. Despite higher credit spreads, the total financing costs are attractive for some issuers due to the low CHF interest rate levels. Several issuers with a solid credit profile are already well positioned to tap the CHF credit market when the need arises, such as Bâloise, Hilti, Roche, Swisscom, or

Syngenta. Overall, we expect an ongoing lively issuance activity in 2009 of both existing and new issuers who we expect to tap the CHF bond market due to their continuous refinancing needs and the conservative lending policy of banks. Also, the expected solid supply combined with continued uncertainties about the global economic environment will likely lead to an additional increase in credit spreads.

In terms of demand, the focus will likely remain on issuers with a sound credit profile and high ratings. As a result, particularly issuers in the BBB segment with perceived higher inherent risk will find it difficult to access the bond market. The issuance window for this segment will only be open for a few issuers that enjoy a solid credit profile supported by a well-known brand. Nonetheless, these issuers will be faced with high credit spreads. In addition, investors will focus on the underlying fundamentals of specific issuers instead of relying on overall ratings, thus further increasing the spread discrepancy within the same rating bucket. Accordingly, the focus will be on companies with solid credit profiles operating in sectors with a relatively stable fundamental outlook, such as utilities, food or pharmaceuticals. Based on these considerations, we expect the following key trends with respect to the development of credit spreads:

! Overall credit spread levels remain high and volatile. ! Likely spread tightening for specific issuers with stronger-than-

expected credit profiles supported by ongoing strong cash flows. ! Increased spread discrepancy within the same rating bucket

(based on fundamentals). Fabian Keller, Daniel Rupli

Figure 3 Figure 4 Net new issuance activity domestic Net new issuance activity foreign

-5

-3

0

3

5

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

CHF bn

2007 2008 Apr 09

-6

-3

0

3

6

9

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

CHF bn

2007 2008 Apr 09

Source: Credit Suisse Source: Credit Suisse

Figure 5 Figure 6 ASW spread development along industries � domestic ASW spread development along industries � foreign

ASW spread (bps)

-50

50

150

250

350

450

550

2001 2002 2003 2004 2005 2006 2007 2008 2009

Financials Industrials Covered bondsPublics Utilities

ASW spread (bps)

-50

50

150

250

350

450

550

2001 2002 2003 2004 2005 2006 2007 2008 2009

Financials Industrials Covered BondsPublics Utilities

Source: Liquid Swiss Index (LSI), Credit Suisse Source: Liquid Swiss Index (LSI), Credit Suisse



Significance of ratings A rating reflects an opinion about timely and complete interest and debt payments and redemptions, as well as the magnitude of a possible default for a specific bond in a foreseeable time frame. The rating is the result of an in-depth qualitative and quantitative analysis of an issuer�s business and financial profile. The Swiss Institutional Credit Research team compiles ratings based on an extensive assessment of each issuer and its environment. The outlook is an indication of the rating�s future trend.

Rating attributes ! A rating reflects the future probability of default covering the

capacity and willingness of the obligor to service his financial commitment on an obligation in accordance with the terms and conditions of the obligation.

! Ratings incorporate business cycles. ! A rating takes into account sector characteristics on a

comparative basis. ! A rating is determined by assessing the business risk and the

financial risk.

Rating process In each case, the Swiss Institutional Credit Research team initiates ratings on issuers. The Credit Research department bases its ratings exclusively on information available to the public pertaining to the company under analysis, such as annual reports, presentations, company and sector reports from rating agencies, and a broad range of historical statistical data. During the rating process, we meet with management and perform due diligence on business, market and financial aspects. The process follows criteria and methodologies established by the Swiss Institutional Credit Research team. Ratings are assigned by vote of a rating committee comprised of analysts and not solely by the covering analyst. During this process, all gathered information that is believed to be important and material is presented to the committee. Maintenance coverage employs the same criteria and methodologies used during the initial rating process. We monitor the development of covered issuers on an ongoing basis and either affirm the assigned rating or update it where necessary. This takes place on a regular basis (i.e. quarterly) where applicable or when prompted by an event that could reasonably be expected to result in a change of the credit quality of the covered issuer. Our rating process represents a fundamental analysis, comprising both quantitative and qualitative factors. In our assessment, we essentially follow three analytical steps: 1. Analysis of business risk in the form of the company�s business profile; 2. Analysis of financial risk in the form of the company�s financial profile; 3. Assessment of the outlook and possible event risks.

Business profile We examine the business risks of an issuer and verify how and in which environment the company operates. The main points include:

! Competitive position and peer analysis; ! Market position and market shares; ! Business consistency and development; ! Management track record and strategy; ! Regulatory environment; ! Geographical exposure and related country aspects; ! Manufacturing processes and interactions with the environment.

After clarifying these qualitative and quantitative aspects, we obtain further data on market position, stability, earnings margins and cash flows. In this regard, we differentiate individual businesses according their importance for a given company in terms overall importance, growth, cash generation and future outlooks. We additionally apply market models such as Porter�s Five Forces to further analyze companies. Some of the key parameters that we derive from our evaluation serve as a basis to assess the level, historical stability and sustainability of profit margins and cash-flow generation capacity.

Financial profile The analysis of an issuer�s financial profile gives us an understanding of the issuer�s cost structure, its margins, capital intensity, capital structure, shareholder focus, sensitivity to environmental changes and credit metrics, indicating its strength and ability to service obligations in terms of debt and interest. Amongst a vast range of financial indicators and metrics, we consider the following information:

! Financial policy based on the overall business and shareholder strategy;

! Financial assessment based on the business phase of the issuer in terms of growth, consolidation or stagnation;

! Size of the issuer in terms of sales, market share and diversification;

! Profitability and cost structure; ! Cash-flow-generating capacity; ! Capital intensity in terms of CAPEX and working capital; ! Cash cycle of the issuer and development in the past; ! Capital structure and leverage; ! Interest and debt coverage on an adjusted basis. This constitutes the quantitative side of our analysis and provides us with information about the financial flexibility and debt capacity of companies. We use financial data to calculate credit metrics over the last couple of years, thereby incorporating some cycles and allowing us to determine the average financial profile. Key credit metrics include adjusted interest and debt coverage ratios such as adjusted EBITDA/adjusted net interest expense, FFO/adjusted net debt, FCF/adjusted net debt and net adjusted leverage, to name just a few that flow into the financial profile assessment. Many of the covered issuers carry large amounts of cash and near cash on their balance

Credit Suisse rating methodology

Figure 1

Business profile vs. financial profile

Highestrating

Belowaverage

Average Aboveaverage

Strong

Strong

Aboveaverage

Average

Belowaverage

Lowestrating

Financial profile

Bus

ines

s pr

ofile

Highestrating

Belowaverage

Average Aboveaverage

Strong

Strong

Aboveaverage

Average

Belowaverage

Lowestrating

Financial profile

Bus

ines

s pr

ofile




sheets, giving them additional financial support and enhancing the financial profile. As a result, we tend to base our credit metric analysis on a net basis. Excluding the cash cushion would penalize issuers with solid liquidity levels and benefit issuers with low amounts of liquidity. On average, Swiss issuers tend to enjoy a higher amount of liquidity than their peers in Europe or the US, for varying reasons. When comparing credit profiles on an international basis, we therefore adjust for these structural differences, thus allowing us to get a clearer peer-group picture within a specific industry. As off-balance-sheet liabilities such as operating leases, funded and unfunded pension liabilities, guarantees and other contingencies play an increasingly important role, we take these into consideration while analyzing the financial profile of issuers: Leases and rents: These are deducted from operating costs and split into an interest and a depreciation component based on the average interest rate of the issuer. In the case where leases and rental expenses are not recorded but are rather presented on a future basis, we base our calculations on the nearest estimated lease and rent expense stated by the issuer. While adjusted EBITDA and adjusted EBIT benefit from this adjustment, so does adjusted FFO, which increases in line with the depreciation component of the lease and rent expense. On the debt side, the lease and rent expense is multiplied by a factor ranging from 5x to 8x depending on the sector and object, the result being added to adjusted debt. Pensions: The deficit from funded pension liabilities and assets is recorded in full and added to adjusted debt. The unfunded deficit is adjusted by the leverage of the issuer, which accordingly reduces the recorded debt for companies with lower leverage levels. Further adjustments are made on the operating cost side, whereby only the service cost is considered as an operating cost and all other costs are factored out. Interest cost from pensions is netted against the actual return on plan assets. Additionally, FFO is adjusted by netting the service and interest cost against the actual return on plan assets and the employer�s contribution. Guarantees and contingencies: These are generally recorded in full or, if qualifying for some reductions, to the extent we assume these to be accurate and most likely.

Event risk/outlook A company�s latest results and prospects are important factors in terms of the rating trend (outlook). Event risk relates to occurrences that may bring about a relatively sudden change in rating and are naturally difficult to foresee. For example, these might relate to share buybacks, capital repayments, larger acquisitions, changes in commodities prices, contingent liabilities and process risks, among other things.

Putting it all together After analyzing the business and financial profile of the issuers, we rank them into the following groups: below average, average, above average and strong. This indicates an issuer�s position in terms of its business profile and financial profile compared to the industry in which it operates. The combination of a strong business profile and a strong financial profile will qualify an issuer for a high rating such as AA or even AAA, whereas an issuer with a below-average business and financial profile will be assigned a non-investment-grade rating. Figure 1 illustrates the profile map we use to place issuers and their ratings:

Table 1: Credit Suisse rating system for long-term debt

Credit Suisse S&P Moody�s

AAA AAA Aaa Highest possible rating. Extremely strong debt-/interest servicing capacity.

High AA AA+ Aa1

Mid AA AA Aa2

Low AA AA� Aa3

Very strong debt-/interest servicing capacity.

High A A+ A1

Mid A A A2

Low A A� A3

Strong debt-/interest servicing capacity, but slightly more exposed to adverse

business and economic developments.

High BBB BBB+ Baa1

Mid BBB BBB Baa2

In

vest

men

t gra

de

Low BBB BBB� Baa3

Adequate debt-/interest servicing capacity, but increased likelihood of weakened

debt-/interest servicing capacity in the event of negative business and economic

developments.

High BB BB+ Ba1

Mid BB BB Ba2

Low BB BB� Ba3

Inadequate debt-/interest servicing capacity with relatively high exposure to

negative business and economic developments.

Source: S&P, Moody�s, Credit Suisse



Banking Sector rating: Low AA, Negative

Financial market crisis and bailouts dominated 2008 The financial crisis and, hence, subprime-related losses and bailouts dominated the entire financial industry and in particular the banking sector throughout FY 2008. Across the globe, the entire banking system came under immense pressure, which resulted in a variety of government bailouts, bank defaults, bankruptcy filings and takeovers. While the sector had already revealed first signs of the crisis the year before, the financial turmoil in 2008 proved to be one of the biggest crises since the Great Depression. Bearn Stearns was taken over by JPM, Bank of America bought Countrywide, and the SEC prohibited naked short-selling to address the negative trend in the stock markets. In the second half of 2008, Lehman collapsed, Bank of America bought Merrill Lynch, the Fed took over the control of AIG after a USD 85 billion rescue plan. The fourth quarter of 2008 was the toughest quarter � not only for the financial industry but for all sectors across the globe. Credit spreads widened to their highest levels as long, lending markets dried up, and investors and banks lost confidence. This was mainly caused by another round of bailouts due to further losses reported by a number of banks. Wells Fargo took over Wachovia, UBS received governmental support, and the three largest banks in Island filed for bankruptcy. Given the collapse of the entire financial industry, banks had to restore investors' confidence by massively reducing their balance sheet risk and strengthening their capital base. So far, the entire banking sector has recorded losses of almost USD 1.0 trillion (see Figure 1). However, the banks were at least able to raise USD 900 billion of new capital to which governments contributed 42%, the public 41%, sovereign wealth funds 7%, strategic buyers 6% and private placements 4%.

Swiss banking market presented a mixed picture With regard to the banking sector in Switzerland, it needs to be said, that the exposure to subprime-related losses was concentrated at the two big banks. The other Swiss banks are mainly active in the domestic retail banking market. In addition, Swiss banks generally

enjoy a stronger capital base, which was reflected in a higher Tier 1 ratio compared to the European average (see Figure 2).

Raiffeisen was able to steadily profit from its expansion in the Swiss market, with a focus on private clients for the savings and residential mortgage business and, hence, improved its capitalization on the back of sustainable profits. In contrast, UBS was least able to maintain its Tier 1 ratio above the European average, having to raise approximately CHF 37 billion of capital and to massively reduce its balance sheet risk to present a Tier 1 ratio of 11.0% at end-December 2008.

UBS reported a record loss for FY 2008, mainly related to its investment banking activities, whereas the other units remained profitable, albeit at lower levels. The loss in client confidence was reflected in large new net money outflows throughout the year. In contrast, Raiffeisen was able to report the fourth strongest gross income in its history and revealed client deposits and mortgage loans of above CHF 100 billion for the first time. Hence, Raiffeisen actually benefited from the global financial crisis as it is active in the local domestic market with a focus on private clients. In terms of outlook, banks have tended to provide a cloudy outlook since the current financial crisis and the banks' dependence on the financial markets influences their profitability, which is particularly true for banks with investment banking exposure. However, the traditional wealth management business will also be affected due to the recession and the intensifying competition in view of the reduced business volume.

Regulatory environment in Switzerland As the so-called "Swiss Finish" � an extra buffer of 20% for Swiss banks over the minimum requirements of Basel II � proved to be insufficient in stress scenarios, the Swiss Federal Banking Commission implemented new capital requirements for the two big banks in 11/2008. The aim is to implement the new requirements over a transition period until 2013 if financial markets allow. The new capital adequacy target ratio for the two big banks will be in a range of 50%�100% above the international minimum requirements (Pillar I) of Basel II. In addition, the banks must comply with a leverage ratio, which defines the proportion of core capital to total assets and will be set for both banks at a minimum of 3% at group level and at 4% for the individual institutions.

Daniel Rupli

Trends by sector

Figure 1

Losses related to subprime in combination with capital raised in thebanking sector

USD bn

0

300

600

900

1,200

Prior Q307 Q407 Q108 Q208 Q308 Q408 Q109 YTD

0

80,000

160,000

240,000

320,000

Subprime related losses RecapitalizationJob cuts (r.h.s.)


Figure 2

Covered Swiss banks' Tier 1 ratios vs. European average

0.0%

3.5%

7.0%

10.5%

14.0%

2004 2005 2006 2007 2008

UBS Raiffeisen European Average




Increasing market challenges in 2008 The negative real estate market development experienced during 2007 continued in 2008, spreading into Western and Eastern Europe, and showing the first negative signs in H2 2008. While the results of our covered companies held up during the beginning of 2008, they came under increasing pressure towards the end of 2009, following the downturn in developed markets and lower growth rates in developing markets that were not able to offset the overall growth decline. In addition to the challenges related to demand declines, many companies faced rocketing input costs during 2008 that added to overall margin pressure in the wake of softening pricing headroom. Following a period of high CAPEX investments and in some cases acquisitions, companies were forced to reconsider their strategies sooner than expected, and often to a much deeper extent than considered possible. Confidence at the beginning of 2008 was suddenly overshadowed by cautiousness and growth scenarios had to be replaced with capacity reduction and cost-cutting programs. While companies like Hilti, Schindler, and Geberit benefited from a sound financial headroom under their ratings due to both a conservative capital structure (in the absence of large acquisitions or CAPEX programs) and solid cash flow generation capacities, companies like AFG, Forbo and Holcim entered the market turmoil with relatively high debt levels, thus posing increasing rating challenges given the expected near-term deterioration of their cash flow generation capacities. In the case of AFG and Holcim, this situation resulted in negative rating actions in anticipation of metrics falling well below the required threshold levels during the cycle.

Near-term liquidity secured while considerable attention needs to be paid to refinancing Most of our covered companies have been running their balance sheets with solid cash cushions and/or committed credit facilities, thus giving them the necessary financial flexibility in case of an unforeseen demand for liquidity. This situation, in combination with the ongoing cash flow generation capacities lent comfort during 2008. However, as already mentioned, AFG, Holcim, and to an increasing extent Forbo, have seen their adjusted net debt levels and leverage ratios increase to levels that are not fully serviceable with their cash flows in the current market downturn, and that are thus falling short of their assigned threshold levels, despite cutting dividends and undertaking cost-cutting measures. In AFG's case, the capital structure weakened considerably following several acquisitions. Exposed to the high adjusted net debt level that by no means would find sufficient cash flow coverage, AFG sought a capital increase of CHF 113 million, roughly equaling 19% of the adjusted net debt at year-end 2008, to strengthen its capital structure and thus its financial profile. Holcim, in our view, could be facing the same difficulty of carrying a large amount of adjusted net debt on its balance sheet, while recording a considerable softening of its cash flow generation in the current market environment. While some refinancing was successfully undertaken in spring 2009, there remains a large portion of debt to be refinanced. However, refinancing

through debt will not reduce the pressure on the rating. This, in our view, can only be achieved by replacing it with equity, divesting assets, or regaining former cash flow generation capacity levels very soon. Capital increases were undertaken by some large European building product companies in spring 2009 to ease the pressure on their ratings in the absence of a near-term recovery in demand.

Gloomy outlook for 2009, with only limited recovery in 2010 The end of 2008 is, in our view, a signpost indicating what to expect in 2009. Contrary to past downturns, volume declines have taken place in mature markets and developing markets. While sales exposure to developing markets was believed to offer some counterbalance to the considerable downturn in mature markets, this has proved and will likely continue not to be the case. As a result, we expect an overall weak H1 2009, with volumes and pricing down resulting in severe margin pressure and cash flow cutbacks. Some margin relief might occur towards the end of 2009, coming from lower input costs and energy prices, under the condition that pricing does not suffer too much in the overall market turmoil. Given the high uncertainties across the global construction market, it is very difficult to predict market recovery, let alone its extent, as the visibility remains very low at this stage. Nevertheless, various stimulus packages expected to have a positive impact very late in 2009, or more likely 2010, are offering a helping hand to the industry. Consequently, we expect to see some recovery in 2010 at best, but with only modest improvements. Given the current market development in North America and Western Europe, we project volumes to decline at a high single-digit to low double-digit rate, given the combined slump in housing and new commercial construction, and the unusual decline in the up-to-now more resilient renovation market suffering from weak consumer confidence. Volumes in emerging markets are likely to decline during 2009, with a more pronounced slowdown towards the end of 2009. A recovery of the global construction market could likely show first signs in North America, mainly supported by the infrastructure programs expected to carry an increasingly positive impact during 2010, followed by some markets in Western Europe. However, the building materials companies that we cover are likely to experience one of their most challenging periods to date, in some cases accelerated through already relatively burdening capital structures that are in need of sound cash flows to support their financial profiles and thus ratings. Ongoing (in some cases severe) restructuring and cost-cutting measures are likely to be a key focus for the companies going forward. A prolonged market downturn with deteriorating volumes and weak pricing would likely trigger negative rating actions across the sector.

John Feigl

Building Materials Sector rating: Mid BBB, Negative

Sector overview

2008 2009E

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Specialty chemicals companies � two sides of a coin in 2008 The specialty chemicals companies that we cover experienced a very double-edged 2008. With the weakening of the global economy and a widespread slump in demand, especially in the automotive, construction, textile, leather, paper, and electronics sectors, the specialty chemicals industry found itself confronted with one of the most challenging environments since more than thirty years. Sales volumes at a large number of specialty companies collapsed faster and to a deeper extent than anticipated. While markets such as Asia and South America were expected to show some resilience to the demand decline in North America and Europe, this did not prove to be the case as the negative development spilled into these markets in a short time. The volume deterioration in Q4 2008 reached up to minus 20% or even more in some cases. Companies like Ciba, Clariant, EMS Chemie, and Sika recorded solid results at the beginning of the year with volumes and prices at considerably higher levels than towards the end of the year, when an unexpectedly harsh slump in demand caused volumes to collapse across the sector (as shown in Figure 1). In some cases, this development prompted a rating cut (Clariant, EMS Chemie) or an outlook change to negative (Sika). Contrary to this, the agrochemical company Syngenta benefited from strong demand and thus posted a record year, with volumes and prices reaching very impressive levels, resulting in a further strengthening of its financial profile with ample financial flexibility.

M&A likely to be driven by well-positioned strategic players 2008 proved to be a year in which many companies refrained from undertaking acquisitions due to the aforementioned increasingly challenging market environment on the one hand, and the dramatically reduced access to funding. However, companies with a high rating, ample cash on their balance sheets and financial flexibility made use

of some opportunities and broadened their product offering through acquisitions. A case of special interest in Switzerland was the acquisition of CIBA SC for some CHF 6.1 billion (EV/EBITDA 2008E: 8.6x) by the world's largest specialty chemicals company BASF. Heading into 2009 and 2010, we expect most of the M&A activity in the sector to involve higher-rated strategic players such as Syngenta, which have ample financial headroom and are on the hunt for companies offering interesting product add-ons at interesting price levels.

Liquidity and refinancing needs remain solid so far Compared to many other specialty chemical companies, the companies we cover have in most cases taken prudent measures well in advance with regard to funding and have hence entered the harsh market environment with no, or only limited financing needs. Debt maturity profiles are mostly spread evenly, with no major front-loaded maturities pressuring the companies' financial profiles. However, the expected deterioration of most cash flow generation capacities will weigh on key metrics of the companies, potentially forcing some companies to tap different funding sources and face increasing costs in the case of any near-term refinancing, or to renegotiate their undrawn credit facilities given the possibility of breaching financial covenants in 2009.

More restructuring efforts and impairment charges to come The number of restructuring and efficiency improvement programs announced increased in 2008 and, driven by the ongoing very challenging market environment with deteriorating demand and pricing pressure, are prone to increase further during 2009. Several specialty chemical companies have announced the closure of production sites, as well as the implementation of efficiency improvements and, last but not least, the reduction of headcounts in different markets around the globe. With these measures, the companies have adjusted, and are continuing to try to adjust to deteriorating demand and thus lower sales, as overcapacities and high fixed cost structures confront many specialty chemicals companies with massive margin pressure and severe cuts in their cash flow generation capacities at times when liquidity is urgently needed given the decreased access to funding. However, these announced steps take time and therefore will not have a positive impact on the companies' cost structure and margins very soon.

With slumping volumes and price pressure, stabilizing the VCP mix is key � further downgrades likely Specialty chemicals companies such as Clariant and EMS Chemie � but also to some extent Sika � have shown that the harsh volume declines recorded in Q4 2008 have accelerated in Q1 2009 (- 25% in the case of Clariant) and, in our view, will continue to do so in Q2 2009 and likely beyond, with no near-term recovery in sight. This development will further weaken the VCP mix of companies and hence result in continued and very unfavorable margin pressure. In addition, pricing will likely turn negative in 2009 due to lower raw material prices and the pressure to pass these on to customers during 2009. We therefore expect to see further large-scale restructurings announced. The key focus in most cases will be to cope with an intermediate phase of substantially lower sales volumes, while being prepared for a recovery once demand starts to pick up again. Given the considerable challenges most companies are facing, we expect to see further rating downgrades over the next twelve months, prompted by considerably weaker cash generation capacities. This said, we view the underlying long-term growth drivers for the chemical industry as solid, with average growth being slightly above GDP levels, in some cases even higher. However, to be able to benefit from these long-term growth drivers, many companies will have to cope with the current downturn, which could result in some major changes within the chemical industry, in our view.

John Feigl

Chemicals Sector rating: High BBB, Negative

Sector overview

2008 2009E

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Figure 1

Specialty chemicals price/volume development (average: Arkema, BASF, Ciba, Clariant, Degussa, Lanxess, Rhodia)

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Overall pleasing results in 2008, despite demanding business environment The business environment for Swiss electrical utilities was mixed in 2008. While the first three quarters were more or less characterized by a supporting business environment (e.g. high and volatile electricity prices combined with continued sound demand), Q4 was clearly negatively influenced by the financial crisis and the related global economic downturn, which led to significantly lower electricity prices, a drop in trading volumes and reduced project financing possibilities. Nonetheless, the companies under coverage have, compared to other sectors, proven their rather low vulnerability to cyclical downturns. The covered companies were able to defend an overall strong cash flow generation capacity. Nonetheless, there are considerable discrepancies within the sector in terms of the adjusted FFO margin. Whereas predominantly production-based companies (such as NOK and CKW) recorded very high adjusted FFO margins of above 20%, the figure remained in the single digits for those companies heavily engaged in electricity trading (such as Alpiq and EGL).

On the income side, the companies� results were supported by more or less uninterrupted power generation, higher trading results and an increasing demand for new renewable energies in Europe. However, in some cases profitability was held back by regulatory restrictions and capacity constraints in cross-border energy trading. In addition, falling electricity prices � especially in the last quarter of 2008 � had a broadly negative impact. Furthermore, the turmoil on the global financial markets led to lower asset values of the Plant Closure Fund and the Waste Disposal Fund, which (depending on the accounting method) either negatively affected the financial result or the operating profitability of Swiss utilities.

Capital structure and debt coverage remained solid In general, the capital structure and the cash flow debt coverage remained solid, supported by a strong cash flow generation and, on average, still low debt levels. Credit metrics remained solid in most cases, despite continued high capital expenditures (CAPEX). In 2008, the increase in CAPEX was particularly pronounced at Alpiq (formerly Atel), EOS (a subsidiary of Alpiq Holding), CKW (a subsidiary of Axpo Holding) and BKW (see Figure 1). Given the level of investment activity planned by the companies in the years ahead, a sustained increase in capital expenditure can be expected. However, the costs associated with these future projects (amounting to billions of francs in some instances) will be spread across a number of years and in some cases lie far in the future. The potentially negative impact of this expenditure on the credit profile of the Swiss electrical utilities should therefore be limited for the time being. In individual cases, however, the risk remains that substantial investments could have a negative impact on credit metrics and ratings in the absence of an attendant increase in cash flows.

Stable outlook despite further challenges ahead Based on the lower vulnerability of the sector regarding the global economic business cycle, the attractive production portfolio of Swiss electrical utilities (e.g. high amount of flexible hydropower and very low amount of CO2 emission-related production technologies) and in anticipation of stabilizing electricity prices, we project another sound set of operating results for 2009, although the overall profitability should be slightly pressured. We expect electricity sales volumes in Switzerland to suffer somewhat from overall lower demand. However, increasing price fluctuations for primary energy sources should result in continued volatile electricity prices in the companies' key markets in Europe, thereby supporting trading activities. On the other hand, increasing low-margin and volume-driven trading activities are expected to put pressure on the companies' profitability. Furthermore, regulatory issues are projected to negatively influence the cost/earnings structure of the sector, thereby putting pressure on margins. That said, the Swiss electricity companies are likely to continue to benefit in the near term from a partially protected Swiss energy market in conjunction with a deregulated European electricity market. However, we expect the market environment to become increasingly challenging. In particular, stiffer competition in Europe, production and transmission bottlenecks and increasing regulatory intervention will likely exert a negative impact on margins.

While the upward trend in capital expenditure is expected to slow in the near term as a result of lower project financing availability, we continue to anticipate larger investments in production facilities in the medium-to-long term. That said, the forthcoming high capital expenditures must be seen in the context of an attendant increase in sales, earnings and cash flows, which we believe will (over the cycle) offset the potential detrimental influence on debt coverage metrics.

Rating-wise, the increasingly harsher market environment expected in the coming years, coupled with rising capital outlays by electrical utilities, suggest that there is hardly any scope for an improvement in the sector�s credit ratings. We therefore expect the overall rating profile of Swiss electrical utilities to remain stable and assign a stable outlook to the sector as a whole. However, the companies within the sector may display a divergent development in the future due to their different positions within Switzerland and in the European market, the disparity of production portfolios, discrepancies in terms of planned capital expenditure levels and differing financial headroom.

Michael Gähler

Electrical Utilities Sector rating: High A, Stable

Sector overview

2008 2009E

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Economic crisis and related uncertainties have slowed growth and squeezed pricing towards the end of 2008 Many branded food companies experienced a somewhat mixed 2008, with organic growth holding up well during the first two quarters, before recording a marked decline towards the end of the year. While the high level of commodity prices allowed most companies to adjust for this by further increasing their selling prices (already beginning in 2007), the companies found themselves in a situation of dwindling volumes prompted by the spreading economic crisis negatively impacting demand on the one hand (with consumers buying less and seeking increased value for their money), and softening commodity prices on the other. This volume/pricing development is illustrated in Figure 1, which obviously shows that volume growth was positive for the last time in Q3 2008, while pricing experienced a clear decline during the same time horizon. Despite this challenging mix towards the end of 2008, margins were kept on solid levels at most companies, supported by the decline in raw material prices and the ongoing reduction in operating cost structures mostly initiated well ahead of 2008. While Nestlé was able to benefit from a sound price increase on average during 2008, which helped to counterbalance the volume decline, Lindt & Sprüngli noted a decline in volume, especially in H2 2008, which the company was unable to offset through increased pricing. While, in the first case, Nestlé's adjusted EBITDA margin even increased slightly from 17.3% to 17.4%, Lindt & Sprüngli witnessed a decline in its adjusted EBITDA margin from 16.0% to 15.4%. However, both companies benefited from their ongoing solid cash flow generation capacities and sound capital structures, which fully supported their ratings despite the more challenging outlook heading into 2009.

"Eating in" and "eating down" � impacting the VCP mix The current economic crisis has already, and is likely to continue to impact consumer demand and purchasing patterns. The opportunities for branded food companies lie in consumers "eating in" or increasingly cooking at home instead of dining out, which could lend good volume support going forward. Contrary to this, the increasingly price sensitive and more reluctant purchasing patterns could reduce volume growth of branded food companies due to "eating down," or substituting branded with private label products at lower prices. Depending on the exposure of branded food companies to private label competition, these two developments can have very different top-line and thus margin impacts. To counterbalance the threat of "eating down," we expect branded food companies to focus on strategic pricing and increasing promotional activity with retailers to support the high value offering to the end consumer. In addition, the branded food companies might also turn to a change of packages, while keeping prices stable, and thereby giving the customer a slightly better trade for their money. The pricing contribution to top-line growth is likely to carry less weight during 2009. in our view. Now that commodity costs have recovered from peak levels in mid-2008, we expect a softening in pricing as retailers and consumers are less likely to accept price increases, or may decide to just "eat down."

While it remains difficult to judge the impact of the volume drivers in 2009, we expect pricing to soften as mentioned above. As such, organic sales will in most cases decline from previous levels and, to counterbalance a margin decline, prompt an adjustment of the operating cost base by increasing efficiency and cutting costs. This measure has been implemented by many companies to date and continues to be a key focus. We view the chance of attaining a solid VCP mix streamlined to the somewhat changed market environment as achievable for the globally leading branded food companies.

M&A and shareholder focus, quo vadis? Contrary to the past, when branded food companies posted high cash flows and enjoyed plenty of financial flexibility to undertake major share buy-back programs and acquisitions, we expect the current market environment to change the financial policies of branded food companies considerably. While many companies continue to enjoy solid financial headroom under their ratings, we expect acquisitions to be focused on bolt-on acquisitions to strengthen existing businesses or tap into new markets. In terms of share buy-backs and other shareholder-friendly measures, we do not expect to see a repetition of the cash outflows seen in the past that soon again, but expect them to take on a more conservative pace. Nestlé, for example, announced that it will cut its initially intended buy-back volume that forms part of the mega CHF 25 billion program announced in 2007 from CHF 8 billion to CHF 4 billion in 2009 due to the current market environment. In our view, companies will increasingly focus on increasing balance sheet liquidity. Following the divestment of its 25% stake in Alcon to Novartis, with the remaining 52% to follow, Nestlé has increased its liquidity considerably, despite the aforementioned share buy-back program. Lindt & Sprüngli, always running on a rather conservative financial policy, clearly benefits from this in the current market and continues to enjoy ample financial flexibility despite a challenging time driven by consumer behavior.

Food for thought The branded food industry is benefiting from solid demand, while, as seen towards the end of 2008 and beginning of 2009, the challenges are increasing in the form of lower volume growth, reduced pricing flexibility in developed markets, increasing competition between branded food peers and private label companies, and a consolidating retail environment. Leading brands with strong market shares supported by ongoing marketing efforts and a focus on innovation will help to drive top-line growth, while a focus on the operating cost base and conservative financial policy will provide companies with financial flexibility and, with this, solid ratings despite increased challenges.

John Feigl

Food Sector rating: High A, Stable

Sector overview

2008 2009E

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Severe drop in global demand pressures revenues and profitability The market environment for Swiss industrials was very mixed in 2008. While the overall market conditions were rather robust in the first three quarters, business conditions worsened markedly in Q4 2008, as a result of the deteriorating global macroeconomic environment combined with arising funding constraints. The severe drop in demand (primarily indicated by significantly lower order intakes) and the corresponding deterioration in profitability and cash flow generation was felt across the whole sector. Given that the demand declined globally, even a good geographic diversification of revenues was not enough to protect against the slowdown. Nonetheless, the impact on the companies under coverage was mixed, depending on their end-markets. For instance, companies heavily linked to the global automotive sector (such as Rieter and Georg Fischer) suffered the most, while companies linked to the agricultural sector (e.g. Bucher Industries) or to energy and/or other infrastructure-related end-markets (such as ABB) were more resistant against the unfavorable trend. Q1 2009 showed rather limited signs of a sustainable recovery, as indicated by a number of Q1 results and published global macroeconomic figures. In order to cope with the severe cyclical downturn, many players in the sector initiated several restructuring initiatives to adapt production capacities to lower demand. The most prominent measures were plant closures and the transfer of manufacturing facilities, short-time working and flexible working-time models, as well as the reduction in employee numbers. In some cases, the cost-cutting actions were complemented by price discipline and (where needed and possible) selective increases in product prices in order to compensate for cost inflation. A key challenge for the capacity adjustment projects is to adapt production facilities to a lower demand without harming the company's market position or reducing the recovery potential once a global economic rebound occurs.

Refinancing remains challenging For most European industrials, refinancing grew increasingly challenging over the last 12 months as a result of their clearly softened operating performance and a continued unfavorable business outlook, combined with the global credit crunch. Both, banks and investors showed reduced willingness to increase their exposure as creditors to the industrial sector. As a result, the issuance of bonds and the renewal of credit facilities was significantly more challenging, particularly for companies positioned in or below the BBB rating category. In addition, if new issues could be realized, they came in at a far higher cost compared to recent years, thereby increasing interest expenditures. As a result, besides initiatives to reduce operating costs, working capital improvements (in order to free up liquidity) and cutting capital expenditures were key strategies to increase free cash flow generation and assure liquidity. However, the Swiss industrials under coverage were able to cope with the unfavorable refinancing conditions. Although no bonds could be issued by the companies covered within the BBB rating bucket, refinancing (if actually needed)

could be achieved via credit facilities. This was possible due to the overall sound balance sheets of companies, adequate liquidity cushions, strong market positions and their overall support relationship with banks.

Cash flow debt coverage suffered from a drop in cash generation and higher indebtedness The cash flow debt coverage ratios (such as adjusted FFO/net debt) suffered significantly as a result of the drop in operating performance and the related lower cash flow generation combined with higher indebtedness on average. Most companies (with the exception of ABB) recorded a significant drop in adjusted FFO/net debt (see Figure 1). Nonetheless, the trend in the metric was mixed within the coverage. While ABB and Bucher Industries were able to defend solid levels for the metric, Bobst Group, Georg Fischer and particularly Rieter have fallen short of their required threshold levels under their current ratings. Regarding 2009, the cash flow debt coverage of many companies is expected to remain weak, in view of the continued challenging business environment (reflected by ongoing subdued order intakes). Accordingly, the credit rating of many Swiss industrials (such as Rieter, Georg Fischer and Bobst Group) remain pressured by inadequate credit metrics under their current ratings, so that the issuance of new bonds could be difficult for these issuers.

Sector outlook remains negative In view of the persistent lack of demand (particularly in the automotive-related segment of the sector), we do not expect a significant recovery of sales in 2009, given the magnitude of the drop in new orders and the risk of order cancellation or deferrals going forward. Also the profitability should remain pressured due to declining volumes, lower capacity utilization and continued pricing pressure. Furthermore, costs related to the initiated restructuring measures are expected to pressure cash flow generation, as the positive impact on profitability and cash generation capacity of most programs should not be fully effective before 2010. Liquidity-wise, we expect the companies under coverage to be able to meet their obligations within the next 12 months given their sound cash positions and committed credit facilities. However, with regard to credit metrics, we project credit metrics of most covered companies to remain weak in 2009, thereby further pressuring financial profiles and, accordingly, the credit ratings of several Swiss industrials. In the absence of clear signs of a recovery within the next 12 months, several downgrades within the sector cannot be ruled out.

Michael Gähler

Industrials Sector rating: Mid BBB, Negative

Sector overview

2008 2009E

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Traditional business overshadowed by financial market crisis The insurance sector benefited in general from a relatively good demand for general life and non-life products. Most of the companies under our coverage enlarged their gross written premiums in both the life and the non-life sector. Whereas the non-life sector enjoyed a positive trend in line with economic growth, life products experienced first signs of an easing demand due to the financial crisis. Although insurance companies enjoyed good growth in their traditional businesses, the entire sector was hit heavily by the financial market crisis throughout the year. While all companies in the insurance sector suffered in terms of returns on their investment portfolios, some companies were exposed to the extent that governmental bailouts were necessary (e.g. AIG). The losses related to the subprime crisis affected mostly North American companies, but also Swiss Re, which has a large exposure in the USA, and suffered heavy losses in FY 2008. Total recorded losses so far for the industry were roughly USD 257.4 billion and caused over 13,000 job cuts. To restore capitalization, insurers have raised USD 142.8 billion of capital to date. Not only subprime-related investments, but also equity and credit markets negatively affected the investment returns of the insurance companies' investment portfolios. However, it needs to be said that we have seen large differences among the Swiss insurers, with Balôise being only marginally exposed to the volatile markets as they generally followed a conservative investment strategy, whereas Swiss Re suffered substantial losses in structured investments, which resulted in rating downgrades and recapitalization needs.

Whereas some companies improved the combined ratios in the non-life sector due to strong underwriting combined with decreasing losses and claim ratios, Swiss Re saw a sharp increase in its combined ratio due to the impact of natural catastrophe claims, particularly from hurricane "Ike." With regard to catastrophe losses,

global insurers experienced a large increase versus the prior year, with two major storms (Ike and Gustav) causing multi-billion losses particularly in the United States which accounted for 76% of the globally recorded USD 52.4 billion of insured losses. Whereas USD 44.3 billion of losses were attributable to weather-related catastrophes, man-made disasters (major fires, explosions, aviation disasters, maritime disasters, mining accidents, etc.) accounted for USD 7.8 billion. Earthquakes only accounted for roughly USD 422 million of insured losses in 2008, which was mainly due to the earthquake in Sichuan China (see Figure 1).

While the life insurance business benefited from an ongoing solid demand, this flattened out in H2 2008 as a result of decreasing investment returns, particularly in non-traditional and unit-linked products, which suffered most under the volatile financial markets. Embedded values experienced significant drops compared to prior years, driven by the weak performance of financial markets, as well as lower future economic assumptions. As already highlighted, capitalization measures were exposed to the negative development of the insurers' investment portfolios, resulting in mark-to-market losses and, hence, negatively impacting shareholders' equity and solvency ratios. In general, Swiss insurance companies are still adequately financed and enjoy solid solvency ratios, (all in a range of 150%�200%) thus still providing a relatively solid buffer (see Figure 2). The combined ratio was below 100% for all the Swiss insurers we cover, which reflects the aforementioned solid trend in the core business.

Cautious outlook for FY 2009 due to financial market volatility In line with many other companies, Swiss insurers did not provide any outlook for 2009, given the forecasting difficulty due to the financial crisis and financial market volatility. World demographic changes should have a positive effect on demand, in particular for life insurances. However, the first few months of the year showed that the current recession and the volatile financial market negatively affected the life businesses in particular. The markets are generally highly competitive and, in some countries, banks entered or expanded their life insurance business with aggressive guaranteed returns. In contrast, the non-life sector revealed relatively firm signs of steadily increasing demand, which was nevertheless still not enough to offset the drop in the life businesses and the volatile investment returns.

With regard to M&A activities, Balôise and Zurich both highlighted their intentions to achieve organic growth but also growth through acquisitions if opportunities occur. However, financial flexibility might be limited, given the pressure on capitalization measures and solvency ratios due to the volatile financial markets, which could negatively affect shareholders' equity due to unrealized mark-to-market losses. After Zurich acquired AIG�s US Personal Auto Group in April 2009, the company immediately offered a rights issue to restore its capitalization metrics and investors' confidence. Daniel Rupli

Insurance Sector rating: Low A, Stable

Sector overview

2008 2009E

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Figure 2

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Baloise - combined ratio Swiss Re - combined ratioZurich - combined ratio Baloise - solvency ratio (r.h.s.)Swiss Life - solvency ratio (r.h.s.) Zurich - solvency ratio (r.h.s.)




Good growth and profitability in 2008 despite some challenges Most global pharmaceutical companies once again recorded a good year in 2008, with sales and margins supporting their credit profiles. The pharmaceutical market as a whole grew by around 5% to some USD 695 billion, with North America maintaining its leading market share of around 44%, followed by Europe with some 32%, Japan with 10% and the remaining 14% split among other countries. In terms of regional growth, the more saturated markets recorded lower growth rates compared to markets with higher growth potential. North America, Europe and Japan saw growth rates of around 3%, 4% and not quite 5%, respectively, while the other markets once again clearly outgrew these markets with growth rates between 12% and 15%. Contrary to expectations, most companies managed to post good top-line growth figures throughout 2008, despite fears of rising political pressure to substitute expensive patent-protected ethical drugs with cheaper generic drugs. In addition, an increasing number of patent expirations and softer late-stage product pipelines were expected to cause lower revenues for pharmaceutical companies. Roche (Low AA, Stable), holding a leading market share in the fast-growing oncology treatment area with growth rates of up to 15%, once again recorded a strong 10% organic growth rate, excluding pandemic Tamiflu sales. As a result, Roche further increased its global market share and now ranks among the three largest pharmaceutical companies. Novartis (Mid AA, Stable), recovered from lower sales growth at the beginning of 2008 related to generic competition and posted an organic growth rate of 5%, with Q3 and Q4 producing rates of 7% and 8%, respectively. Both companies continued to enjoy good margins, with their adjusted EBITDA margins reaching 28.9% (26.0%) in the case of Novartis and 37.4% (37.7%) in the case of Roche.

Resistance to economic crisis � it's patent cycles that matters and the ability to fuel the pipeline with new products The pharmaceutical sector is generally not impacted by the global financial and economic crises as it is not exposed to economic cycles. Companies' cash flow generation capacities depend much more on patent-protected drugs, which, during the time of their patent protection of 8 to 10 years, are more or less not exposed to any competition. The cyclicality of the pharmaceutical sector is therefore a patent cycle rather than an economic cycle. Compared to a number of other pharmaceutical companies, Novartis has a relatively modest exposure to patent sales loss, whereas Roche holds virtually no exposure at all. Globally, some USD 100 billion of sales will be exposed to sales loss in the form of generic competition by 2012, which equals an estimated 12% of the global pharmaceutical market. In our view, some companies will therefore lose up to 40% of their sales by that time and hence be in dire need to substitute these products with new, patent-protected products. Screening through the companies and their product pipelines, it becomes obvious that there are many promising products waiting for release besides the recently approved ones that are now already enjoying a strongly growing franchise.

Looming M&A set to change the pharmaceutical market structure and ratings Compared to other industries, the pharmaceutical industry continues to be relatively fragmented with the ten largest players accounting for some 44% of the global market, while the five largest players have a market share of around 24%. The increasingly challenging development and high costs related with new products in addition to the search for growth has recently prompted several large-scale acquisitions and mergers that, as shown in Figure 1, have started to change the market share structure of the largest players considerably, with a correspondingly negative impact on ratings. These include the acquisition of Wyeth by Pfizer for some USD 68 billion, the merger of Schering-Plough and Merck under which Merck will pay USD 41 billion for the transaction, the staged acquisition of Alcon by Novartis for some USD 37 billion, and the acquisition of the remaining Genentech shares by Roche for a total consideration of USD 47 billion. We expect to see further M&A headline news driven by issues such as companies' needs to fuel their product pipelines, the will to diversify into businesses such as biotech or medtech with additional growth opportunities or, and this cannot be ruled out at this stage, for pure size reasons. As such, we expect US pharmaceutical companies to be more active than their European counterparts, where patent thinning risks are more prominent and the need to fuel top-line growth remains higher. However, having said this, we believe M&A risks and related rating uncertainties will remain across the industry.

Well positioned for ongoing strong operating performance The pharmaceutical industry continues to benefit from major growth drivers such as the ageing population, the increase in life expectancy, a growing number of diseases such as SARS, H5N1 avian and swine flu, as well as the spread of vector borne diseases like malaria and dengue fever due to global warming, and last but not least the increasing demand from patients in countries with only limited healthcare treatment till now. As such, we expect both sales growth and margin development to remain very good for many pharmaceutical companies, and especially Novartis and Roche with their strong and diversified product franchises, which should allow the companies to further strengthen their capital structures and credit profiles going forward. While, in some cases, past M&A activity has resulted in rating cuts (as in the case of Novartis and Roche), we would not exclude further rating cuts across the sector in the wake of further market consolidation or shareholder friendly activities.

John Feigl

Pharmaceuticals Sector rating: Low AA, Stable

Sector overview

2008 2009E

Sector development $ $

Sales growth $ $

Adjusted FFO/sales " "

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Figure 1

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Swiss real estate market enjoyed sound demand in FY 2008 The Swiss real estate market enjoyed another good year in 2008, whereas real estate prices and rental income in Europe or North America suffered substantial setbacks in certain countries as a result of the subprime and financial crisis. In the past, however, property values and rents in Switzerland rose steadily but not as exorbitantly as in other countries such as the UK or Spain. Domestic real estate companies benefited in the past from the steadily increasing demand � not only from domestic companies but also from international firms which relocated in Switzerland either to increase their market presence or in some cases even to set up their European headquarters (e.g. Google and Kraft Foods). The sound demand was not only reflected in materially higher rents over the years, but also in low vacancy rates in cities, which, however, started to increase in H2 2008, indicating an ease in demand (see Figure 1). In 2008, the vacancy rate for office rentals stood at a record low 0.9% in Geneva, 1.5% in Bern, 3.5% in Zurich and 4.5% in Basel. The rates are expected to increase in 2009, given the decreasing demand for office space due to the recession. These vacancy rates were below the average of large European cities such as London (5%), Paris (6%), Frankfurt (13%) and Barcelona (7%). Both, Jelmoli and PSP revealed net property value gains on their existing portfolios as a result of the increasing demand and higher rents due to the sound demand. However, we note that the first signs of an ease in property values emerged in H2 2008 as a result of the change in global economic sentiment and evidenced by the lower revaluation gains of domestic real estate companies last year.

Jelmoli/PSP with stable credit metrics and attractive properties PSP maintains an attractive portfolio in central locations, with a concentration in Zurich (61%), Geneva (14%), Basel (6%), Lausanne (4%) and Bern (3%). However, the company reported a rather high

vacancy rate of 8.3% at end-December 2008, which declined materially from 13.9% at end-December 2006. In addition, we question the ability of PSP to further reduce its vacancy rate in the coming year given the weakening demand in office rentals, which accounted for 66% of PSP's total rental income. Jelmoli's property portfolio (including the acquisition of the 55.5% stake in Tivona in Q1 2009) is mainly focused on the retailing industry, which accounted for 61% of total rental income. The locations are concentrated in Geneva (35%), Zurich (26%) and the Basel region (19%). Jelmoli presented a low vacancy rate of 3.7% at end-December 2008. Additionally, Jelmoli profits from the longer duration of its existing leasing contracts and, hence, a lower exposure to maturities in the near future, given the nature of the retailing industry. Although PSP is more exposed to rental agreement renewals, given the shorter-dated agreements and the higher vacancy rate, the company already renewed over 70% of its 2009 lease maturities in March 2009.

Swiss real estate companies are generally well financed, with PSP having a loan-to-value (LTV) ratio of 41.2%, which was very stable over the last few years. Jelmoli, after the acquisition of Tivona, presented a more aggressive LTV ratio of 47.0%, which nevertheless compares favorably with European companies in similar rating categories (see Figure 2).

Pressure on the office market to arise in FY 2009 Although we expect more stability in the Swiss real estate market than in the relatively volatile European and North American markets, rental income for domestic companies could come under pressure as a result of decreasing demand due to the current recession.

In particular, the companies with an exposure to office rentals (PSP) could be exposed to a decline in demand led by the financial industry, which has widely announced efficiency measures and cost-saving targets. The extension of the financial crisis into the real economy, which has revealed negative growth rates in recent months, will negatively impact unemployment and, as such, the demand for office premises across several industries. Central locations and those with attractive transport connections should be better positioned.

The retail industry could also come under pressure, driven by lower consumer spending particularly in the luxury non-food retail business, which has benefited in recent years from sound demand and a solid increase in international customers. In contrast, the non-food retail sector should be less exposed as we expect this sector to grow, albeit at lower levels than in the past, which could have a positive impact for Jelmoli. However, the relatively large amount of planned investments in new buildings could further pressure rental income going forward, as the supply gap will likely be closed as a result of the decreasing demand. In addition, we believe companies with a concentration of properties in prime retail locations will be less affected.

Daniel Rupli

Real Estate Sector rating: High BBB, Stable

Sector overview

2008 2009E


Sales growth " "

Adjusted FFO/sales # "

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Adjusted net leverage # "

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Figure 1

Offered rents by regions for office space in 2008 and vacancy rates

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Source: Immovista, Cantonal Statistical offices, Credit Suisse * vacancy rate n.a

Figure 2

Loan-to-value comparison

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2006 2007 2008*

PSP - Low A Jelmoli - Mid BBBBeffimo - S&P: BBB Klepierre - S&P: BBB+Unibail - S&P: A

Source: Company data, S&P, Credit Suisse *Jelmoli FY 2008 incl. Tivona



Price pressure and intensifying competition due to discounters The Swiss retail market profited from an ongoing sound demand in 2008, driven by a growing population as well as increased purchasing power. The non-food retail market outperformed the food retail segment in 2008 again as seen from the data published by the Swiss Federal Statistic Office. While the food goods real turnover increased by 5.0% and beverages by 3.7% in 2008, consumer electronics and beauty, health and wellness even advanced 17.5% and 7.4% in real terms versus the prior year (see Figure 1). However, clothing and footwear revealed already a negative growth trend in real terms in 2008, which continued in the first two months of 2009 reflecting first sings of an easing for the non-food retail sector.

With Aldi and the recent market entrance of Lidl, two discounters in the Swiss market will add more competition, which should result in price reductions for the customer. Both large retailers in Switzerland, Coop and Migros, addressed the increasing competition with their newly launched strategies. Whereas Coop reduced the prices on more than 600 products to discounter levels, Migros acquired Denner as a discounter in 2007 and also just recently launched its new marketing strategy focusing on brand recognition and its own-brand products. Taking a closer look at the cost structure, large discounters such as Aldi and Lidl enjoy a sizable advantage, not only on the purchasing side, but also with personnel costs, which account for only about a third compared to other retailers, according to a study published by the Gottlieb Duttweiler Institute in 2008. On the other hand, the discounters are more exposed to reputational risks due to that fact.

Given the current recession in combination with the entrance of Lidl into the Swiss retail market, price competition is expected to increase further, which could result in lower profitability margins for domestic retail companies, despite a relatively stable outlook for the industry as a whole.

Swiss retailers well prepared for competition Last year was another good year for the Swiss retail market, reflective of top-line growth and increased market share for both Coop and Migros. The increase in market share, however, was not only due to organic growth but also acquisitions. The further concentration was recently dominated by the acquisition of Denner by Migros and of Carrefour, Bell and Fust by Coop. In contrast, Valora divested its non-core processing units to focus on its core strength as a retail company. The acquisitions resulted in increased indebtedness at the two biggest retailers in Switzerland which, however, have the ability to generate a large amount of cash and reduce debt over the cycle, despite increasing competition, potentially decreased margins and lower cash flow generation. Restrictions implemented by the Swiss competition authority limit inorganic expansion steps in the food sector for both retailers, Coop and Migros. Whereas Migros is investing a large amount of the generated cash flow into the refurbishment of its sales floor space, Coop has expanded its joint-venture with REWE under transGourmet to become the second largest food service and C&C company in Europe, increasing its international market presence.

Credit metrics in FY 2008 suffered in particular from pension adjustments, as Coop and Migros presented underfunded liabilities. As we focus on a sustainable ratio over the cycle (approx. three years) in our rating methodology, the credit metrics in combination with the stable outlook for the food-retail industry did not have a negative impact on the ratings so far (see Figure 2). However, we highlight the increasing rating pressure for Coop due to the expansion via transGourmet, which we expect to be financed through a relatively large debt portion. While Valora benefits from solid credit metrics, we highlight the intensifying competition and its low margin business.

Outlook for FY 2009 While the demographical structure in Switzerland should positively impact the food retail segment, we expect a shift from the luxury food products (Sélection, Fine Food, etc.) towards own brands or discount products (M-Budget, Prix Garantie). In contrast, the non-food sector will come under pressure due to the current recession and the changed consumption behavior of private consumers, despite the fact that private consumers should have experienced real wage increases in 2009. More intense competition in the retail industry could result in decreasing prices, which positively impacts consumers, but could negatively impacts companies' profitability margins.

The first two months of retail turnover in Switzerland have proved our thesis so far, with food experiencing a 5.9% increase in January and a slight decrease of �1.9% in February versus the prior year. The non-food segment revealed a weaker trend, reflected in the clothing and footwear segment, with negative growth rates of �3.4% and �14.7% in the first two months of the year.

Daniel Rupli

Retailing Sector rating: High BBB, Stable

Sector overview

2008 2009E


Sales growth $ $

Adjusted FFO/sales $ #

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Figure 1

Retail turnover by segment

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Food BeverageBeauty, Wealth, Wellness Consumer electronics

Source: Swiss Federal Statistical Office, Credit Suisse

Figure 2

FFO/net debt over the cycle

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FY 2006 FY 2007 FY 2008 Threshold




Notes



Rating rationale Our Low A credit rating for ABB is based on the company�s above-average business profile and above-average financial profile. The rating reflects the company�s global diversification, its broad array of products, its diversified customer base, and its favorable long-term market outlook. The rating is further supported by ABB�s attractive profitability, as well as its solid balance-sheet structure, high cash flow generation and ample financial flexibility. The rating is constrained by the ongoing moderate performance of the Robotics division, sustained high raw material prices, the company�s share buyback program, and potential major acquisitions. In view of the company�s high level of operating flexibility and solid financial situation, as well as expectations that ABB�s credit metrics will remain robust, the rating outlook is Stable.

Corporate strategy ABB has focused its core business activities on power and automation (energy and automation technology) and continued to do so in FY 2008. The company places emphasis on innovative strength, quality and rapidity, as well as on close customer ties. ABB�s longer-term strategy is primarily based on raising profit margins and growing the enterprise, while securing a high level of stability for its business operations and finances. The main financial targets set by the company for 2011 include average annual sales growth of 8%�11% and an EBIT margin of 11%�16%. Profitable organic growth continues to be a priority for ABB. In addition, the company is looking for appropriate acquisition targets with a view to closing the gaps in its production portfolio or at its existing production sites. Nonetheless, in view of the global economic downturn, ABB intends to follow a rather cautious acquisition strategy.

Business profile ABB encompasses five divisions: Power Products, Power Systems, Automation Products, Process Automation and Robotics. The Power Products division (34% of consolidated revenue in 2008) comprises ABB�s manufacturing network for transformers, high and medium-voltage switchgear, circuit breakers, relays and associated equipment. The division services electricity, gas and water utilities, industrial and commercial clients, as well as distribution partners. The Power Systems division (20%) supplies turnkey systems and services for electricity transmission and distribution grids and power plants. Its main customers include utilities, industrial clients and distribution partners. The Automation Products division (29%) works with channel

partners, distributors, wholesalers and system integrators to enhance customers� productivity, for example through the employment of highly efficient motors and generators. The Process Automation division (22%) focuses on supplying integrated solutions for process control and plant optimization, as well as on providing industry-specific application expertise aimed at boosting plant productivity and reducing energy consumption. The Robotics division (5%) supplies highly sophisticated robot software, services and integrated systems for a range of applications. Its key markets are the automotive, foundry, packaging, material handling and consumer goods industries. The division's EBIT contribution remained at a very low level in FY 2008. The cyclicality of demand for the bulk of the company�s products and services, as well as the dependency on growth in the Asian markets, are the main operational risks for ABB. Nonetheless, despite the currently demanding economic environment, ABB is able to benefit from long-term trends, such as the renewal of existing energy infrastructure in more mature markets and the construction of new power facilities in the emerging markets. Industrial companies invest predominantly in solutions aimed at increasing productivity and energy efficiency, while electrical utilities invest mainly in equipment that secures a reliable supply of power with a limited environmental impact.

Financial profile ABB recorded continued strong top-line growth in FY 2008 of 19.6%. The company continued to improve its profitability, with an adjusted EBITDA margin of 18.1% (prior year: 17.1%), despite sustained pressure on margins due to high raw material prices in H1 2008 and the global economic downturn. Cash flow generation was once again very pleasing, with adjusted FFO increasing from CHF 4.0 billion to CHF 4.3 billion. The balance sheet structure remained strong, with a net cash position of CHF 33 million. ABB�s adjusted liquidity position was USD 5.9 billion, which offers the group ample financial flexibility. ABB's liquidity is also supported by undrawn committed credit lines in the amount of USD 2 billion. The adjusted FFO/Net debt ratio reflects the company�s adjusted net cash position and represents extremely solid debt coverage. We regard an adjusted FFO/Net debt ratio of around 45% as the minimum requirement for the current rating. The company thus enjoys considerable financial headroom within the current rating, a fact of particular significance in terms of potential future acquisitions and the announced share buyback program.

Event risk/outlook Market conditions are expected to remain difficult in 2009, as a result of the global financial crisis, which led to a delay in many power investment decisions. The visibility in the company's markets remains limited in view of the significant uncertainty with regard to key drivers behind the demand for ABB's products and services. Nonetheless, we think demand should be supported by the various governmental stimulus programs (mainly focusing on infrastructure investments). In addition, the increased pressure to cut costs could intensify the focus on investments to improve the productivity and energy use of ABB's customers. Last but not least, ABB currently exhibits robust credit metrics, which provide the company with considerable financial headroom. Accordingly, we see ABB as well positioned to withstand the current economic downturn.

Michael Gähler

ABB (CS: Low A, Stable) Sector: Electrical Equipment

Company description

ABB Ltd. is a global leader in the field of energy and automation technology. The company enables its customers in the energy supply and industrial sectors to increase their output while reducing their environmental impact. ABB is organized into five divisions: Power Products, Power Systems, Automation Products, Process Automation and Robotics. The company is active in over 100 countries and has approximately 120,000 employees. ABB�s main sales markets are Europe (45% of consolidated revenue in 2008), the Americas (18%) and Asia (26%).

Business profile: Above-average Financial profile: Above-average



Sec. no. / Description Recommendation Guarantor S&P Rating Moody�s Rating Issue volume (m)

000896367 / 3.75% ABB Ltd 30/09/2009 HOLD ABB Ltd. A�, Stable A3, Stable CHF 500*

* outstanding amount CHF 108 million

Financial overview (USD m) 2006 2007 2008 2009E

P&L

Sales 23,281 29,183 34,912 30,353

Gross margin 31.4% 32.8% 33.2% 30.9%

Adjusted EBITDA 3,490 4,998 6,324 4,416

Margin 15.0% 17.1% 18.1% 14.5%

Adjusted EBIT 2,702 4,166 5,384 3,465

Margin 11.6% 14.3% 15.4% 11.4%

Adjusted interest expense 381 362 832 805

Net profit 1,390 3,757 3,118 2,197

Cash flow

Adjusted FFO 3,028 3,986 4,331 3,408

Adjusted CFO 2,457 3,357 4,237 3,358

CAPEX 536 756 1,171 1,000

Adjusted FCF 1,921 2,601 3,066 2,358

Adjusted DCF 1,718 2,152 2,006 3,278

Balance sheet

Net cash & near cash 3,446 6,505 5,886 7,749

Core working capital 466 1,092 891 776

Adjusted Total asset base 27,092 33,059 35,677 36,715

Total adjusted debt (M&L adjusted) 5,598 4,875 5,853 5,619

Total adjusted net debt (M&L adjusted) 2,152 -1,630 -33 -2,129

Equity (pension leverage adjusted) 6,343 11,375 11,598 13,975

Market capitalization 37,042 66,475 33,658 n.a.

Key ratios

Interest and debt coverage

Adjusted EBITDA/Net interest coverage 14.9x 56.0x 12.2x 8.7x

Adjusted EBIT/Net interest coverage 11.5x 46.7x 10.4x 6.9x

Adjusted FFO/Debt 54.1% 81.8% 74.0% 60.6%

Adjusted FFO/Net debt 140.7% -244.5% <-300% -160.0%

Adjusted FCF/Net debt 89.3% -159.5% <-300% -110.7%

Adjusted net debt/EBITDA 0.6x -0.3x 0.0x -0.5x

Capital structure

Core working capital/Sales 2.0% 3.7% 2.6% 2.6%

Cash cycle 87.7d 90.6d 82.4d 100.0d

Cash/Adjusted gross debt 61.6% 133.4% 100.6% 137.9%

Adjusted net leverage 25.3% -16.7% -0.3% -18.0%

Adjusted gross leverage 46.9% 30.0% 33.5% 28.7%

Adjusted net gearing 33.9% -14.3% -0.3% -15.2%

n.a. = not available Accounting standard: US GAAP

Margin development

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Year end2008

2009 2010 2011 2012 2013

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Cash Committed credit facility Bonds & loans

Strengths / Opportunities Next events

Broad product portfolio 23 July 2009: Q2 2009 results

Geographical diversification 29 October 2009: Q3 2009 results

Extremely solid credit metrics

Favorable market position

Website

www.abb.com

Weaknesses / Threats

Reliance on economic cycle and customer CAPEX

Dependency on growth in Asia

Low margins in the Power Systems division

Difficult market environment for Robotics division

Source: Company data, Bloomberg, Credit Suisse



Rating rationale Our Mid BBB credit rating for Adecco is based on the company�s above-average business profile and average financial profile. The rating reflects Adecco�s leading position in most large staffing markets, its broad geographical diversification and extensive branch network, its strong brand, solid balance-sheet structure and positive cash-flow generation. The rating is restrained by the cyclicality of the industry, its low margins and operating capital intensity. Moreover, future acquisitions could have an adverse effect on Adecco�s credit metrics. The rating outlook is Stable in light of Adecco�s dominant market position, its increased focus on higher-margin segments, and its rather flexible cost structure, despite the currently challenging market conditions and the potential for further acquisitions in the future.

Corporate strategy Adecco's operating business is divided into six global business lines, which are designed to better represent the company�s global activities. One of Adecco�s main targets is to improve its business mix by increasing the weighting of higher-margin segments. To reach this goal, Adecco is supplementing its organic growth with strategic acquisitions (e.g. DIS AG and the Tuja Group). The company is targeting an operating margin of above 5% in the medium-term and average revenue growth of 7% to 9% per annum. Adecco aims to have a thorough knowledge of the markets in which it operates. Accordingly, the company conducts an open dialog with trade unions and other organizations involved in the employment market. In view of the currently very difficult market environment, protecting margins throughout disciplined pricing and cost reductions is a key priority for the management. Furthermore, in order to optimally position itself for the next economic upswing, Adecco aims to undertake investments to structurally improve the organization (with strict financial discipline) and with a focus on the professional and specialized business fields.

Business profile Adecco has a network of over 6600 branches in over 60 countries around the world and is ranked first or second in terms of market share in more than nine of the largest staffing markets. The company�s management structure consists of its Office and Industrial businesses, the six global business lines (Engineering & Technical, Finance & Legal, Human Capital Solutions, Information Technology, Medical & Science and Sales, Marketing & Events) and the Emerging

Markets segment. This structure has been designed to improve the global orientation of the company and its internal information flow, and to strengthen Adecco�s customer relationships in order to more effectively identify and respond to clients� needs. In addition, it should allow the company to identify and implement additional cost-cutting opportunities. The company�s activities are dominated by its Office and Industrial businesses, which together generated around 55% of revenue in FY 2008, while the six business lines accounted for some 22% and the Emerging Markets segment 6%. Based on the company�s extensive branch network and dominant market position, its geographical diversification and its business mix, Adecco is well positioned to benefit from structural changes in the labor market. The company has responded to demographic trends in Europe and the USA by expanding its placement services for highly qualified personnel. Given the higher margins generated in this business area, the strategy has resulted in an improvement in Adecco�s overall margins. As experienced in FY 2008, the human resources market is subject to pre-cyclical fluctuations and therefore clearly suffers from the currently very demanding business environment. Further, the industry is faced with an increasingly competitive environment with an attendant negative impact on margins.

Financial profile Adecco's top line declined by 5.3% (organic growth: �5%) in FY 2008. Adecco's adjusted EBITDA margin was 5.5% (prior year: 5.4%), indicating a rather flexible cost structure of the group. The cash-flow generation remained pleasing, with an adjusted FFO of EUR 1.0 billion, unchanged compared to last year. The balance sheet structure is sound in our view. Adjusted net leverage was stable at 45.0% and is within the range required to support the current rating. Adjusted net debt declined from EUR 2.4 billion to EUR 2.3 billion, while net liquidity increased slightly from EUR 352 million to EUR 381 million. In addition, the company's liquidity is further supported by undrawn committed credit lines in the amount of EUR 483 million. The adjusted FFO/Net debt ratio of 44.3% (prior year: 41.8%) is still at a solid level for the rating, in our view, and provides the company with good financial headroom. A level clearly above 30% is sufficient for the current rating, in our view.

Event risk/outlook Adecco aims to defend its profitability during the current economic downturn. In this regard, the company plans to spend EUR 50 million in H1 2009 to further reduce costs (actions initiated in H2 2008 are already well underway). Currently there are no signs of improvement for FY 2009. Accordingly, we expect revenues and cash flow generation to deteriorate in the current year. As a result, credit metrics are expected to weaken in the future, putting pressure on the group's financial profile. Nonetheless, we see Adecco as well positioned to withstand the current economic downturn, given its financial flexibility, its fairly flexible cost structure compared to other sectors, and the group's focus on profitability. In addition, given the company's pre-cyclical business, Adecco should benefit quickly from an economic recovery. In the medium term, Adecco�s focus on a value-oriented management approach and on placement services for specialist and highly-qualified personnel will likely underpin further improvements in the company�s unadjusted EBIT.

Michael Gähler

Adecco (CS: Mid BBB, Stable) Sector: Staffing

Company description

Adecco SA is the global leader in human resources solutions and offers a comprehensive range of personnel services. Adecco�s structure comprises the Office and Industrial businesses, as well as six global business lines. The company operates in over 60 countries and has an extensive network of local branches. France is Adecco�s main market, generating around 33% of sales, followed by North America (14%), Germany (8%), GB/Ireland (7%), Japan (7%) and Italy (6%). Emerging markets are contributing approximately 6% to total group revenues. The company has currently over 34,000 employees.

Business profile: Above-average Financial profile: Average




02522754 / 4.50% Adecco Fin. 25/04/2013 n.r. Adecco SA BBB, Neg. Baa2, Neg. EUR 500

10138092 / 7.625% Adeco Fin. 28/04/2014 n.r. Adecco SA BBB, Neg. Baa2, Neg. EUR 500

n.r. = not rated

Financial overview (EUR m) 2006 2007 2008 2009E

P&L

Sales 20,417 21,090 19,965 15,972.0

Gross margin 17.4% 17.8% 18.1% 18.1%

Adjusted EBITDA 1,015 1,136 1,104 548.2

Margin 5.0% 5.4% 5.5% 3.4%

Adjusted EBIT 861 956 781 341.7

Margin 4.2% 4.5% 3.9% 2.1%

Adjusted interest expense 103 116 125 133.1

Net profit 611 735 495 115.1

Cash flow

Adjusted FFO 829 1,012 1,015 415.6

Adjusted CFO 889 1,215 1,217 200.0

CAPEX 85 91 106 615.6

Adjusted FCF 804 1,124 1,111 120.0

Adjusted DCF 684 989 948 495.6

Balance sheet

Net cash & near cash 684 352 381 1,096

Core working capital 613 621 382 242



Total adjusted net debt (M&L adjusted) 2,021 2,423 2,289 2,032



Key ratios





Adjusted FFO/Net debt 41.0% 41.8% 44.3% 20.4%

Adjusted FCF/Net debt 39.8% 46.4% 48.5% 24.4%

Adjusted net debt/EBITDA 2.0x 2.1x 2.1x 3.7x

Capital structure


Cash cycle 0.3d -5.8d -11.0d -14.0d


Adjusted net leverage 44.6% 45.7% 45.0% 42.3%


Adjusted net gearing 80.6% 84.1% 81.8% 73.4%


Margin development

2%

3%

4%

5%

6%

2006 2007 2008 2009E

12%

14%

16%

18%

20%




0

1,000

2,000

3,000

4,000

2006 2007 2008 2009E

EUR m

30%

35%

40%

45%

50%



20%

30%

40%

50%

2006 2007 2008 2009E

4x

8x

12x

16x



0

400

800

1,200

Year end2008

2009 2010 2011 2012 2013

EUR m

Cash Committed credit facility (maturing 2013) Bonds & loans


Leading market position worldwide 11 August 2009: Q2 2009 results

Geographically diversified operating network 5 November 2009: Q3 2009 results

Diverse customer base

Focus on higher-margin segments

Website

www.adecco.com


Highly cyclical industry

Low-margin business

Substantial operating capital requirements

Potential debt increases due to acquisitions




Rating rationale AFG's average business profile is supported by its sound business diversification with five divisions focused on offering a broad product and service portfolio for the home improvement and construction markets, while diversifying the customer base through the newly established fifth division Surface Technology into the areas of general industries, automotive, defense technology and aeronautics, among others. The company enjoys good market positions, well-established brands, high quality, a good track record for innovation, and the flexibility to adjust to rapidly changing market developments due to its strong customer focus and flexible organization. Ongoing competition in its key markets and raw material price pressure in combination with a weakening demand related to the real estate market challenges has recently resulted in margin pressure. As a result AFG's cash flow generation capacity was unable to increase to the same extent that its adjusted debt base increased, following past acquisitions. Hence key metrics weakened considerably, such as adjusted FFO/Net debt at a low 19.0% in 2008, well below the required threshold level of 25% over the cycle that was newly assigned following the downgrade to a Low BBB in spring 2009. While we consider the recent CFH 113 million equity increase as a positive step to add some support for the financial profile, we doubt whether this measure is sufficient to offset the softening cash flow generation capacity going forward. The negative outlook incorporates a further weakening of key metrics relating to a further weakening of demand and margins, while facing continued high adjusted debt levels despite the aforementioned capital increase. Should key metrics not develop towards their threshold levels in the foreseeable future, a negative rating cut would be likely.

Corporate strategy AFG's strategy is clearly focused on positioning the company as a leading independent and fully integrated manufacturer and supplier of building products under the motto "One Building � One Stop" and, in addition, to enter new markets with its newly established Surface Technology division. Past acquisitions have helped to strengthen its business portfolio not only in terms of product offering, but also geographically. Following these acquisitions, AFG's focus is set on integrating these businesses and reaping further synergy potentials in the fields of processes, sales and marketing activities. Following several acquisitions in the last couple of years, AFG has stretched its capital structure steadily, building up its adjusted net debt level to CHF 605 million in 2008 and thus being forced to take two decisive steps to support its financial profile. On the one hand the aforementioned capital increase of CHF 125 million, while on the other hand, AFG's management announced that there would not be any further near-term acquisitions until the company has deleveraged its balance sheet to an appropriate level. In terms of its product

portfolio, AFG is focusing on higher-value-adding products and services. On a geographical basis, the company is reducing its dependency on the Swiss and German markets, which still accounted for 71% of total sales in 2008, by further expanding its presence in existing areas and entering new and promising markets.

Business profile Since the beginning of 2007, AFG has been split into five divisions, with four of them focusing mainly on the improvement or new construction of residential and commercial buildings, and the most recent one focusing on surface technology applied in areas such as paper & print, defense technology, aeronautics and automotive, among others. Together with the already existing Steel Technology division (construction and non-construction products), the new Surface Technology division is expected to reduce AFG's dependency on the building industry going forward. Overall sales continue to be heavily biased towards the Swiss and German markets, which account for some 71% of group sales and thus pose a cluster risk in a downturn. AFG operates in markets that are fragmented, with only a small number of larger players. Due to this constellation, AFG holds strong-to-leading market shares in many of its businesses. However, the company remains largely exposed to its two key markets Germany and Switzerland, which, in case of a downturn like the current one, weighs on the business profile due to the low sales diversification.

Financial profile 2008 proved to be a very challenging year for AFG, with sales recording an organic growth of 2.1%, which was largely offset by negative currency effects. Only thanks to its acquisitive stance was AFG able to post a top-line increase of 6.7% resulting in sales of CHF 1,571 million. The adjusted EBITDA margin suffered from ongoing high raw material costs and lower volume growth and therefore declined to 11.0%. Although the adjusted FFO remained flat at CHF 115 million YoY, FCF turned even more negative, at minus CHF 20 million, following high CAPEX investments of CHF 116 million. AFG's acquisition track record together with PP&E investments resulted in a continued increase of its adjusted net debt to CHF 605 million, a level clearly in excess of its debt capacity, in our view. As a result, key metrics such as adjusted FFO/Net debt and net adjusted leverage declined to 19.0% and increased to 54.8%, respectively. We cut the rating to a Low BBB with a Negative outlook in anticipation of this development. To counter a further weakening of its financial profile, AFG undertook a capital increase that both reduces the leverage on the one hand, while increasing debt coverage on the other. We view AFG's liquidity as sufficient, given its balance sheet cash of CHF 61 million in addition to the undrawn CHF 137 million from its committed credit facility. This compares to CHF 71 million of maturing debt in 2009. Besides this, the capital increase of CHF 125 million lends the company additional financing headroom, especially when heading towards 2010.

Event risk/outlook AFG expects 2009 to be another challenging year, with the construction-related divisions also being affected by the market downturn. As a result, the company will undertake further cost-cutting efforts, while paying very close attention to its debt level. Therefore, CAPEX and working capital will be reduced considerably in addition to divesting non-core assets where possible. Given the very challenging market outlook, however, we remain very cautious regarding AFG's cash flow generation capacity necessary to meet the required threshold levels over the cycle.

John Feigl

AFG (CS: Low BBB, Negative) Sector: Building Materials

Company description

AFG is a leading integrated supplier to the building industry, with FY 2008 sales of CHF 1,571 million. Its five divisions cover Heating and Sanitary (accounting for 41% of group sales), Kitchens and Refrigeration (18%), Windows and Doors (24%), Steel Technology (11%) and Surface Technology (around 6%). In 2008, Switzerland accounted for the largest part of total sales with 40%, followed by Germany with 31% and the remaining 29% split between countries in Eastern Europe, the Far East and North America. At year-end 2008, AFG had some 6,131 employees.

Business profile: Average Financial profile: Average




001859402 / CHF 3.38% AFG 03/06/2010 HOLD AFG Holding n.r. n.r. CHF 150

n.r. = not rated

Financial overview (CHF m) 2006 2007 2008 2009E

P&L

Sales 1,243 1,471 1,571 1,375

Gross margin 55.1% 54.9% 54.0% 52.1%

Adjusted EBITDA 155 170 172 128

Margin 12.5% 11.6% 11.0% 9.3%

Adjusted EBIT 98 99 91 51

Margin 7.9% 6.7% 5.8% 3.7%


Net Profit 66 56 48 18

Cash Flow

Adjusted FFO 112 115 115 76

Adjusted CFO 99 85 111 99

CAPEX 46 87 116 62

Adjusted FCF 52 -1 -5 37

Adjusted DCF 40 -19 -25 37

Balance Sheet

Net cash & near cash 102 45 30 132


Adj. Total asset base 1,122 1,457 1,524 1,585

Total adjusted debt (M&L Adj.) 449 542 634 578

Total adjusted net debt (M&L Adj.) 348 497 605 446

Equity (Pension leverage adj.) 351 501 500 628

Market Capitalization 610 560 183 n.a.

Key ratios






Adjusted FCF/Net debt 15.1% -0.3% -0.8% 8.2%


Capital structure


Cash cycle 59.3d 66.1d 50.2d 56.0d





n.a. = not available Accounting standard: IFRS

Margin development

0%

3%

6%

9%

12%

15%

2006 2007 2008 2009E

0%

15%

30%

45%

60%

75%




0

150

300

450

600

750

2006 2007 2008 2009E

CHF m

0%

12%

24%

36%

48%

60%



-10%

0%

10%

20%

30%

40%

2006 2007 2008 2009E

0x

3x

6x

9x

12x

15x



0

50

100

150

200

250

Year end2008

2009 2010 2011 2012 2013

CHF m


Strengths / Opportunities

Sound positions in most key markets

Good product and brand diversification

Focus on higher-value-adding products

Efficiency and cost structure improvement


Imbalanced geographical sales split

Increasing competition and pricing pressure

High indebtedness and weak metrics

Acquisition and integration risks

Next events

4 August 2009: H1 2009 results

26 January 2009: 2009 sales results

Website

www.afg.ch




Rating rationale The High A credit rating for Alpiq is based on the group�s above-average business profile and above-average financial profile. The rating is supported by the group�s vertical integration, its strong position in Switzerland, the European-wide diversification of its power generation, distribution and trading activities, its key position in the cross-border power grid with Italy, its high cash flow generation capacity and sound, less cyclical earnings. The rating is constrained by the high foreign share of production coupled with the creation of new electricity distribution and trading capacity in Europe, with an attendant increase in operating risks. In addition, high and volatile wholesale energy prices and the risks associated with grid-related income could have a negative impact on the company�s medium-term earnings stability. Furthermore, the financial profile currently suffers from insufficient credit metrics (an insufficient cash flow debt coverage in particular) following the integration of EOS and high CAPEX. The rating outlook is Stable in view of the group�s robust cash flow generation, the diversification of its operating activities, its solid credit metrics and in anticipation of its credit metrics recovering to adequate levels over the cycle. The rating for Alpiq Holding is High A in line with our credit rating for the Alpiq Group. The rating is based on the Holding company's good access to earnings, cash flows and assets of its subsidiaries (due to the ownership structure and composition of the management), as well as the sound business diversification at the Holding level, the anticipated refinancing of subsidiaries' debt at the Holding level and the high credit rating of the overall group.

Corporate strategy With the merger of Atel and EOS, a new leading Swiss energy company, Alpiq, with a strong European orientation was created. The new group started operations on 1 February 2009 and combines electricity generation, marketing, distribution, trading and energy services with a comprehensive set of energy solutions. Alpiq's extensive peak energy capacity will provide interesting business opportunities in the European energy market, in our view. In terms of production, Alpiq favors a balanced mix of traditional and renewable energies (including a high proportion of eco-friendly hydroelectric and wind power) with a commitment to both environmental and economic sustainability. In the medium to long term, Alpiq is intensively developing options in terms of new major power facilities (with a focus on technical and geographic diversification), and is also planning to undertake selective investments in additional production capacities.

Business profile Alpiq Group is the leading European-wide production-backed energy trader in Switzerland. The Energy division's activities cover the entire value chain (trading, production, grid and energy services). Alpiq is active in 29 countries in Europe, relying on its own power plants in Switzerland and several other European countries, its interests in hydraulic and thermal partner plants, as well as its drawing rights on foreign power generation parks, and thus benefiting from a technically and geographically diversified production portfolio. The company's production portfolio has an installed production capacity of 6,595 MW (allowing an annual electricity production of 21 TWh) and is well diversified across generation technologies. Further 1,500 MW of new production capacities in several European regions are under construction. The flexibility on the production side (in particular regarding flexible hydro power) supports its trading and distribution activities. Beyond Switzerland, Alpiq enjoys a good platform for growth in Italy, as well as in Central and Eastern Europe. The group�s internal production capacity provides sustained support for its activities. The company is represented on all major European electricity exchanges and trading platforms, thereby trading in both traditional physical and financial products as well as coal, gas, oil and CO2 certificates. On the one hand, these trading activities provide the group with an opportunity to exploit specific market situations and to optimize procurement and distribution prices. On the other hand, they involve costly administrative and risk-management functions, are exposed to the risk of losses, tend to generate declining profit margins and generally produce volatile income flows. Although the Energy Services division (AIT and GAH Group) is exposed to the cyclicality of the construction industry and government procurement budgets and is personnel-intensive, this business area requires less capital and exhibits lower operating risks.

Financial profile Pro forma net sales in FY 2008 were CHF 15.8 billion. With an unadjusted pro forma EBITDA of CHF 1.7 billion and a related pro forma EBITDA margin of 10.9%, profitability is at a good level. The balance sheet is solid, with an unadjusted pro forma net debt of CHF 4.1 billion and unadjusted equity of CHF 8.2 billion, resulting in an unadjusted net leverage of 33.5%. However, in view of the increased indebtedness (following high CAPEX in FY 2008 and the cash outflow of CHF 1.8 billion related to the integration of the assets of EOS), we project adjusted FFO/Net debt to fall short of our minimum requirement of 40% under the current rating. As a result, the company's financial profile will remain under pressure until credit metrics recover.

Event risk/outlook The European electricity market is expected to remain challenging in view of lower electricity demand and market liquidity, lower electricity prices, limited cross-border capacities and regulations. Furthermore, profitability is expected to be pressured by costs related to the integration of EOS. Accordingly, the cash flow debt coverage should remain insufficient for the current rating in FY 2009. Nonetheless, in view of the group's strengthened market position and production capacities, its solid cash flow generation and Alpiq's aim to reduce indebtedness going forward, we expect credit metrics to recover over the cycle to adequate levels under the current rating.

Michael Gähler

Alpiq (CS: High A, Stable) Sector: Electrical Utilities

Company description

The Alpiq Group (resulting from the merger of Atel and EOS) is the largest electricity trader in Switzerland and the leading Swiss electricity company operating on a pan-European scale (power generation, transmission and trading). The company is active in the traditional physical electricity business and in electricity trading markets (physical energy and electricity derivatives), and operates power stations in several European countries. Alpiq also offers related services through its Energy Services division. The major share of group sales is generated in foreign markets (Italy, Germany, France, Central and Eastern Europe). The company currently has more than 10,000 employees.





004972765 / 3.000% Alpiq Holding 10/02/2014 HOLD Alpiq Holding n.r. n.r. CHF 200

004622990 / 3.375% Alpiq Holding 30/10/2014 HOLD Alpiq Holding n.r. n.r. CHF 175

004972768 / 4.000% Alpiq Holding 10/02/2017 HOLD Alpiq Holding n.r. n.r. CHF 250n.r. = not rated

Financial overview (CHF m) 2006* 2007* 2008* 2009E

P&L

Sales 11,334 13,452 12,897 15,110

Gross margin 16.1% 15.8% 16.8% 15.9%

Adjusted EBITDA 975 1,259 1,290 1,585

Margin 8.6% 9.4% 10.0% 10.5%

Adjusted EBIT 773 1,011 1,010 1,145

Margin 6.8% 7.5% 7.8% 7.6%


Net profit 504 463 723 704

Cash flow

Adjusted FFO 783 928 871 1,173

Adjusted CFO 706 906 698 1,243

CAPEX 266 615 1,064 800

Adjusted FCF 440 291 -366 443

Adjusted DCF 478 349 -150 748

Balance sheet

Net cash & near cash 1,112 394 579 222







Key ratios






Adjusted FCF/Net debt 32.0% 17.4% -15.2% 8.4%


Capital structure


Cash cycle 23.9d 23.2d 26.9d 29.9d





* = 2006 � 2008 figures based on Atel Group's financials n.a. = not available Accounting standard: IFRS

Margin development

0%

5%

10%

15%

2006 2007 2008 2009E

10%

15%

20%

25%




0

2,500

5,000

7,500

10,000

2006 2007 2008 2009E

CHF m

10%

20%

30%

40%

50%



-30%

0%

30%

60%

2006 2007 2008 2009E

0x

10x

20x

30x



0

400

800

1,200

1,600

Year end2008

2009 2010-2014

>2014

CHF m

Cash Bonds & loans


High income and cash flow

Vertical integration of the group

Diversification of production throughout Europe

Relatively high share of flexible hydropower


Credit metrics insufficient for the current rating

Latent risk of losses in electricity trading

Low margins in Energy Services segment

Integration risks related to EOS

Next events

August 2009: H1 2009 results

November 2009: Q3 2009 results

Website

www.alpiq.com




Rating rationale Our Low AA credit rating is based on the group�s above-average business profile and strong financial profile. The rating reflects the vertically integrated group structure, the production flexibility offered by the company�s hydroelectric activities, its broad customer base and stable cash-flow generation. Additional factors with a positive impact on the credit rating include the long-term nature of the group�s corporate strategy, its extremely solid balance sheet (underpinned by a conservative financial policy), as well as its ample liquidity and financial flexibility. The public sector�s direct ownership of the group also supports the rating by one notch. Negative factors for the rating are the impact of deregulation of the Swiss electricity market, growing regulatory pressure (particularly in conjunction with transmission grids) and the political uncertainty surrounding nuclear energy. The rating outlook is Stable in view of the group�s strong position in Switzerland, its sound financial structure, stable cash flow and planned capital expenditure. Given the good access to earnings, cash flows and assets of its subsidiaries, the sound business diversification at the holding level, the low debt levels of subsidiaries and the very high credit rating of the overall group, we have assigned Axpo Holding a Low AA rating in line with our credit rating for the Axpo Group.

Corporate strategy Axpo Group aims to strengthen its position in Switzerland and to guarantee a reliable supply of power via its own production capacities. The group focuses on a diversified production portfolio in Switzerland and abroad, and plans to invest about CHF 10 billion between now and 2020 (CHF 1.5 billion thereof within the next three years) in electric power generation in Switzerland, in Swiss power transmission and distribution networks, in the local production of electricity in Italy and in the expansion of its European electricity and gas trading operations. The emphasis of the investment is on achieving greater diversification through renewable energies, hydroelectric power, nuclear power and gas. In this regard, Axpo Group, together with BKW, also submitted two framework permit applications for the replacement of the nuclear power plants in Beznau and Mühleberg. As part of its preparation for the ongoing deregulation of the Swiss electricity market, Axpo continues to pursue a pricing strategy aimed at maintaining the group�s medium-term international competitiveness.

Business profile The Axpo Group is the leading producer of nuclear and hydroelectric power in Switzerland and the country�s premier power grid operator. In FY 2008, electricity sales volumes amounted to 67,128 GWh (2007: 113,447 GWh). Axpo's generation portfolio is well diversified across generation technologies and primary energy sources. Via its subsidiaries, the group owns a nuclear power plant (Beznau), has a stake in the Leibstadt (52.7%) and Gösgen (37.5%) and owns interests in the drawing rights companies AKEB, KBG and ENAG. In the hydropower segment, Axpo holds interests in more than 40 run-of-river and pump-storage plants in central and eastern Switzerland, and in the cantons of Valais, Graubünden and Ticino. Furthermore, Axpo enjoys a leading position as a producer of power from renewable energy sources (such as biomass-fueled power plants). Power derived from third parties and trading amounted to a high 30,025 GWh (due primarily to EGL's trading activities), which ex-poses the group to the volatility of wholesale energy prices (particularly when coupled with potential supply shortfalls at the group�s own production plants). Strategies to increase the company�s power generation capacity in Switzerland mainly include the expansion of production facilities in the hydropower and renewable energy segment. In addition, the EGL subsidiary is building thermal power plants (in particular in Italy). The group�s European wide energy trading activities (through EGL) offer sound growth potential. However, besides the rather low margins of these activities in general, the business is exposed to risks, such as market-price risks and earnings volatility.

Financial profile Axpo recorded a 17.8% decline in revenue in FY 2008, attributable to the shift from traditional physical electricity sales to energy derivatives trading. The group's profitability remained at an attractive level, with an adjusted EBITDA margin only slightly deteriorating from 17.5% to 17.3%, primarily due to ongoing investment projects and the expansion of international energy trading activities. Profitability thus remained at an attractive level. Adjusted FFO remained stable at CHF 1.1 billion, reflecting the group�s continued strong cash-flow generation. In addition, Axpo exhibits a very solid balance-sheet structure, in our view, with adjusted net debt of CHF 0.8 million and an impressive CHF 2.1 billion of net liquidity. The adjusted FFO/Net debt ratio reflects its very low indebtedness and underscores the considerable financial headroom the company enjoys under the current rating.

Event risk/outlook We anticipate Axpo's FY 2009 results will come in below last year's high levels (both in terms of growth and margins), in view of the economic slowdown, further potential impairments of the financial assets for federal nuclear funds and the uncertainties related to the impact of the market liberalization. As a result of the group�s expansion projects, operating costs and capital requirements will likely continue to rise. However, given that the investment outlays will be spread across a number of years and underpin an expansion of Axpo�s production capacity, we anticipate that such expenditure will have only a moderate impact on Axpo�s credit rating.

Michael Gähler

Axpo (CS: Low AA, Stable) Sector: Electrical Utilities

Company description

Axpo Holding (established in 2001) is a holding company consisting of NOK (100%), EGL (87%), CKW (74%) and Axpo Informatik AG (63%). The Axpo Group is one of Switzerland�s leading integrated power companies and a major player in the European electricity trading market. Axpo is focused on supply areas in northeastern and central Switzerland and meets approximately 45% of Swiss electricity demand. Through its subsidiary EGL, Axpo also engages in energy trading on the European market. Axpo Holding AG is wholly owned by the cantons and cantonal electrical utilities of northeastern Switzerland.

Business profile: Above-average Financial profile: Strong




No CHF-denominated bonds outstanding


P&L

Sales 9,301 9,117 7,492 7,103

Gross margin 19.8% 24.6% 27.7% 26.4%

Adjusted EBITDA 1,296 1,594 1,297 1,119

Margin 13.9% 17.5% 17.3% 15.8%

Adjusted EBIT 1,018 1,282 948 743

Margin 10.9% 14.1% 12.7% 10.5%


Net profit 980 1,324 922 674

Cash flow

Adjusted FFO 1,053 1,139 1,111 962

Adjusted CFO 855 1,165 1,071 916

CAPEX 652 914 567 600

Adjusted FCF 203 251 505 316

Adjusted DCF 91 85 321 133

Balance sheet





Total adjusted net debt (M&L adjusted) 61 -188 1 -149


Market capitalization n.a. n.a. n.a. n.a.

Key ratios





Adjusted FFO/Net debt >100% -607.2% >100% -647.4%

Adjusted FCF/Net debt >100% -133.8% >100% -212.7%

Adjusted net debt/EBITDA 0.0x -0.1x 0.0x -0.1x

Capital structure


Cash cycle 18.4d 13.9d 20.0d 22.0d


Adjusted net leverage 1.0% -2.7% 0.0% -1.8%


Adjusted net gearing 1.0% -2.6% 0.0% -1.8%


Margin development

5%

10%

15%

20%

2006 2007 2008 2009E

15%

20%

25%

30%




-3,000

0

3,000

6,000

9,000

2006 2007 2008 2009E

CHF m

-6%

-4%

-2%

0%

2%



-800%

-400%

0%

400%

800%

2006 2007 2008 2009E

10x

20x

30x

40x

50x


Liquidity and debt profile1

0

1,000

2,000

3,000

Year end2008

2009 2010-2014

>2014

CHF m

Cash Bonds & loans

1 as of end-September 2008


Leading position in Swiss electricity market No information given

Very solid financial profile (net cash position)

100% government-owned

Opportunities in European electricity trading

Website

www.axpo.com


Impact of electricity market deregulation

Growing regulatory pressure

Dependency on wholesale prices

High level of capital expenditure in the future




Rating rationale Our Low A rating for Bâloise is based on its above-average business profile and above-average financial profile. Bâloise braved the headwinds from financial markets and the difficult economic conditions, and was thus able to grow its core business in all regions. This shows that the company successfully implemented its operational excellence strategy. While the non-life business grew above the market average, the life business revealed an overall drop in business volumes. The conventional life business reported an improving trend, but the investment-type life business suffered from the current difficult economic environment. In our view, the company is well positioned in its current markets and we acknowledge the relatively defensive characteristic of its investment portfolio. In addition, we view the proposal for the 10% authorized capital as positive, as it will provide Bâloise financial flexibility with regard to capitalization � not only from a stabilization point of view due to potential further investment losses, but also in terms of business expansion.

Corporate strategy Bâloise sees itself as a solutions provider in the fields of insurance and provision for the future. Its core businesses are life and non-life primary insurance and pension solutions. Banking in Switzerland is viewed as an important component of its insurance business and distribution network. Bâloise primarily targets private individuals as well as small and medium-sized enterprises. In February 2009, Bâloise launched its new brand initiative "The Safety World," with the aim of achieving ambitious growth and earnings targets, particularly in the targeted customer segments. The new group-wide claim "Making you safer" is aimed at addressing clients' basic safety needs and should thus increase interest in the company's product offering. Bâloise aims to become one of Europe�s most profitable and fastest-growing insurance companies by 2012 through a combination of optimization programs, organic growth and the development of new growth areas. Regarding the expansion of business operations, Bâloise reiterated its focus on organic growth, supplemented by targeted acquisitions, strategic partnerships or mergers in existing markets in continental Europe. According to management, potential takeover candidates may be considered if they strengthen Bâloise�s strategic position, meet the group�s financial criteria, and also fit culturally.

Business profile Bâloise has a balanced mix of life (FY 2008: 53.5% of group's GWP) and non-life activities (46.5% of group's GWP). Life insurance generated a segment profit of CHF 89 million, which was, however, significantly lower than the previous year's figure due to the difficult financial market conditions and, as such, the investment results. Given

the difficult market conditions, overall life business volume (including unit-linked life insurance) dropped 2.2% YoY to CHF 4.6 billion as a result of a mixed trend of 1.7% higher business volumes for conventional life and a 15.4% drop in investment-type life insurance business volumes. The embedded value (an indication of the value of the existing insurance portfolio) dropped significantly to CHF 3.2 billion, representing a return on embedded value of �20.1%, which was mainly attributable to the weak performance of financial markets, as well as lower future economic assumptions. The non-life primary insurance business accounted for 46.5% of GWP (+0.8% to CHF 3.2 billion), generating a segment profit of CHF 423 million in FY 2008. Bâloise has a well-diversified non-life portfolio, with automobile accounting for 31.7% of GWP, property 30.7%, accident 14.8%, general liability 11.0%, marine 4.5%, health 3.6%, reinsurance 2.1%, and other 1.6%. A strong 88.1% combined ratio further underpinned the company's solid underwriting performance. Bâloise�s banking business contributed CHF 53 million to the group�s segment income. With Bâloise BankSoBa, Bâloise owns a major regional universal bank in north-west Switzerland, which generated a net profit of CHF 25 million. Bâloise Asset Management and Bâloise Fund Invest achieved a net profit of CHF 11 million and CHF 9 million, respectively.

Financial profile Premiums earned dropped slightly by 2.4% YoY to CHF 6.7 billion in FY 2007, and net attributable profit increased by 14.9% to CHF 803 million. A strong performance in life and a higher investment result contributed to this good result. Bâloise�s investment portfolio declined to CHF 46.9 billion at end-December 2008. The company reduced its equity exposure step by step to net exposure after hedging of 5.1%. Nonetheless, Bâloise suffered a significant amount of unrealized losses on its portfolio. The company benefited from the high quality of the bond portfolio, which resulted in only marginal impairments from fixed income securities. Bâloise once again stressed that it had almost no sub-prime or CDO and CLO exposures. The group�s balance sheet metrics remained solid for its rating category in our view despite the drop in shareholders� equity to CHF 3.7 billion mainly due to unrealized losses on financial assets of CHF 1.7 billion. Hence, the group�s solvency ratio dropped significantly to 196%, which, however, is still a solid ratio. Although Bâloise announced it would continue its current share buyback program, the company will also propose to the AGM to create 10% authorized capital, which would provide financial flexibility in the future. Total debt remained almost unchanged in FY 2008.

Event risk/outlook Bâloise indicated a solid trend in its core business, with business volumes increasing by 7.0% in local currencies to CHF 3.5 billion. The company affirmed its previously communicated target of 15.0% return on equity and a combined ratio of appreciably below 100% over the cycle, but did not provide a clear guidance for FY 2009, as the current market environment and volatile financial markets make predictions very difficult. We expect the company to further scan the market for potential acquisitions to expand its market share and to grow its business, as seen in recent years. The focus will remain on its existing markets in continental Europe.

Daniel Rupli

Bâloise (CS: Low A, Stable) Sector: Insurance

Company description

Bâloise is Switzerland�s fourth-largest insurer, active in selected markets in continental Europe (mainly Switzerland, Germany, Belgium, Luxembourg, Austria, Croatia, Serbia and Liechtenstein). Its core businesses are life and non-life primary insurance and pension solutions. Banking activities through the Bâloise BankSoBa in Switzerland is viewed as an important component of its insurance business and distribution network. Bâloise primarily targets private individuals, as well as small and medium-sized enterprises (SME). In FY 2008, Life accounted for 53.5% of gross premiums written (GWP) and non-life for 46.5%.





002011789 / 2.375% BALHOL 20/12/2010* SELL Bâloise Holding n.r. n.r. CHF 350



*Since these bonds were issued by Bâloise Holding, we rate them one notch lower at High BBB to reflect structural subordination. n.r. = not rated


P&L

Gross premiums written 6,717 6,868 6,954 !

Net premiums earned 6,519 6,672 6,751 "

Net investment income 1,824 2,050 2,053 #

Realized investment gains/losses 703 598 -1,680 !

Net attributable profit 699 786 358 !

Comprehensive income 815 456 -661 !

Balance sheet

Total investments 59,357 62,162 56,332 "

Deferred acquisition costs 1,177 1,259 1,243 "

Acquired present value of future profits 47 77 64 "

Goodwill & other intangibles 134 289 280 "

Total assets 63,671 67,079 60,930 "

Technical liabilities: Life (other than linked) 38,677 39,477 36,701 "

Technical liabilities: Life (linked business) 1,933 2,200 1,581 "

Technical liabilities: Non-life business 5,911 6,150 5,787 "

Less: Reinsurer share of technical provisions -362 -351 -313 "

Financial debt 895 1,194 896 "

Equity 4,922 4,733 3,691 !


Key figures � Life


Net segment income 246 407 89 !

Embedded value 2,628 3,231 2,446 "

New business margin 7.3% 9.5% 7.9% "

Key figures � Non-life


Net segment income 542 509 423 "

Loss ratio (incl. surplus sharing ratio) 61.6% 61.6% 57.8% "

Expense ratio 31.6% 33.0% 32.6% "

Combined ratio (net) 94.0% 95.1% 90.9% "

Other key ratios

Return on average equity 15.1% 16.3% 8.5% "

Comprehensive return on average equity 17.6% 9.4% -15.7% !

Gearing (financial debt/equity) 18.0% 24.0% 23.0% "

Leverage (financial debt/[debt + equity]) 15.2% 19.4% 18.7% !

Shareholders' equity/Gross premiums written 73.3% 68.9% 53.1% !

Solvency margin (excl. banking assets) 320.0% 287.0% 196.0% "


Net segment income and combined ratio

0

300

600

900

1,200

2005 2006 2007 2008

CHF m

70%

80%

90%

100%

110%

Life Non-LifeBanking OtherP&C combined ratio (r.h.s.)

Embedded value - Life

0

1,000

2,000

3,000

4,000

2005 2006 2007 2008

CHF m

0%

3%

6%

9%

12%

Embedded value New business margin (r.h.s.)

Equity and leverage

0

1,250

2,500

3,750

5,000

2005 2006 2007 2008

CHF m

10%

13%

16%

19%

22%

Shareholders' equity Leverage (r.h.s.)

Investment portfolio

Mortgage loans

Liquidity

Shares & funds

Investment property

Policy & other loans

Fixed-income securities

Alternative financial

investments


Balanced mix of life and non-life business

Solid capitalization and solvency ratio, despite a significant drop in shareholder's equity

Focus on selected key markets in Europe

Defensive investment portfolio


Very mature core markets

Volatile financial markets and economic recession

M&A headline risk due to growth strategy

Increasing pricing pressure

Next events


Website

www.baloise.com




Rating rationale Our Low AA credit rating for the BKW Group is based on the company�s above-average business profile and strong financial profile. The rating reflects the group�s vertical integration (production, distribution, trading and network transmission), its extensive supply region, the high share of power generation from flexible hydropower, the high proportion of direct customers, as well as the group�s close customer relationships. The rating is further substantiated by the group�s very strong balance sheet and conservative financial policy. In addition, the dominant position of the public sector in the group�s shareholder structure is a positive factor (that supports the rating by one notch). The rating is constrained by the impact of deregulation on the Swiss electricity market (including transmission grid revenues and electricity tariffs), political uncertainty surrounding nuclear energy and the risks associated with the group�s electricity trading activities. Moreover, there are residual risks associated with the operating li-cense of the Mühleberg nuclear power station. The rating outlook is Stable in light of BKW�s solid balance-sheet structure, the group�s firm integration in its supply region, its planned capital expenditure, and its outlook for 2008.

Corporate strategy BKW will continue to pursue a strategy of vertical integration, cooperation with its partners, strengthening its regional base and further expanding its independent position. The company focuses on partnerships in production, distribution and R&D, and maintaining close customer ties. In terms of production, the group intends to have a stable, crisis-resistant production portfolio. In this regard, BKW has launched projects or acquired interests in facilities in Germany and Italy, which should support sales activities in these countries, allowing it to respond flexibly as a group in the different markets. In Switzerland, BKW, together with Axpo, has submitted two framework permit applications for the replacement of the nuclear power plants in Beznau and Mühleberg. In addition to that, BKW continues to campaign for the extension of the permit to operate the Mühlberg nuclear power station beyond 2012.

Business profile BKW�s activities cover the entire value-added chain. The company offers power generation, trading, distribution and transmission grid services under one roof. This vertical integration is particularly advantageous in the price-dominated industrial customer segments in Germany and Italy. The BKW Group�s electricity sales in 2008 were

25,969 GWh (+7.2% compared to 2007). The group has a long position of approximately 1,500 GWh on its own electricity generation of 10,299 GWh, which supports international sales. BKW�s power generation park consists of storage and run-of-river power stations, the Mühleberg nuclear power plant, a 9.5% holding in the Leibstadt nuclear power station and purchase rights for French nuclear power. BKW�s interests in its partner plants, which produce valuable peak load energy, are of high importance to the company. In addition to the traditional generation technologies, BKW is active in the renewable energy segment is Switzerland and Germany. In order to support sales activities abroad, BKW is further expanding its presence in both Germany (targeted base load production capacity of 500 MW) and Italy. One key project is the acquisition of a 33% stake in a coal-fired power plant (around 240 MW net-capacity) in Wilhelmshaven, which requires a investment by BKW of some EUR 430 million. Furthermore, together with EnBW (which seeks to acquire a 75.1% stake in the project), a 900 MW coal-fired power plant in Dörpen (Germany) is in the pipeline. In addition, BKW intends to further expand its position in Italy via a range of power station projects and acquisitions, focusing predominantly on gas-fired power plants, as well as renewable energy facilities. Through its trading activities on the German and Italian energy exchanges (EEX and IPEX), BKW is able to optimize its energy production, purchase energy from third parties, gather information on the performance of the European energy markets and to expand its network with other players in the industry. Furthermore, the trading activities enable the group to leverage its increasing peak-load production capacity. BKW�s range of business activities is further diversified by its portfolio and energy management services to major customers, as well as by the group�s commitment to alternative energies (including wind and solar power).

Financial profile Due to an increase in trading activities (+50.9% YoY) and costs for strategic projects, BKW�s adjusted EBITDA margin in FY 2008 of 13.8% was below last year's 15.7%, but nevertheless continued to represent a solid level. Adjusted FFO increased to a pleasing CHF 404 million. In our opinion, BKW's balance-sheet structure is still solid thanks to its conservative financial policy. This is reflected by the fact that BKW�s net liquidity of CHF 1.0 billion far exceeds its adjusted gross debt of CHF 284 million, resulting in a net cash position of CHF 555 million. We believe that the company�s adjusted FFO/Net debt ratio of �72.7% (the negative value reflects the net cash position) is very comfortable. BKW�s sound capital structure and strong cash flow provide the company with a high level of financial flexibility, especially with a view to future capacity expansion.

Event risk/outlook In FY 2009, a moderate increase in revenue is expected, while EBITDA should remain in line with the prior year. However, higher energy procurement costs and additional expenditure for strategic projects will likely exert pressure on margins. In case of a recovery on the financial markets, the group�s financial result should positively impact its net income. Although BKW�s liquidity requirements can be expected to increase due to its planned investment projects (around CHF 6 billion by 2020), the company�s previously accumulated cash reserves and solid operating cash flow should ensure that the impact of this expansion on its credit profile will remain moderate.

Michael Gähler

BKW (CS: Low AA, Stable) Sector: Electrical Utilities

Company description

BKW FMB Energie AG (BKW) is one of Switzerland�s leading energy companies. Its business activities focus on the production, transmission and distribution of energy generated at hydroelectric and nuclear power plants, as well as alternative energies. BKW�s transmission grid covers over 21,000 kilometers. The company provides energy to one million customers in its supply region, which covers the cantons of Bern, Neuchâtel, Jura, Solothurn and Basel-Land. BKW also engages in energy trading and international distribution. Major shareholders are the Canton of Bern (52.5%) and German power company E.On (21.0%).





003035671 / 3.00% BKW 27/04/2022 HOLD BKW FMB Energie AG n.r. n.r. CHF 200

n.r. = not rated


P&L

Sales 2,306 2,734 3,392 3,225

Gross margin 36.0% 31.3% 26.3% 26.3%


Margin 18.3% 15.7% 13.8% 11.8%


Margin 13.6% 11.0% 9.8% 7.5%


Net profit 331 226 138 191

Cash flow

Adjusted FFO 415 357 404 330

Adjusted CFO 321 405 280 360

CAPEX 250 377 447 450

Adjusted FCF 71 29 -167 -90

Adjusted DCF -60 -111 -308 -211

Balance sheet

Net cash & near cash 1,094 1,161 839 894



Total adjusted debt (M&L adjusted) 150 216 284 309

Total adjusted net debt (M&L adjusted) -944 -945 -555 -585



Key ratios


Adjusted EBITDA/Net interest coverage -22.4x -17.7x 36.1x -110.0x

Adjusted EBIT/Net interest coverage -16.7x -12.5x 25.7x -69.9x


Adjusted FFO/Net debt -44.0% -37.8% -72.7% -56.5%

Adjusted FCF/Net debt -7.6% -3.0% 30.1% 15.3%

Adjusted net debt/EBITDA -2.2x -2.2x -1.2x -1.5x

Capital structure


Cash cycle 34.9d 19.0d 30.9d 30.9d


Adjusted net leverage -46.7% -43.8% -22.1% -22.9%


Adjusted net gearing -31.8% -30.4% -18.1% -18.6%


Margin development

0%

5%

10%

15%

20%

2006 2007 2008 2009E

20%

25%

30%

35%

40%




-1,000

0

1,000

2,000

3,000

4,000

2006 2007 2008 2009E

CHF m

-50%

-40%

-30%

-20%

-10%



-80%

-40%

0%

40%

2006 2007 2008 2009E

-120x

-60x

0x

60x



0

400

800

1,200

Year end2008

2009 2010 2011 2012 >2012

CHF m

Cash Bonds & loans


Vertical integration of the group

Conservative financial policy

Public-sector ownership

Close customer ties and high share of direct clients


Impact of electricity market deregulation

Long-term solution for Mühleberg reactor needed

Rising investment outlays

Increased regulation

Next events

September 2009: H1 2009 results

Website

www.bkw-fmb.ch




Rating rationale Our Mid BBB rating for Bobst Group is based on the company�s average business profile and average financial profile. The rating is supported by its favorable position in the business of packaging machinery and equipment, the relatively stable demand for packaging in the food and pharmaceuticals industries, and Bobst Group�s sound credit metrics (thanks to a cautious financial policy). The rating is constrained by the cyclicality of the investment goods sector, the fact that the flexible materials business is yet to display sustained profitability, as well as the company�s relatively small size in terms of sales volumes. Our rating outlook is Negative in view of the continued global economic downturn, which is expected to result in clearly lower sales, cash generation and thus a further deterioration of credit metrics in FY 2009. We would change the outlook to Stable if we see clear indications that Bobst Group is able to defend its credit metrics in line with the current rating over the credit cycle.

Corporate strategy Bobst Group positions itself as the world�s leading supplier of versatile machines and systems for the production of packaging materials. The company builds machinery and automated production lines for manufacturers of folding carton and corrugated board packaging, as well as for flexible plastic packaging. Bobst Group targets a sales contribution from Europe, Southeast Asia and North/South America of one-third each. The main pillars of the company�s corporate strategy include growth in its main businesses, expansion into associated business areas, as well as the optimization of its business processes and organization. In terms of margin targets, the company is aiming for organic growth of 3.5% to 4.5% and an EBIT margin of 11.0% to 13.0% in the medium to long term. With regard to its balance-sheet structure, Bobst Group is targeting an equity ratio of 40.0% to 45.0%. In order to address the global economic downturn, Bobst will adapt its capacities to adequate levels. In addition, the management sees cash preservation as a priority.

Business profile Bobst Group�s operating activities are divided into three segments: Machines (76% of revenue in 2008), Spare Parts (20%) and Services (4%). The revenue generated by Bobst Group is thus derived from machine sales, services and spare parts, with the latter proving to be the most stable component. Bobst Group has a broad customer base. Among its key customers are paper and pulp manufacturers and specialized producers of cardboard boxes and packaging sheets. Given the high level of performance required of the machines (e.g.

high throughput volumes), customers depend on the provision of reliable services in order to quickly resolve potential production interruptions. Bobst Group is able to meet these demands thanks to its dedicated customer focus. Regarding packaging material, the group�s activities can similarly be divided into three areas: folding carton (38% of revenue in 2008), corrugated board (37%) and flexible materials (24%). In terms of their contribution to revenue and, in particular EBIT, the two segments, folding carton and corrugated board, form the main part of the company�s earnings. The folding carton and corrugated board packaging materials produced by the machines Bobst supplies are used almost exclusively in consumer-goods applications. Nearly 80% of the packaging is employed for food and beverage, pharmaceutical and cosmetic products. Although demand for these end-products is generally stable, sales of packaging machinery are still cyclical to a certain extent, since some buyers of the machines and systems tend to delay investments in new equipment when the economy is weak. Moreover, customers often elect to wait for new products, underlining the importance of innovation for Bobst�s business. For example, the corrugated board segment is currently being adversely impacted by the ongoing consolidation of the packaging industry. The flexible materials business has continued to struggle in generating a sustainable operating profit. Bobst Group is expanding its activities in terms of machinery and systems for flexible packaging, since these have high growth rates and the potential to supplant other packaging materials. However, production costs in this business area are highly dependent on the performance of raw material prices, a fact that has proved to be a disadvantage in recent years.

Financial profile As a result of the global economic downturn, the top-line declined by 6.3%, indicating the group's vulnerability to economic turmoil. The adjusted EBITDA margin clearly declined in FY 2008 from 12.5% to 8.8%, while the adjusted EBIT margin decreased from 9.6% to 5.8%. The group's cash flow generation capacity clearly deteriorated on the back of the subdued operating result. Adjusted FFO declined from the prior year's very strong CHF 197 million to CHF 106 million. The group's balance sheet suffered from substantial cash payments to shareholders (CHF 311 million), leading to an adjusted net debt of CHF 403 million. Nonetheless, with an adjusted net leverage of 37.1%, the capital structure is still solid, in our view. The company�s net cash & near cash position dropped significantly to CHF 38 million. That said, the group's overall liquidity position (CHF 152 million) remained solid, in our view, and is further supported by undrawn committed credit facilities. As a result of the higher indebtedness and the subdued cash flow generation, the adjusted FFO/Net debt ratio dropped to 26.3%, thereby falling short of our minimum required level of 35.0% under the current rating.

Event risk/outlook Bobst anticipates that markets will remain very challenging. The company will likely face further difficulties during 2009, leading to continued sales declines, lower profitability and subdued cash flow generation. Accordingly, we expect adjusted FFO/Net debt to decline further. However, we see the group as well positioned to withstand the global economic downturn, in view of its strong market position, its continued solid capital structure, the initiative to adapt capacities and the still healthy liquidity cushion.

Michael Gähler

Bobst Group (CS: Mid BBB, Negative) Sector: Packaging Machinery

Company description

Bobst Group is a major supplier of machinery and services to the corrugated board and folding carton packaging industries, as well as flexible materials processing. Its range of machinery includes die cutting, folding, gluing and printing equipment. In the flexible plastic packaging segment, Bobst offers versatile machines and systems for the production of plastic films. Bobst has a global network of production facilities and sales organizations in more than 50 countries. Europe is the company�s largest sales market (56% of revenue in 2008), followed by the Americas (24%) and Asia (17%). The group has currently nearly 6,000 employees.





001625554 / 3.25% Bobst 08/07/2011 HOLD Bobst Group SA n.r. n.r. CHF 120

004355456 / 4.125% Bobst 23/07/2013 HOLD Bobst Group SA n.r. n.r. CHF 100

n.r. = not rated


P&L

Sales 1,604 1,744 1,633 1,241

Gross margin 50.8% 51.6% 46.5% 43.7%


Margin 10.1% 12.5% 8.8% 2.7%

Adjusted EBIT 111 167 95 -16

Margin 6.9% 9.6% 5.8% -1.3%


Net profit 103 130 56 -22

Cash flow


Adjusted CFO 191 355 -27 137

CAPEX 24 32 40 35

Adjusted FCF 168 322 -67 102

Adjusted DCF 142 288 -131 102

Balance sheet





Total adjusted net debt (M&L adjusted) 224 -54 403 267

Equity (pension leverage adjusted) 890 994 684 661

Market capitalization 1,092 1,468 524 n.a.

Key ratios



Adjusted EBIT/Net interest coverage 12.8x 21.6x 2.2x -0.6x


Adjusted FFO/Net debt 59.9% -364.9% 26.3% 14.0%

Adjusted FCF/Net debt 74.9% -598.6% -16.7% 38.3%

Adjusted net debt/EBITDA 1.4x -0.2x 2.8x 7.9x

Capital structure


Cash cycle 7.2d -27.9d 37.5d 30.0d


Adjusted net leverage 20.1% -5.7% 37.1% 28.8%


Adjusted net gearing 25.1% -5.4% 58.9% 40.5%


Margin development

-5%

0%

5%

10%

15%

2006 2007 2008 2009E

35%

40%

45%

50%

55%




-500

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500

1,000

1,500

2006 2007 2008 2009E

CHF m

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-700%

-400%

-100%

200%

2006 2007 2008 2009E

0x

10x

20x

30x



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100

200

300

Year end2008

2009 2010-2014

>2014

CHF m

Cash Bonds & loans


Relatively stable end-user markets 2 September 2009: H1 2009 results

Favorable position within the industry 9 December 2009: Press & analyst conference

Solid balance sheet

Cost-saving initiatives

Website

www.bobstgroup.com


Cyclical nature of capital goods industry

Integration of flexible materials business

Small company size in terms of sales

Low cash flow debt coverage




Rating rationale Our High BBB credit rating for Bucher Industries is based on the company�s average business profile and above-average financial profile. The rating reflects the company�s leading position in many of its businesses (particularly in the profitable agricultural machinery segment), its diversified product portfolio, innovative strength, conservative financial policy, as well as its solid balance-sheet structure and debt coverage. The cyclical nature of Bucher�s sales markets, the rather limited size of the company in terms of revenue, and the fact that most of its divisions operate in mature markets detract from the rating. The rating outlook is Stable in light of Bucher�s solid cash-flow generation, low net debt level resulting in considerable financial headroom under the current rating, despite the cautious business outlook for 2009.

Corporate strategy Bucher Industries positions itself as a long-term industrially oriented company and favors a clear divisional structure with decentralized managerial and performance-related responsibility, combined with group-wide strategic and financial management. Based on its technological leadership, market presence and systematic cost management, the company is striving for superior profitability and high cash flow. Bucher Industries focuses on nurturing growth across the group. The company aims to ensure continued development by means of internal growth, as well as through the acquisition of carefully selected complementary business activities. In the medium term, the company is targeting a sustained EBITDA margin of 12%, an EBIT margin of 9%, along with a return on net operating assets of above 16%. In addition, the maintenance of a solid balance-sheet structure and liquidity are cornerstones of the company�s financial strategy.

Business profile Bucher Industries� activities are divided into five specialized segments in industrially related areas of machine and vehicle construction. These business segments operate mainly in cyclical and/or mature user markets. As a result, the company�s growth potential is limited to a certain extent (particularly given Bucher�s limited exposure at present to the growth markets of Asia), while its earnings are exposed to economic cycles. However, this sensitivity to economic trends is offset by the group�s broad diversification. Based on the innovative strength of Bucher Industries� products and services, the company is able to take full advantage of its existing earnings and growth potential. A further opportunity for growth lies in the geographical expansion of the company�s operations. Europe is the company�s dominant geographical sales market, accounting for approximately

three quarters of overall revenues. The Americas, with a sales share of around 18% in FY 2008, are the company�s second largest end-market, while Asia, with a sales share of some 7%, has played a more minor role so far. Kuhn Group (40% of consolidated revenue in 2008), a maker of specialized agricultural machinery, was supported by a solid growth in its main markets such as Western Europe and North America. Bucher Municipal (21%), which manufactures municipal vehicles, has benefited from a high demand in Western and Eastern Europe, as well as Australia in FY 2008. As a manufacturer of wine and fruit juice production equipment, Bucher Process (7%) was buoyed by a surge in demand in FY 2008, particularly in China and Great Britain. Bucher�s Hydraulic (18%) components business exhibits particular exposure to the markets for agricultural, construction and material transport machines. Emhart Glass (17%), the world�s leading supplier of sophisticated technologies for the manufacture and quality control of glass containers, boasts a high level of innovative ability.

Financial profile Bucher posted sound top-line growth of 13.4% in FY 2008. While M&A contributed some 3.5% to the top-line growth, organic growth reached a very pleasing 16.0%. Despite volume and price increases, the group�s gross profit margin decreased slightly from 47.6% to 46.4%, resulting from the ongoing strong increase in raw material prices. Adjusted EBITDA improved by an impressive 20.0% to CHF 348 million, leading to a higher adjusted EBITDA margin of 12.5%. The profitability enhancement was achieved despite higher raw material costs and negative currency effects. The group�s cash generation capacity remained solid, despite a slightly lower adjusted FFO of CHF 217 million. Adjusted FCF was CHF �24 million, reflecting the substantial cash drain due to higher working capital investments of CHF 110 million (2007: CHF 53 million) and ongoing high CAPEX of CHF 131 million. The group's capital structure remained solid, however, with its adjusted net debt position increasing by CHF 285 million to CHF 295 million, mainly driven by the decrease in the adjusted net cash position due to several bolt-on acquisitions in FY 2008 combined with the aforementioned high CAPEX. Bucher Industries' liquidity position is still sufficient, in our view, despite the aforementioned lower adjusted net cash position of CHF 95 million, given the company's committed credit facilities of CHF 600 million (maturity range: 3�7 years), of which around CHF 300 million are undrawn, compared with the group's short-term financial debt of CHF 110 million. Additionally, the company has access to uncommitted credit lines in the range of CHF 200�300, which are only partly drawn. Turning to credit metrics, adjusted FFO/Net debt of 73.5% is on a very solid level and therefore clearly remained well above our expected minimum threshold of 35% over the credit cycle for the current rating.

Event risk/outlook Despite the solid order backlog at the year-end FY 2008, Bucher gives a cautious outlook for FY 2009. A decline in the group's revenues and profitability are expected due to the ongoing economic slowdown. Therefore, the company needs to take several steps to weather declining demand. Nevertheless, Bucher enjoys an ongoing solid financial flexibility under the current rating, given its limited debt levels and good cash flow generation capacity.

Fabian Keller, Michael Gähler

Bucher Industries (CS: High BBB, Stable) Sector: Mechanical Engineering

Company description

Bucher Industries is a globally active technology group manufacturing advanced machinery and vehicles, with production facilities all over the world. It offers a wide range of products through its five specialized divisions: Kuhn Group (agricultural machinery), Bucher Municipal (municipal vehicles), Bucher Process (wine and fruit juice production equipment), Bucher Hydraulics (hydraulic components) and Emhart Glass (production systems for the container glass industry). The company�s main sales market is Europe (around 70% of revenue in 2008), followed by the Americas (around 17%) and Asia (8%). Almost 5% of revenues in 2008 were generated in Switzerland.

Business profile: Average Financial profile: Above-average






P&L

Sales 2,087 2,459 2,789 2,648

Gross margin 48.6% 47.6% 46.4% 46.0%


Margin 10.4% 11.8% 12.5% 10.5%


Margin 7.3% 9.3% 8.9% 7.8%


Net profit 94 169 143 121

Cash flow

Adjusted FFO 191 224 217 207

Adjusted CFO 169 171 107 182

CAPEX 60 131 131 90

Adjusted FCF 109 40 -24 92

Adjusted DCF 88 15 -74 46

Balance sheet





Total adjusted net debt (M&L adjusted) -19 10 295 265



Key ratios





Adjusted FFO/Net debt -1025.8% 2203.6% 73.5% 78.0%

Adjusted FCF/Net debt -584.4% 390.3% -8.2% 34.6%

Adjusted net debt/EBITDA -0.1x 0.0x 0.8x 1.0x

Capital structure


Cash cycle 72.1d 72.3d 72.1d 82.7d


Adjusted net leverage -2.7% 1.2% 26.2% 22.7%


Adjusted net gearing -2.6% 1.2% 35.5% 29.4%


Margin development

0%

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15%

2006 2007 2008 2009E

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50%

60%




-300

0

300

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2006 2007 2008 2009E

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-2000%

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2000%

4000%

2006 2007 2008 2009E

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100

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Year end2008

2009 2010-2014 >2014

CHF m

Cash Committed credit facility (maturing in 3-7 years) Bonds & loans


Solid balance sheet and strong margins

Divisions occupy leading market positions

High level of innovative capability

Steady solid cash-flow generation capacity


Cyclical market for capital goods

Risks associated with integration of acquisitions

Focus on Europe

Foreign currency risks

Next events


29 October 2009: Q3 2009 sales

Website

www.bucherind.com




Rating rationale Our High A credit rating for CKW is based on the group�s above-average business profile and above-average financial profile. The rating reflects CKW�s leading position in central Switzerland, as well as its vertical integration, high proportion of direct customers, stable sales to cantonal electrical utilities, solid credit metrics, and the fact that CKW is firmly embedded within the Axpo Group. The rating is constrained by the impact of electricity market deregulation, growing regulatory pressure (particularly in conjunction with transmission grids) and the attendant potential pressure on margins, as well as the company�s limited size in terms of revenue. The rating outlook is Stable, given CKW's increasing capital expenditures in the coming years, offset by an ongoing solid balance sheet, sound profitability and cash flow generation.

Corporate strategy CKW focuses on selling electricity and operating electricity networks in central Switzerland. The company is active in the areas of power generation and transmission, as well as in the distribution of electricity to its end-customers (vertical integration). As a major electricity supplier in the region, the stability and reliability of power supply throughout central Switzerland are of utmost importance to CKW. CKW focuses on sustained, profitable growth. To remain competitive in a deregulated market, CKW is committed to the ongoing improvement of its processes. In addition, CKW aims to increase the number of end-customers outside its supply region and to expand its physical energy trading activities, in order to take full advantage of trends within the electricity market. In terms of its power generation, CKW focuses on a diversified, reliable, environmentally friendly and profitable mix of hydropower, nuclear power and new energies. CKW intends to expand its capacity in order to counteract rising wholesale prices, latent supply shortages in the cross-border transmission segment, as well as the effects of adverse weather conditions. Alongside conventional energy sources, CKW also focuses on renewable energy as a means of participating in the growth potential of this segment.

Business profile CKW supplies large areas of the Canton of Lucerne (with the exception of the city itself), the Canton of Uri and some regions in the Canton of Schwyz. Private households and corporate customers are the company�s major direct customers (some 200,000). In addition, CKW engages in electricity trading on the Swiss and European

markets and supplies electricity to several resellers. The European trading activities allow the company to offer more competitive products, but also entail risks associated with price fluctuations on the European energy exchanges, which the company is addressing by using a risk management strategy with clearly defined processes and responsibilities. CKW�s electricity sales in 2008 amounted to 5,422 GWh (prior year: 5,703 GWh). CKW is rather small in terms of revenue compared to peers and the growth opportunities are relatively limited in view of its key sales regions. However, CKW�s integration within the Axpo Group diminishes these disadvantages and strengthens the company�s market position within Switzerland. At some 80%, the company�s internal production is at a very high level. CKW obtains most of its electricity from nuclear energy (Leibstadt and Gösgen power stations, and purchase rights for French nuclear power). Hydroelectric power plants, new renewable energies and the open market represent additional sources. In order to ensure the security of energy supply, CKW aims to invest up to CHF 2.0 billion up to 2020. While the business profile is supported by the group's flexible hydropower generation capacity and its low exposure to carbon-dioxide-related power production, the company�s heavy reliance on nuclear power entails some risks (such as political risks and risks related to decommissioning and waste disposal funds). In view of the progressing deregulation of the Swiss electricity market, CKW needs to continuously optimize its procurement costs, with the aim of strengthening ties to its customers, and to realize efficiency gains so that it can counter the inevitable competitive pressure once the market is fully deregulated. As a second line of business, CKW offers services for electrical and communication installations (almost 13% of revenue). However, in terms of its contribution to the company�s EBIT (around 1.7% in FY 2007), this segment is of limited significance.

Financial profile CKW recorded an increase in revenue in FY 2008 of 9.0%. The adjusted EBITDA margin decreased from last year's exceptionally high 42.6% to 29.2%, primarily due to a substantial increase in electricity procurement costs. Nonetheless, the company�s profitability is still at a high level. Adjusted FFO was CHF 148 million. We view the capital structure as very solid, with an adjusted net debt of CHF 59 million, net liquidity of CHF 91 million and adjusted net leverage of only 5.0%. The adjusted FFO/Net debt ratio of 251% represents a very strong level, which provides CKW with considerable financial headroom. With a payout ratio of close to 28% in 2008, the company pursues a shareholder-friendly dividend policy.

Event risk/outlook CKW will continue to strive to strengthen its leading position in its core businesses in FY 2009. We anticipate rather moderate growth in view of the current difficult market environment. CKW is forecasting net profit of CHF 135 million to 140 million. The planned investment outlays associated with the expansion of CKW�s transmission grid and power generation capacity are likely to have a negative impact on the company�s free cash flow during the years in which the projects are realized. However, given the company�s strong cash-flow generation capacity, we believe that any effect on CKW�s credit rating will be limited.

Michael Gähler

CKW (CS: High A, Stable) Sector: Electrical Utilities

Company description

CKW (Centralschweizerische Kraftwerke AG) is a leading electrical utility and energy services company in central Switzerland. It supplies electrical power, operates and maintains distribution network facilities, and offers consulting services to its clients. With its power generation park and grid infrastructure, CKW is the main provider of electricity in central Switzerland. The company is part of the Axpo Group, which is the principal shareholder of CKW, with a majority holding of some 74%, while the Canton of Lucerne owns approximately 10% of the company�s share capital. The remaining shares are in free float.







P&L

Sales 702 693 755 786

Gross margin 51.0% 61.7% 52.5% 51.1%


Margin 32.8% 42.6% 29.2% 27.0%


Margin 25.4% 35.4% 22.8% 20.4%


Net profit 152 194 166 128

Cash flow

Adjusted FFO 207 206 148 143

Adjusted CFO 196 241 164 152

CAPEX 69 59 106 100

Adjusted FCF 127 182 58 52

Adjusted DCF 98.6 128.3 4.2 -1.3

Balance sheet





Total adjusted net debt (M&L adjusted) 175 73 59 163

Equity (pension leverage adjusted) 843 1,001 1,122 1,196


Key ratios








Capital structure


Cash cycle 49.5d 47.7d 42.1d 42.1d






Margin development

10%

20%

30%

40%

50%

2006 2007 2008 2009E

0%

30%

60%

90%




0

300

600

900

1,200

2006 2007 2008 2009E

CHF m

0%

5%

10%

15%

20%



0%

100%

200%

300%

2006 2007 2008 2009E

0x

20x

40x

60x



0

30

60

90

120

150

Year end2008

2009 2010-2014 >2014

CHF m

Cash Bonds & loans



Stable sales structure in central Switzerland 16 December 2009: FY 2008/09 results

High share of CO2-neutral production

Public-sector ownership

Firmly embedded within the Axpo group

Website

www.ckw.ch


Limited growth opportunities in Switzerland

Political pressure on electricity prices

Small size of the company





Rating rationale Clariant's rating reflects its solid market position as one of the leading specialty chemicals companies, its good geographical and product diversification, and the sound spread over its end-markets with a good customer portfolio. In some of its divisions, such as Pigments & Additives, Masterbatches, and Textile and Leather Chemicals, Clariant enjoys leading market shares. Besides this, Clariant enjoys an average liquidity cushion, in our view, with an undrawn credit facility of CHF 750 million comfortably supporting the relatively modest adjusted net cash position of CHF 195 million at year-end 2008. However, the rating is constrained by the company's large exposure to raw material prices, its relatively low profitability, ongoing challenges in the textile and fine chemicals industries that suffered considerably during 2008, increasing competition and pricing pressure, and, last but not least, by the continued very low cash-flow generation capacity, with a special focus on the FCF development. Despite a slight improvement in the adjusted FFO/Net debt ratio to 27% in FY 2008, the posted level remains below the required threshold level of 30%. Pressured by the collapse in volumes starting in Q4 2008, with volumes dropping by 20%, 25% in Q1 2009, and markets remaining very sluggish in the near future, Clariant will likely face an ongoing weak cash flow generation capacity while adjusted net debt levels remain relatively high, thus resulting in a considerable weakening of the financial profile. Based on considerable pressure on metrics with no near term relieve in sight, we cut the rating to a High BB with a Stable outlook following its Q1 2009 results.

Corporate strategy Following Clariant's Performance Improvement Program (CPIP), launched in 2003, a new program was announced in 2006 following a strategic business portfolio review, with a focus on generating profitable growth, with a clear focus on price increases combined with growth offering sufficient margins, and achieving sustained cost leadership. Clariant will build on its strengths in colors, surfaces and performance chemicals. Following a very challenging FY 2008 in its Textile, Leather & Paper Chemicals business, Clariant is actively seeking for options to reposition the business and is currently considering different options. Overall, Clariant plans to close about 10% of its production facilities and reduce its workforce by another 10% by 2009, with total restructuring costs amounting to around CHF 500 million by 2009. Clariant further intends to reduce its product portfolio by around 25%, thereby targeting high-margin products, as well as cut costs, and reduce working capital through supply chain improvements. The company intends to achieve an above-peer-group ROIC of 10% by 2010 after achieving 9.0% in 2008, up from 7.8% in 2007. However, Clariant's clear short-term aim is to generate cash by measures such as reducing its net working

capital and procurement savings. The generated cash will then allow it to fund the short- to medium-term cost-saving and complexity reduction initiatives such as personnel cost reductions, product- and country pruning.

Business profile With sales of CHF 8,071 million in 2008, Clariant is a leading specialty chemicals company. The company operates in four divisions: Textile, Leather & Paper Chemicals; Functional Chemicals, with the integrated Specialty Intermediates business from the former Life Science Chemicals division; Pigments & Additives; and Masterbatches. In pigments and additives, Clariant is one of the three leading producers, with a broad range of products applied in coatings, plastics and printing inks. The company is the global leader in the very challenging and low-margin textile and leather chemicals market, while holding a very strong position in dyestuffs. Clariant enjoys a good market share in the functional chemicals market, offering products such as surfactants for detergents and personal care. Besides facing continued challenges from raw material price volatility (accounting for around 50% of group sales), ongoing competition and overcapacities (as in the case of dyes) pose major challenges for companies active in these areas of the specialty chemicals industry.

Financial profile Clariant was able to increase its selling prices by 8% during FY 2008, thereby adhering to its "price above volume" strategy. However, volumes declined by some 6%, with Q4 2008 showing a dramatic collapse of 20%. As a result of this and the ongoing need for a reduction of the operating cost base, the adjusted EBITDA margin continued to decline, thereby reaching 9.9%. While the adjusted FFO of CHF 597 remained at a similar level to the previous year, adjusted FCF declined considerably to CHF 154 m. On the back of a modest decline in adjusted net debt to CHF 2,209 million, the adjusted FFO / net debt improved temporarily to 27.0%, while the adjusted FCF / net debt remained at a very low 7.0%. Considering the very weak outlook for FY 2009 and the company statement that volumes are expected to remain very low, we view a substantial weakening of Clariant's key metrics as very likely. The announced measures to reduce costs will result in costs of around CHF 200�300 million in FY 2009, while their impact is likely to be recorded at a later stage. We currently view Clariant's liquidity as modest, given its CHF 750 million committed credit facility maturing June 2010, and the adjusted net cash of CHF 195 million at year-end 2008, with only limited near-term debt refinancing of CHF 278 million in 2009, CHF 154 million in 2011, and CHF 250 million in 2012. However, given the weak cash flow generation capacity and softening metrics that continue to pressure the rating, refinancing is very likely to become a major issue in the future for Clariant.

Event risk/outlook The fourth quarter of FY 2008 was the beginning of what Clariant is likely to expect in FY 2009, with volumes being very weak and pricing likely to record a softening. As a result we expect margins and cash flow to be very weak in H1 2009, with some chances of a slight recovery in H2 2009. All in all however, we expect key metrics to deteriorate considerable in 2009 and hence have reflected this by downgrading the rating accordingly. Clariant will continue to focus on generating cash through a further reduction of its working capital and cost-cutting measures, that will, on the other hand, burden the company with costs of up to CHF 300 million in 2009 and likely take quite some time before showing the necessary impact on margins and cash flow generation capacity.

John Feigl

Clariant (CS: High BB, Stable) Sector: Specialty Chemicals

Company description

Clariant is a leading specialty chemicals company, with sales of CHF 8,071 million in FY 2008. The company, after having reorganized its portfolio, is split into four divisions, with Textile, Leather & Paper Chemicals accounting for 25% of group sales, Functional Chemicals for 35%, Pigments & Additives for 24%, and Masterbatches for around 16%. Geographically, sales in Europe reached 48% of total sales, followed by the Americas with 28%, while Asia, Australia and Africa shared the remaining 24%. At year-end 2008, Clariant had some 20,102 employees.





003012575 / 3.13% Clariant AG 24/04/2012 SELL Clariant AG BBB�, Neg. Ba1, Stable CHF 250


P&L

Sales 8,100 8,533 8,071 6,759

Gross margin 52.1% 49.5% 47.8% 43.1%


Margin 11.5% 10.1% 9.9% 6.8%


Margin 7.2% 6.1% 6.5% 2.5%


Net Profit -78 5 -37 -105

Cash Flow

Adjusted FFO 577 570 597 289

Adjusted CFO 414 605 445 377

CAPEX 362 320 291 162


Adjusted DCF -13 219 92 216

Balance Sheet


Core working capital 1,752 1,605 1,472 1,334

Total assets 7,710 7,801 6,372 6,053




Market Capitalization 4,138 2,424 1,614 n.a.

Key ratios








Capital structure


Cash cycle 19.9d 13.2d 24.7d 35.0d






Margin development

0%

3%

6%

9%

12%

15%

2006 2007 2008 2009E

0%

20%

40%

60%

80%

100%




0

600

1,200

1,800

2,400

3,000

2006 2007 2008 2009E

CHF m

0%

12%

24%

36%

48%

60%



0%

10%

20%

30%

40%

50%

2006 2007 2008 2009E

0x

3x

6x

9x

12x

15x

Adj. FFO / Net debt (r.h.s.)Adj. FCF / Net debtAdj. EBITDA / Net fixed charge coverage (r.h.s.)


0

300

600

900

1,200

1,500

Year end2008

2009 2010 2011 2012 2013

CHF m



Among the top players in its businesses

Good geographical and product diversification

Well-diversified customer base

Low near-term refinancing needs covered by liquidity


Exposure to raw material price volatility

Weak margins and cash-flow generation

Ongoing restructuring program and cash outflows

Deteriorating key metrics

Next events

30 July 2009: H1 2008 results

4 November 2009: Q3 2009 results

Website

www.clariant.com




Rating rationale Coop's Low A rating is based on its above-average business profile, mainly reflected in the steadily increasing market share, not only in the food-retailing, but also in the retailing segment overall. The recently announced expansion of the transGourmet JV with REWE will make Coop a 50% member of Europe's second largest cash & carry company. Hence, Coop will expand outside of its core market, with the intention of further growing the business. Given the implemented domestic growth limitation by the competition authority, such an expansion was one of the few steps Coop can undertake to further enlarge the group. However, the impact on the company's financial profile will be crucial, in our view, as we expect indebtedness to increase in 2009 as a result of the expansion. In FY 2008, Coop did not materially increase its gross debt, despite large acquisitions such as Carrefour Switzerland and Bell, thanks to its strong operating performance. Cash flow generation was strong and benefited from the sound profitability. However, adjusted FFO/Net debt decreased to 28.7% due to increased pension fund liabilities and rent lease adjustments. This ratio remained below our target threshold of 30.0% FFO/Net debt over the cycle. We question whether Coop will be able to bring this ratio back to below the threshold in a reasonable time horizon of roughly three years, following the transGourmet deal. If Coop is unable to reduce its indebtedness in combination with strong cash flow metrics over the cycle, a rating downgrade will be likely. The outlook is Stable based on the solid operating environment and Coop's proven track record of acquiring companies. Although the company is facing fierce competition with the entrance of another hard discounter, Coop should be able to maintain its market share and to generate a good amount of operating cash flow to reduce debt. Profitability margins will remain under pressure in the future due to the increasing competition in our view. The management remained confident to address price competition with further saving potential.

Corporate strategy Given the saturated food/near-food market, Coop is focusing on further optimizing its product and brand mix, as well as its pricing policy. In 2009, Coop announced the price reduction on over 600 branded articles across the entire product segment to be on par with price levels seen at hard discounters. The company expects an annual cost impact of approximately CHF 100 million. Due to the expected entrance of another hard discounter into the Swiss retailing market in 2009, prices are expected to shrink further, and Coop has announced that it is willing to continue offering competitive prices on these products going forward. In addition, Coop is expanding its range of innovative Coop flagship brands (Naturaplan, Pro Montagna, Jamadu,

Slow Food, Jamie Oliver). Through Naturaplan, Coop controls roughly 50% of the Swiss organic food market. The further optimization of its Fine Food gourmet range is also among the top priorities. In terms of sales points, Coop aims to further increase the number of megastores (sales floor area of above 4,200 m2), which it has nearly achieved through the acquisition of Carrefour in 2008.

Business profile Coop is operating its 1,885 sales outlets through five regions, with core food and non-food retailing accounting for 61% of group turnover. Through the expansion of the transGourmet JV, Coop will significantly increase its exposure outside of Switzerland by owning 50% of Europe's second largest cash & carry company. The group is split into three operating business segments and other fully consolidated subsidiaries. Coop Retail consists of supermarkets and mega stores, Coop Trading stands for non-food retailing activities (Bau+Hobby, Interdiscount, TopTip, Lumimart, Christ Uhren & Schmuck, Import Pafumerie, Other), and Coop Mineraloel AG comprises Coop Pronto and gas stations. In addition, the group also operates through Fust, Coop Vitality, Distributis, internet shops, hotel operations and others.

Financial profile For FY 2008, Coop presented a sound organic growth rate of 9%, resulting in net sales of CHF 18.3 billion. Overall market share rose 150 basis points to 17.2%, the food market share increased by 40 basis points to 21.9% and the non-food share by 220 basis points to 12.8%. Coop's gross profit margin declined slightly to 33.1% due to a combination of increased raw material prices and price reductions across its entire product segment. However, as operating costs remained under control despite an increase in personnel costs, adjusted EBITDA advanced to CHF 2.0 billion YoY, resulting in an adjusted EBITDA margin of 10.3%. The sound profitability trend supported adjusted FFO, which increased to CHF 1.8 billion. Cash flow generation was sufficient to cover recent acquisitions of Carrefour and Bell, thereby positively impacting the almost unchanged gross debt. However, pension liabilities and lease adjustments resulted in a weaker net debt figure in FY 2008. Hence, adjusted FFO/Net debt declined to 28.7%, which is below the targeted 30.0% we would like to see for the single A rating category. Although adjusted leverage increased to 52.1%, the company's reported equity ratio of 43.9% was above Coop's target of 40.0%. Given the recent expansion of the transGourmet JV, we expect weaker ratios with the FY 2009 results and question whether leverage and the net debt coverage ratio will improve in the near term.

Event risk/outlook For the upcoming year, the management projects a relatively conservative organic sales growth of 2%�3% due to the economic downturn, as well as the fierce competition, which is expected to add even more pressure with the likely entrance of another discounter. The company is aiming to offset the top-line decrease through efficiency gains. In view of the pressure on the profitability margin, we will also closely monitor the development of Coop's market share, which we do not expect to grow significantly since Coop's flexibility in terms of food-segment-related acquisitions is limited in the coming years. The completion of the transGourmet JV and debt reduction through cash flow generation will also be a top priority in 2009.

Daniel Rupli

Coop (CS: Low A, Stable) Sector: Retailing

Company description

Coop is the second largest retailer in Switzerland with a market share of 21.9% in the food retailing and 17.2% in the overall retailing segment. The cooperative consists of over 2.5 million members. Net sales in FY 2008 was CHF 18.3 billion and was derived mainly through food retailing, but is also through non-food retailing (DIY, electronics, furnishing, cosmetics, healthcare, jewelry), services (gastronomy, travel, gas station), and manufacturing. In 2008, Coop signed an agreement with REWE to expand the already existing 50:50 joint venture (JV) creating the second largest cash & carry and food-service company in Europe, with an expected turnover of EUR 10.0 billion.





001930966 / 2.75% COOPSW 09/07/2011 SELL Coop n.r. n.r. CHF 250

002126180 / 2.50% COOPSW 18/05/2012 SELL Coop n.r. n.r. CHF 250

004278779 / 3.50% COOPSW 25/06/2013 SELL Coop n.r. n.r. CHF 150n.r. = not rated


P&L

Sales 14,785 15,812 18,271 18,588

Gross margin 33.3% 33.5% 33.1% 32.6%

Adjusted EBITDA 1,551 1,721 1,974 1,915

Margin 10.5% 10.9% 10.8% 10.3%


Margin 3.9% 4.1% 4.1% 2.8%


Net profit 310 350 390 194

Cash flow

Adjusted FFO 1,317 1,523 1,771 1,640

Adjusted CFO 1,338 1,424 1,841 1,626

CAPEX 649 580 705 729

Adjusted FCF 689 844 1,136 897

Adjusted DCF 671 839 1,110 884

Balance sheet


Core working capital 799 1,234 1,270 1,284





Market capitalization n.a n.a n.a n.a

Key ratios








Capital structure


Cash cycle 7.1d 17.0d 14.5d 14.5d





n.a. = not available Accounting standard: Swiss GAAP FER

Margin development

10%

15%

20%

25%

30%

2006 2007 2008 2009E

6.0x

8.0x

10.0x

12.0x

14.0x



0

2,000

4,000

6,000

8,000

2006 2007 2008 2009E

CHF m

45%

48%

50%

53%

55%



10%

15%

20%

25%

30%

2006 2007 2008 2009E

6.0x

8.0x

10.0x

12.0x

14.0x



0

625

1,250

1,875

2,500

Year end2008

2009 2010 2011 2012 2013 n.a.

CHF m



Second largest Swiss retailer

Increasing market share, despite fierce competition

Defensive nature of food retail sector

Improved operating profitability


High adjusted net debt ratios

Credit metrics to weaken due to transGourmet deal

Further competition will put pressure on profitability

Saturated food retail market limits expansion possibility

Next events

Dates not yet available

Website

www.coop.ch




Rating rationale The Low BBB credit rating for Edipresse is based on the company�s average business profile and average financial profile. The rating reflects the company�s strong market position in the local and regional markets of western Switzerland, the group�s diversified portfolio of magazines outside Switzerland (offering growth opportunities with relatively low financial risks) and the rather high barriers to market entry. In addition, Edipresse has successfully cut costs and achieved relatively stable profit margins to date. However, the rating is restrained by the company's cyclical business and the ongoing competitive pressures. We expect the worsening of global economy and hence the deterioration in advertising spending in FY 2009 to weigh significantly on Edipresse's operating performance and cash flow generation capacity. Furthermore, the company's financial leeway is constrained under the current rating, following the high level of indebtedness due to a wave of acquisitions in recent years, as well as the company's pension adjustments in FY 2008. The rating outlook is Stable, as we expect Edipresse to be able to defend adequate debt coverage ratios for the current rating over the cycle.

Corporate strategy Edipresse focuses primarily on print (newspapers and magazines) and multimedia products, and is active in 15 countries with around 200 publications and websites. The ongoing cyclical and structural pressures have forced Edipresse to enter a staged merger agreement with the Tamedia group, the main publisher in German-speaking Switzerland. In an initial stage, Tamedia will acquire a 49.9% shareholding in PPSR, which represents most of Edipresse activities in Switzerland. Secondly, Tamedia will acquire an additional 0.2% of PPSR at the start of 2011. The transaction price for the first two shareholdings will be around CHF 226 million. In early 2013, Tamedia will acquire the remaining 49.9%, where the amount for the third transaction will depend on the development of Edipresse's Swiss business. However, the final tranche will consist of cash, as well as stock payment, therefore making Edipresse one of Tamedia's major shareholders. The transaction is still subject to the approval of the Swiss Competition Commission, which is expected in Q3 2009. Management outlined that the long transition period (2010�2013) will enable Edipresse to redefine its strategy and operations. So far, the following key objectives are set for the next four years: Optimize integration between Edipresse Swiss operations and Tamedia, expand business activities � particularly in Eastern Europe, Asia and the luxury sector, and strengthen the balance sheet, so that next year the group should move from a position of indebtedness into a net cash position

Business profile At the moment, Edipresse holds a clear leading position in its home market, with high circulation figures in western Switzerland. Outside

Switzerland, Edipresse concentrates on the market for specialty magazines, with particular emphasis on Spain and Poland. In addition, the company has built up a presence in selected emerging markets (including Ukraine, Russia, Romania and China). The company is able to take advantage of the growth potential of these markets with a relatively low level of investment. Edipresse also operates a variety of websites (including Homegate) as a supplement to its print publications. The cyclical advertising market is Edipresse�s major source of revenue, accounting for around 57% of group sales in 2008. Competition in this market intensifies during economic downturns (as pricing pressure increases and demand wanes). On the cost side, raw material prices play a pivotal role. Paper accounts for a considerable portion of Edipresse�s overall expenditure. The pro-cyclical behavior of the price of paper (which declines during recessionary periods) can exert a certain stabilizing effect on operating earnings, as the drop in material costs partially offsets the negative impact of shrinking advertising and sales prices.

Financial profile Edipresse FY 2008 sales declined by 9.4% to CHF 736 million, mainly driven by the change in scope of consolidation. Adjusted EBITDA increased by CHF 23 million to CHF 79 million, resulting in an adjusted EBITDA margin of 10.7% (+378 basis points). Adjusted FFO improved by CHF 20 million to CHF 79 million, while at the same time, adjusted FCF increased to CHF 42 million (up CHF 30 million YoY) resulting from a lower cash drain in working capital investments despite somewhat higher CAPEX. The capital structure was negatively affected by the increase in adjusted net debt to CHF 239 million, and the decrease in adjusted equity to CHF 297 million, which led to an increase in adjusted net leverage to 44.6%. Liquidity-wise, Edipresse enjoyed unadjusted cash & near cash of CHF 29 million, which compares to short-term debt of CHF 21 million. The company has moderate refinancing needs for FY 2009, whereas in 2010 the group has to refinance its CHF 100 million bond. However, Edipresse is expected to enjoy a substantial cash inflow at the beginning of 2010 of around CHF 226 million due to the aforementioned merger agreement. Turning to credit metrics, adjusted FFO/Net debt increased to 33.1% resulting from the improved cash flow generation capacity. Although we appreciate the aforementioned improvements in cash flow generation, we are rather disappointed about the company's increased indebtedness. Additionally, in anticipation of the challenging market environment in FY 2009, particularly the expected sharp deterioration in advertising volumes, it is very unlikely in our view that Edipresse will be able to bring adjusted FFO/Net debt back to a sustainable level in line with the Mid BBB rating over the credit cycle. Therefore we have downgraded Edipresse from Mid BBB to Low BBB with a Stable outlook. We see an adjusted FFO/Net debt of at least 25% over the credit cycle as adequate for the current Low BBB rating.

Event risk/outlook Edipresse's operating performance will be significantly pressured in FY 2009 following the deterioration in the advertising market. Accordingly, the sharp drop in demand combined with the company's high operating leverage will adversely affect the group's operating result and cash flow generation capacity. We project that the company will only partially be able to offset the aforementioned negative impacts with cost-cutting measures and efficiency programs.


Edipresse (CS: Low BBB, Stable) Sector: Publishing

Company description

Edipresse, headquartered in Lausanne, is a leading publisher of daily newspapers in western Switzerland. The group publishes a variety of newspapers and magazines in and outside of Switzerland. Major titles include the three biggest dailies in western Switzerland (Le Matin, 24heures and Tribune de Genève), as well as local newspapers. Edipresse also holds a stake in Le Temps. The group owns subsidiaries in Spain, Poland, Ukraine, Russia, Romania, and Asia. In March 2009, Edipresse announced a staged merger of its Swiss business with Tamedia (2010�2013). Advertising is Edipresse's major source of revenue at 57%, followed by copy sales (19%), subscriptions (11%) and printing (6%).





001722262 / 4.00% Edipresse SA 10/12/2010 HOLD Edipresse SA n.r. n.r. CHF 100

n.r. = not rated


P&L

Sales 887 813 737 690

Gross margin 82.8% 84.4% 86.6% 86.6%


Margin 8.2% 6.9% 10.7% 9.8%


Margin 3.7% 2.2% 3.3% 4.1%


Net profit 30 31 30 21

Cash flow



CAPEX 45 23 26 26


Adjusted DCF 2 -1 35 10

Balance sheet


Core working capital 12 10 -24 -27

Adjusted Total asset base 900 839 740 715




Market capitalization 677 556 252 n.a.

Key ratios








Capital structure

Core working capital/sales 1.4% 1.3% -3.2% -3.9%

Cash cycle -188.5d -171.0d -161.1d -161.1d






Margin development

0%

5%

10%

15%

2006 2007 2008 2009E

60%

70%

80%

90%

100%




0

100

200

300

400

2006 2007 2008 2009E

CHF m

30%

35%

40%

45%

50%



0%

10%

20%

30%

40%

2006 2007 2008 2009E

2x

4x

6x

8x

10x



0

20

40

60

80

100

120

Year end2008

2009 2010(bond)

2010 andthereafter

(loans)

CHF m

Cash Bonds & loans


Dominant position in home market

Relatively stable EBITDA margins

International diversification

Successful cost-cutting measures


Cyclical advertising market

Strong competitive pressures (e.g. free newspapers)

High operating leverage

Constrained financial headroom

Next events

September 2009: H1 2009 results

Website

www.edipresse.com




Rating rationale Our Mid A rating for EGL is based on the company�s above-average business profile and above-average financial profile. The rating reflects the favorable growth opportunities of the group�s electricity and gas trading activities in Europe, as well as the planned substantial increase in internal energy production, its long-term procurement contracts, and EGL�s integration within the Axpo Group. General electricity trading risks, the risks associated with the expansion of the company�s power generating activities in Italy, as well as comparably low margins, negatively impact the rating. Furthermore, earnings volatility will likely increase with the expansion of the company�s energy trading activities. The rating outlook remains Negative, as key credit metrics remain below the required thresholds under the current rating, as a result of high financing requirements associated with the company�s expansion projects and in view of continued high CAPEX.

Corporate strategy EGL�s strategic business model consists of the three segments � electricity trading, Natural gas business and assets, whereby electricity trading is the company�s traditional core business. EGL pursues a multi-niche-player strategy in the European wholesale electricity trading market. The company intends to profitably exploit the attractive price constellations on offer and aims to further expand its local presence in major markets (including southeastern Europe). To enhance its competitiveness, EGL is making a substantial investment in its asset portfolio (predominantly in Italy), with a focus on the completion and integration of its gas-fired combined cycle power plants, the targeted linking of assets and trading competencies, the utilization of potential synergies and the promotion of renewable energies. EGL regards gas trading as an important complement to its asset-based activities. With the construction of a new natural gas pipeline to Italy across the Adria (TAP), EGL intends to alleviate constraints to its existing import capacity to Italy. In addition, the company has optimized its gas procurement portfolio by concluding a long-term gas delivery contract with Iranian state-owned gas exporter NIGEC.

Business profile EGL is the second-largest pan-European electricity trader operating out of Switzerland (following Alpiq). The company trades on both the spot market (short-term deliveries, both on and off the market) and the forward market (trading in futures, swaps and options on energy exchanges) and is represented on all major European electricity exchanges through its subsidiary EGL Trading AG. Electricity trading

margins are substantially lower than those generated by conventional energy activities, with a corresponding impact on profitability. Trading volumes are influenced by a multitude of factors � a fact that creates both opportunities and risks. EGL manages the risks generated by its business activities (market and counterparty, as well as operational and regulatory risks) by means of a sophisticated risk management strategy. The ongoing expansion of EGL�s internal production capacity is of primary strategic significance, as it reduces the company�s exposure to price fluctuations and transport restrictions, while supporting margins and increasing the company�s proximity to its sales market. EGL�s asset portfolio includes internal power generation, transport infrastructure (EGL owns around one third of all cross-border transit lines in Switzerland � particularly those to Italy) and a number of long-term procurement contracts for electricity and natural gas. In Switzerland, EGL is a major partner in several hydropower facilities and nuclear power plants, as well as in drawing-rights companies (AKEB and ENAG). In cooperation with its partners, the company is establishing an asset portfolio in its key European markets (in particular in Italy). EGL is also increasingly expanding its gas trading activities, which is an important way of ensuring optimum future supply for its gas-fired power stations � especially given that European electricity prices are increasingly affected by fluctuations in the price of oil and natural gas. In addition, EGL�s cross-border electricity and gas trading operations allow the company to take full advantage of price spreads between the commodities electricity and gas.

Financial profile EGL�s top-line growth declined by 29.3% in FY 2008 to CHF 4.2 billion as a result of a continued shift from traditional physical electricity sales to energy derivatives. By contrast, the adjusted EBITDA margin increased from 5.8% to 11.6%, reflecting a very pleasing trading result. Adjusted FFO increased from CHF 154 million to CHF 344 million. EGL�s net liquidity rose for the third consecutive year, reaching CHF 836 million. Despite a renewed increase in adjusted net debt to CHF 1.2 billion, adjusted net leverage remained nearly stable at 36.0%. The adjusted FFO/Net debt ratio increased significantly to 28.9%, but is still below the minimum value of 40% required for the current rating. The company�s credit rating is thus under pressure, particularly given that, with a view to future capacity expansion, a rapid recovery is not expected. With a dividend yield of around 16% for FY 2008, EGL�s dividend policy is in line with the company�s aggressive growth strategy.

Event risk/outlook The company's FY 2009 results will probably come in below last year's very pleasing levels. European energy markets will remain challenging in the near term, as a result of lower electricity prices and a subdued demand in view of the global economic downturn. Furthermore, investment outlays are likely to continue pressuring credit metrics. At the same time, however, the company's profitability should be supported, as additional gas-fired combined cycle power stations come on line. We expect that EGL will be capable of maintaining adequate credit metrics to support the current rating across the credit cycle. Failure to do this would result in a rating downgrade to Low A.

Michael Gähler

EGL (CS: Mid A, Negative) Sector: Electrical Utilities

Company description

EGL (Elektrizitäts-Gesellschaft Laufenburg AG) is the second-largest pan-European electricity trader operating out of Switzerland. The company focuses on the trading of electricity, gas and financial energy products. EGL has a variety of interests in partner plants in Switzerland and owns gas-fired combined cycle power stations in Italy. EGL is a member of Europe�s major electricity exchanges and enjoys a local presence through a range of subsidiaries. Its customers include electricity producers and regional power distributors, as well as local utilities and industrial companies. 87.4% of EGL�s share capital is currently held by Axpo Holding.





002326262 / 2.50% EG Laufenburg 23/11/2015 SELL EG Laufenburg AG n.r. n.r. CHF 250

n.r. = not rated


P&L

Sales 6'377 5'890 4'167 4'582

Gross margin 6.5% 9.0% 18.3% 16.0%


Margin 4.4% 5.8% 11.6% 9.4%


Margin 3.8% 5.1% 10.4% 8.2%


Net profit 243 447 315 277

Cash flow

Adjusted FFO 277 154 344 312

Adjusted CFO 163 147 257 282

CAPEX 437 433 212 100

Adjusted FCF -273 -286 45 182

Adjusted DCF -313 -337 -6 132

Balance sheet





Total adjusted net debt (M&L adjusted) 925 1,116 1,189 1,061



Key ratios






Adjusted FCF/Net debt -29.5% -25.6% 3.8% 17.2%


Capital structure


Cash cycle 11.8d 6.1d 10.8d 16.5d






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Rising internal production capacities 15 December 2009: 2008/09 results

Opportunities in European electricity trading

Firmly embedded in the Axpo Group

Improved profitability

Website

www.egl.ch


Energy trading risks

High level of electricity sourcing

Sustained high investment outlays

Insufficient cash flow debt coverage for the rating




Rating rationale EMS Chemie's rating reflects the company's leading market positions in the areas of performance polymers and the fine chemicals/engineering business with a broad product portfolio and a solidly diversified customer base. The strong customer focus combined with customized products, a high innovation rate, and the ongoing commitment to R&D and advisory services enables the group to achieve above-industry margins supported by a sound pricing flexibility, as reflected by the (despite being lower than the previous year's level) solid adjusted EBTDA margin of 18.6% in 2008. In terms of its financial profile, EMS Chemie clearly benefits from a very sound capital structure, with an adjusted net cash position over the last couple of years that finds additional support from a healthy cash-flow generation capacity, with an adjusted FFO of CHF 254 million in 2008 translating into strong metrics, well above the assigned adjusted FFO/Net debt threshold level of 55%. However, the dramatically risen challenges in the markets of EMS Chemie during 2008 have hampered both sales growth and margins, with the negative trend set to continue in 2009. Q1 2009 sales were severely impacted by deteriorating key markets and hence suffered a decline of nearly 38% in local currency with an according negative impact on margins and the cash flow generation capacity. As a result of this development and the continued harsh market outlook that is not expected to offer past cash flow levels we cut the rating of EMS Chemie to Low A with a negative outlook. Despite the sound capital structure and liquidity that offer good support, we will closely monitor the margin and cash flow development and further adjust the rating if deemed appropriate.

Corporate strategy Following the divestment and spin-off of INVENTA-FISCHER and EMS Dottikon, EMS Chemie has clearly set its focus on the key area of Performance Polymers, while considering different options for the non-core businesses. At the product and service level, the company plans to further enlarge its range of high-value-adding products and services, thereby building on and expanding its current market position. Additionally, EMS will continue to search for new application areas for its product offering, thereby replacing common materials with performance polymers and other fine chemicals. The company is pursuing its R&D efforts, expecting these investments to allow it to emerge in a position of strength once markets record a rebound in demand. Despite generating a substantial amount of sales in the automotive industry, the clear focus on the premium segment with a stable customer base allows the company to generate sound margins on the back of ongoing strong demand for innovative and custom-tailored products and services. This focus, although not fully immune to overall market downturns, should permit better demand development than a focus on low range automotives would. EMS

Chemie intends to further strengthen its position in existing markets such as Europe, Asia and North America, while entering new markets in Eastern Europe and South America. The current harsh market environment has prompted EMS Chemie to take several cost reduction and efficiency gain measures that have been and will continue to be implemented going forward.

Business profile EMS Chemie is a specialty chemicals group with a strong position in selected areas of the polymers and fine chemicals/engineering business. The Performance Polymers division develops, manufactures and markets high-performance engineering plastics for demanding applications. EMS GRIVORY manufactures products for the automotive, electrical and electronics, industrial, eyeglass and packaging industries; EMS GRILTECH supplies the automotive, apparel and paper machine sectors with thermoplastic adhesives, and EMS TOGO offers bonding, coating and sealing products for different stages of the vehicle assembly and production process. The Fine Chemicals and Engineering division produces high-quality additives for surface protection and the tire industry. EMS PRIMID supplies hardeners for metal and powder coatings, bonding agents applied in the production of tires and diluents, and resins and hardeners. EMS PATVAG manufactures airbag igniters and seatbelt pretensioners for a variety of vehicles. Despite an increasingly competitive environment in the polymers and fine chemicals market, in addition to challenging raw material price developments, as witnessed in the past, EMS Chemie has managed to position itself as a leading provider of innovative products and services, combined with a high customer focus, allowing it to post continued sound margins.

Financial profile EMS Chemie was confronted with increasing challenges during 2008 with both sales and margins declining below prior-year levels. Demand dropped towards the end of 2008 and hence hampered overall growth. Sales amounted to CHF 1,504 million, down 3.1%. The negative development was also felt on the adjusted EBITDA margin, which declined from 21.1% to 18.6%, the lowest level over the last couple of years. While Polymer Chemicals recorded a decline of its unadjusted EBITDA margin from 20.2% to 18.0% following an increase in 2008, Fine Chemicals continued to face a decline, with the unadjusted EBITDA margin now reaching 24.0%, down from 28.1%. However, EMS Chemie managed to support its cash flow generation capacity with an adjusted FFO of CHF 255 million that, together with a lower negative working capital swing and lower CAPEX, helped to increase the adjusted FCF to CHF 173 million. Supported by its sound cash cushion and ongoing solid equity base, EMS Chemie was able to post good key metrics, with an adjusted FFO/Net debt well above the required 55%. This would add to the expected decline in the company's cash flow generation capacity going forward. We view the company's liquidity position as very solid, with only limited near-term financing needs.

Event risk/outlook EMS Chemie expects markets to turn even more challenging in 2009, with demand deteriorating to very challenging levels. The sales decline of nearly 39% in Q1 2009 clearly underpinned this view. EMS Chemie will take the necessary steps to respond to developments, with a continued focus on the expansion of the Polymer Chemicals business. Sales and unadjusted EBIT are expected to fall clearly below 2008 levels.

John Feigl

EMS Chemie (CS: Low A, Negative) Sector: Specialty Chemicals

Company description

EMS Chemie is a specialty chemicals company active in niche markets of performance polymers and the fine chemicals industry. During 2008, the company generated sales of CHF 1,503 million, with the core part of around 93% being generated by the Performance Polymers business and the remaining 7% contributed by Fine Chemicals/Engineering. With 64% of group sales, Europe is by far the largest sales region, followed by Asia with 20%, North America with nearly 12% and the remaining 4% spread over other regions. As of year-end 2008, EMS Chemie had some 2,165 employees.





No CHF straight bond outstanding


P&L

Sales 1,396 1,552 1,504 1,128

Gross margin 38.0% 37.7% 39.4% 37.0%


Margin 21.4% 21.1% 18.6% 16.7%


Margin 17.3% 17.3% 14.2% 10.9%


Net Profit 297 283 212 123

Cash Flow

Adjusted FFO 213 242 255 164

Adjusted CFO 199 203 237 231

CAPEX 64 72 64 51

Adjusted FCF 135 131 173 180

Adjusted DCF -16 -66 8 41

Balance Sheet

Net cash & near cash 1,108 926 479 536


Total assets 2,378 2,333 1,752 1,743


Total adjusted net debt (M&L Adj.) -323 -329 -37 -86

Equity (pension leverage adjusted) 1,103 1,277 975 959


Key ratios


Adjusted EBITDA / net interest coverage 20.8x 66.6x 142.3x 45.6x

Adjusted EBIT / net interest coverage 16.8x 54.3x 108.1x 29.8x

Adjusted FFO / debt 27.2% 40.5% 57.6% 36.4%

Adjusted FFO / net debt -66.1% -73.6% -695.0% -190.2%

Adjusted FCF / net debt -41.9% -39.8% -473.4% -208.9%

Adjusted net debt / EBITDA -1.1x -1.0x -0.1x -0.5x

Capital structure

Core working capital / sales 0.2x 0.3x 0.2x 0.2x

Cash cycle 73.0d 81.0d 72.0d 71.0d

Cash / adjusted gross debt 141.1% 155.1% 108.3% 119.1%

Adjusted net leverage -41.4% -34.7% -3.9% -9.9%


Adjusted net gearing -29.3% -25.8% -3.8% -9.0%


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-800%

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2009 2010 2011 2012 2013

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Strong market position in selected areas

Sound product diversification and innovation rate

Good margins and cash-flow generation

Strong capital structure/adjusted net cash


Imbalanced revenue mix

Exposure to the cyclical automotive industry

Raw material and energy price volatility

Shareholder focus

Next events


October 2009: 9M 2009 results

Website

www.emschemie.com




Rating rationale Our Low A rating for Energiedienst Holding AG (EDH) is based on the company�s average business profile and above-average financial profile. The rating reflects the company�s integrated corporate structure, its close relationship with the customers in its supply region in southern Baden-Württemberg, its leading position in renewable energy, as well as its solid balance-sheet structure, stable cash flows and its relationship with EnBW. The rating is negatively impacted on the distribution side by the volatility of electricity prices (coupled with a pronounced dependency on electricity sourcing), as well as by competitive pressure on the sales side, government regulation (e.g. grid fee regulations), and the company�s generous dividend policy. The rating outlook is Stable based on the company�s solid financial structure, its continued focus on cost efficiency, its high proportion of direct customers and its planned capital expenditure.

Corporate strategy Energiedienst Holding AG is an integrated, regionally active electricity group, with a focus on electricity production through hydropower (environmental corporate strategy), grid transmission and distribution, as well as the provision of natural energy products to customers within its supply region and throughout Germany. Through its subsidiary NaturEnergie, EDH occupies targeted market niches across Germany with a focus on environmentally oriented companies. In addition, EDH engages in forward-looking, cooperative partnerships with municipal authorities, resellers and industrial companies. Production-wise, EDH intends to expand its internal production of energy via the rebuilding of its Rheinfelden power plant; the new power station is set to come on line in 2010. In order to strengthen is position as a Swiss green electricity producer, the group acquired EnAlpin during 2008 in an all-stock transition. The acquired company aims to maintain its strong position in Valais, while, in close cooperation with the ED group, expanding in other cantons.

Business profile The Energiedienst Group is vertically integrated (production, distribution and sales). The group generates electricity at its three power stations on the Rhine � in Laufenburg, Rheinfelden and Wyhlen and participates in four additional power stations through EnAlpin. In addition, the group has an interest in jointly owned hydroelectric stations and purchases its remaining energy requirements on the wholesale market. EDH boasts an extensive grid infrastructure at the

local, regional and interregional level, which is constantly adapted to meet rising demand and is in line with regional developments. On the sales side, the deregulation of the German electricity market has seen traditional, fixed customer relationships be-come more fluid. EDH has been able to counteract this effect by providing innovative services and by strengthening its market presence and customer focus. Total electricity sales (including EnAlpin) in 2008 were 7,840 GWh (2007: 7,771 GWh). Power generation at the company�s own power stations and partner plants amounted to 2,569 GWh or some 32% of electricity sales. Internal power generation is thus still at a low level (despite the EnAlpin-related increase in production capacities), making EDH heavily reliant on external sourcing. Coupled with higher and more volatile energy prices on the spot and forward markets, this leads to a related procurement risk. However, this must be seen in the context of the mark-to-market strategy pursued by EDH, whereby the required energy volumes are sourced at the same time as supply contracts are concluded. This narrows procurement-related risks to the risk of a potential discrepancy between the volume sourced and the contractually agreed volume. In addition, the construction work underway at the Rheinfelden hydropower plant will increase the company�s internal production of electricity. The new power station, with an output of 100 MW (formerly 26 MW), will generate around 600 million kWh (previously 185 million kWh) of electricity each year (although 50% will go to NOK). That said, the positive impact of this additional power-generating capacity will probably not be noticeable until 2010.

Financial profile Top-line growth in FY 2008 was 8.7% to EUR 694 million. Adjusted EBITDA grew by 10.8% with a related slight increase in adjusted EBITDA margin to a still-solid 22.8%, primarily due to sound sales growth and efficiency improvements. With an adjusted FFO of EUR 152 million, the company�s cash-flow generation reached a very pleasing level. Turning to the capital structure, ED Holding exhibits a very healthy balance-sheet structure, in our view, with adjusted net debt of EUR 38 million and adjusted net liquidity of EUR 185 million. EDH�s cash flow debt coverage remained extremely solid. The adjusted FFO/Net debt ratio exceeded 400%, while we regard a ratio of at least 35% as adequate for the current rating. In terms of future capacity expansion, the company thus enjoys considerable financial headroom. With a payout ratio of around 36%, the company�s dividend policy is shareholder-friendly.

Event risk/outlook Sales volumes and the company�s customer base are expected to decrease slightly in FY 2009, in particular with regard to business clients. Furthermore, price-driven competition should further increase. By contrast, sales of Natur-Energie are projected to increase further. Profitability-wise, continued pressure on grid fees will need to be compensated by efficiency improvements in this area. With regard to EnAlpin, sales are projected to remain stable while profitability could be pressured by regulatory-driven cuts in grid fees. Thanks to the company�s solid financial position and the sustained strength of its cash-flow generation, capital expenditure relating to the Rheinfelden hydroelectric plant should be neutral in terms of EDH�s credit rating.

Michael Gähler

Energiedienst (CS: Low A, Stable) Sector: Electrical Utilities

Company description

The Energiedienst Group (formerly Kraftwerk Laufenburg) is a fully integrated power utility. All of the electricity it produces is derived from hydro-power. The group operates hydroelectric power plants on the Rhine and delivers power to southern Baden-Württemberg and to a small region of Switzerland; its supply area encompasses 750,000 residents. Around 88% of sales are generated in Germany. The German company EnBW Energie Baden-Württemberg AG (S&P rating: A�/Stable, Moody�s rating: A2/Stable) is Energiedienst Holding AG�s majority shareholder, with an interest of approximately 82%.





001469366 / 3.75% KW Laufenburg 27/08/2010 HOLD ED Holding AG n.r. n.r. CHF 100

001750316 / 3.00% Energiedienst 16/01/2012 HOLD ED Holding AG n.r. n.r. CHF 100

n.r. = not rated

Financial overview (EUR m) 2006* 2007 2008 2009E

P&L

Sales 510 639 694 685

Gross margin 38.3% 34.7% 34.4% 34.6%


Margin 23.8% 22.4% 22.8% 23.0%


Margin 15.4% 14.0% 15.1% 15.2%



Cash flow



CAPEX 24 84 60 90



Balance sheet



Adjusted Total asset base 989 1'514 1'533 1'574




Market capitalization 871 979 1'153 n.a.

Key ratios








Capital structure


Cash cycle 17.1d -1.8d -31.3d -31.3d





* = without EnAlpin n.a. = not available Accounting standard: IFRS

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Vertical integration of the company

Extensive power grid

High proportion of end-customers

Growing environmental awareness


Low level of internal power generation

Increasingly competitive environment

Regulatory intervention

Shareholder-friendly dividend policy

Next events


Website

www.energiedienst.ch




Rating rationale The Mid A credit rating for EOS is based on the company�s above-average business profile and above-average financial profile. The rating reflects the company�s strong position in the electricity market in western Switzerland, the high proportion of flexible hydroelectric power (and resultant access to valuable, CO2-neutral peakload energy) in its production mix, as well as the integration of EOS in the Alpiq Group. The rating is constrained by the risks associated with EOS� rapidly expanding electricity trading operations and the continuing deregulation of the Swiss electricity market. The rating outlook is Stable, based on the company�s favorable market position in western Switzerland, its position as a part of the Alpiq Group, the stable cash flow generation and in view of the company�s planned expansion projects.

Corporate strategy With the merger of Atel and EOS, a new leading Swiss energy company, Alpiq, with a strong European orientation has been created. The new group started operations on 1 February 2009. EOS forms an important part of the new company, primarily based on its strong position in flexible hydropower generation. The strategy is conforming to the energy politics determined by the Swiss Federal Council. Production-wise, EOS� main focus is on hydroelectric power. The company aims to further expand its power generation and grid facilities. Major projects include the reopening of the Cleuson-Dixence plant (projected for 2010), the 75% improvement in the performance of the facilities of Forces Motrices Hongrin-Léman, the heightening of the Fah dam at Simplon, and the construction of a pump storage power station in Serra. In addition, new renewable energies (such as wind energy, small-scale hydropower and biomass energy) form part of the company's expansion strategy. Concerning large power plants, EOS adheres to its focus on a gas-fired combined cycle power plant (which provides control energy) in Chavalon, which the company sees as a good complement to the development of the aforementioned new renewable energies. Regarding the grid, EOS favors a connection of the very high voltage grid of the Swiss Romande to the national grid.

Business profile EOS� customers are comprised of power distributors, resellers, large-scale consumers and power-generating companies. Electricity sales (physical delivery) in FY 2009 amounted to 34.9 TWh while trading activities amounted to 70.0 TWh. Approximately 90% of the electricity generated by EOS (at its own power stations and partner power plants) is derived from hydropower. A large share of this electricity

production is obtained from the company�s 60% stake in Grande Dixence (Switzerland�s largest hydroelectric power station). This investment is particularly significant for EOS in terms of the generation of peakload energy, which can be produced in line with market needs and sold at a high price. In addition, EOS draws energy from the Leibstadt nuclear power plant (5%) and from the drawing-rights company KBG (Kernkraftwerk Beteiligungsgesellschaft AG). Repair work on the Cleuson-Dixence high-pressure water pipe continued in 2008 and the power station should come on line again in 2010. The reconstruction of the site is extremely important for EOS, given that the additional power generated at the plant will expand the company�s capacity to market flexible, high-priced peakload energy. The total output of the Grande Dixence power station will be significantly higher once the repairs are complete. In addition, EOS plans to increase output at Forced Motrices Hongrin-Léman (in which it holds a 39.3% stake) from 240 MW to 420 MW, with the aim of enhancing the company�s regulated supply of energy. EOS operates and maintains an extensive high voltage and very high voltage network, which supplies around 60% of western Switzerland with electricity and allows the company to engage in cross-border electricity trading operations. EOS is also active in the electricity trading business, as well as in energy portfolio management and analysis.

Financial profile Top-line growth in FY 2008 was an impressive 55.8%, supported by increasing trading activities and the absence of unfavorable supply contracts. Adjusted EBITDA increased by 93.0% to CHF 311 million resulting in a pleasing adjusted EBITDA margin of 8.9%, reflecting the strongly supportive effect of the expiry of the company�s former supply contracts. At the same time, adjusted FFO increased from CHF 147 million to CHF 295 million. EOS exhibits a solid balance-sheet structure, in our view, with adjusted net debt of CHF 544 million, resulting in an adjusted net leverage of 14.3% � a very solid level, in our view. Liquidity-wise, EOS enjoys a pleasing CHF 173 million of adjusted cash and near cash, significantly up from last year's CHF 117 million. The adjusted FFO/Net debt ratio of 54.3% (prior year: 28.2%) is clearly above the level required to maintain the current rating (35%), which offers the group ample financial flexibility under its current rating. This is particularly of importance in view of the group's expansion plans.

Event risk/outlook The European electricity market is expected to remain challenging in view of lower electricity demand and market liquidity, lower electricity prices, limited cross-border capacities and regulations. However, in view of EOS' strong position in flexible hydropower generation, the absence of unfavorable supply contracts and its position in the Alpiq Group, we see the group as well positioned to profit from potential business opportunities in both Switzerland and the European electricity market. The company�s planned investment spending (CHF 0.9 billion by 2013) will require a substantial improvement in its cash-flow generation. As the EOS now forms part of the Alpiq Group, the future coverage of the company will depend on prospective activities related to EOS' outstanding bonds.

Michael Gähler

EOS (CS: Mid A, Stable) Sector: Electrical Utilities

Company description

EOS forms a part of the new established Alpiq Group. The activities of EOS (Energie Ouest Suisse SA) comprise the generation of hydropower, high voltage and very high voltage transmission lines and the marketing of electricity in both Switzerland and foreign markets. The group's activities are rooted in western Switzerland and the Alpine region. Its major customers are the main electricity distributors in western Switzerland. The company has currently 711 employees.





002675544 / 2.875 % EOS SA 22/09/2014 HOLD EOS SA n.r. n.r. CHF 125

n.r. = not rated


P&L

Sales 1,893 2,244 3,497 3,567

Gross margin 9.4% 10.0% 11.5% 12.8%


Margin 6.1% 7.2% 8.9% 10.2%


Margin 3.8% 5.3% 7.1% 8.1%


Net profit 55 334 204 239

Cash flow



CAPEX 38 48 100 150



Balance sheet








Key ratios








Capital structure


Cash cycle 7.1d 7.5d 7.8d 7.8d






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Relatively high share of flexible hydropower

Strong market position in western Switzerland

Positioned as a part of the new Alpiq Group

Opportunities in European electricity markets


Risks related to electricity trading activities

Significant investments pending

Integration risks after merger with Atel to Alpiq

Insufficient cash flow debt coverage of Alpiq Group

Next events

No information given

Website

www.eosholding.ch




Rating rationale Forbo's rating is based on its average business profile, with strong market positions in the flooring business (linoleum with a global market share of 65%, vinyl and parquet products), a good niche position in the adhesives business with a diversified client portfolio, and a leading market share in the belting business. However, mitigating these factors are Forbo's exposure to volatile raw material prices, the commodity-like character of some products with only limited pricing flexibility, and increasing competition that fuels further pricing and margin pressure. After recording two good years in 2006 and 2007 in terms of its financial profile, with metrics reaching values well above the required levels, Forbo saw a strong weakening of key metrics in 2008. While Forbo's cash flow generation capacity softened, resulting in an adjusted FFO of CHF 147 million, its adjusted net debt increased considerably from CHF 244 million to CHF 657 million, mainly driven by the acquisition of Bonar Floors and the Rieter stake, and the share buyback, with the resulting adjusted FFO/Net debt metric reaching a very low 22.4%, well below the required 40% threshold level. Considering the challenging market environment, which is likely to persist for some time and hence hamper Forbo's cash flow generation capacity development, while continuing to record a considerable amount of adjusted net debt, we will closely monitor the near term development of Forbo's key metrics and their rating implications going forward.

Corporate strategy Forbo has continuously followed its core strategy of building on its three divisions and developing these into one market and a customer-driven company. As a consequence, Forbo has bundled its different brands into one umbrella brand. To further increase its identity, Forbo has renamed its three divisions into: Flooring Systems, Bonding (formerly Adhesives) Systems, and Movement (formerly Belting) Systems. Profitability is to be further increased by streamlining processes and concentrating operations on one base where possible. The Flooring Systems business will continue to focus on the commercial market, while broadening its product portfolio and boosting its presence in fast-growing and promising markets such as Eastern Europe, Asia and the USA. Production sites are to be relocated to low-cost regions, with the aim of gaining further margin improvements. Where feasible, growth will additionally be supported by active participation in market consolidation, as in the case of Bonar Floors in 2008 for some CHF 222 million. The Bonding Systems business is to further shift its product offering towards higher-value-adding products with higher margins driven by enhanced innovation, while seeking further market growth potential. Bolt-on acquisitions

supporting this strategy of widening the product range and providing access to high-growth markets are expected to further support the business going forward. The Movement Systems business is to benefit from continued efforts to improve margins on the one hand, and to expand the geographical reach on the other.

Business profile The flooring industry is quite fragmented and continues to experience market consolidation, with larger players acquiring smaller competitors, with the aim of benefiting from economies of scale and broadened geographical and product reach. Forbo's Flooring Systems business enjoys a good market position in the upper price range, with a strong focus on the commercial and residential side. With a market share of around 65%, Forbo's linoleum product range is leading the global market. In the market for adhesives products valued at around CHF 38 billion, Forbo ranks among the top ten companies. On the back of challenging raw material prices and increasing competition, the market continues to record further consolidation. However, the trend towards substituting established fastening and bonding techniques through adhesives will likely offer sufficient growth opportunities for innovative and well-positioned companies like Forbo, thus offering certain pricing flexibility. Forbo's Movement Systems business holds various leading market positions for products applied in a vast range of belt-driven machines in industries such as food, fitness and logistics.

Financial profile In 2008, Forbo recorded sales of CHF 1,919 million, down 4.3% YoY. While negative currency movements hampered top-line growth, organic growth was negative. As a result of lower volumes and ongoing challenging raw material prices, Forbo's adjusted EBITDA margin declined from 12.2% to 11.6%. This development had a negative impact on the cash flow generation capacity, which saw a decline in adjusted FFO to CHF 147 million. Following a short period of low adjusted net debt levels in 2006 and 2007, the acquisition of Bonar Floor and the Rieter stake caused the adjusted net debt level to increase to CHF 657 million, well above the capacity level for the current Mid BBB rating. As a result, adjusted FFO/Net debt declined from a good 70.9% to a low 22.4%, while the adjusted net leverage increased to 53.7%, up from 26.3%. In our view, Forbo could have easily managed to digest the aforementioned acquisition with key metrics falling short of threshold levels only to a limited extent (adjusted FFO/Net debt of around 35%). The stake in Rieter, however, clearly surpassed Forbo's debt capacity and hence resulted in major near-term rating pressure. Considering Forbo's CHF 349 million refinancing needs during 2009 and comparing this with the balance sheet cash of CHF 289 million at year-end 2008, we view Forbo's liquidity as below average, with a need to undertake some crucial refinancing during 2009.

Event risk/outlook Forbo expects 2009 to be considerably more challenging than 2008, with markets not expected to recover very soon. Given these uncertainties, the company refrains from guiding towards any targets. We project both lower sales and margins for 2009, and thus expect the company's cash flow generation capacity to soften further. It will be crucial for the rating to see how fast key metrics can recover to levels deemed necessary for the rating in the near term.

John Feigl

Forbo (CS: Mid BBB, Stable) Sector: Building Products

Company description

Forbo is a leading producer of adhesives, floor coverings and belting products, with sales of CHF 1,919 million in 2008. The Flooring business, which covers a wide range of linoleum, high-quality vinyls and parquet, accounts for the largest part of group sales with 47%, followed by the Bonding division with 34%, which manufactures adhesives for paper processing and packaging, shoes and textiles, automobile interiors, and furniture and building applications. Movement Systems, at around 19% of total sales, supplies products such as high-grade drives, conveyors and processing belts. Forbo had some 6,563 employees at year-end 2008.





Currently no CHF bonds outstanding


P&L

Sales 1,880 2,004 1,919 1,858

Gross margin 59.9% 59.5% 58.8% 58.0%


Margin 10.7% 12.2% 11.6% 9.9%


Margin 5.9% 8.4% 6.4% 5.3%


Net Profit 61 111 16 49

Cash Flow

Adjusted FFO 162 173 147 141

Adjusted CFO 170 171 166 128

CAPEX 65 62 55 39



Balance Sheet






Equity (Pension leverage adj.) 618 686 567 616

Market Capitalization 1,253 1,717 435 n.a.

Credit Metrics


Adjusted EBITDA / Net fixed charge coverage 8.6x 12.5x 8.3x 4.7x

Adjusted EBIT / Net fixed charge coverage 4.8x 8.5x 4.6x 2.5x


Adjusted FFO / Net debt 65.8% 70.9% 22.4% 24.0%

Adjusted FCF / Net debt 42.9% 44.6% 16.9% 15.1%

Adjusted Net debt / EBITDA 1.2x 1.0x 3.0x 3.2x

Capital structure

Core working capital / Sales 22.8% 21.8% 21.9% 23.3%

Cash conversion cycle 45.1d 42.4d 40.6d 49.0d

Adjusted Cash / gross debt 51.0% 36.0% 27.6% 35.3%

Adjusted Net leverage 28.5% 26.3% 53.7% 48.8%

Adjusted Gross leverage 44.9% 35.8% 61.5% 59.6%

Adjusted Net gearing 39.9% 35.6% 115.8% 95.3%


Margin development

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Strong market positions in selected segments

Sound geographical diversification

Sound metrics and financial headroom

Strong brand name


Raw material price volatility


Increasing competition

Exposure to cyclical markets

Next events


Website

www.forbo.com




Rating rationale Geberit's rating reflects the company's average business profile, with a strong market position in the European sanitary industry, as well as its high innovation rate supported by an ongoing investment in R&D, its strong and well-recognized brand, the high quality of its products and its well-established distribution network. Geberit's financial profile is supported by high margins, such as an adjusted EBITDA of above 26%, and solid cash flow generation capacity derived from the company's focus on technology-based and innovative products. The financial profile also reflects management's commitment to a conservative funding structure, which resulted in an adjusted net cash position at year-end 2008 of CHF 36 million and therefore an adjusted net leverage of �3.2%. Geberit enjoys very strong credit metrics, giving it plenty of financial headroom under the current rating, with an adjusted FFO/Net debt of 40% to 50% over the cycle. Considering the adjusted FFO of CHF 564 million generated in 2008, Geberit's implied debt capacity is well above CHF 500 million, in our view. Nevertheless, the rating is constrained by Geberit's somewhat limited product diversification and its continued geographical sales imbalance, with Germany accounting for nearly a third of total sales. Additionally, increasing competition and the challenges related to high raw material and energy prices pose further limiting rating factors.

Corporate strategy Geberit aims to set global standards in the sanitary industry, growing organically by 4% to 6% above the industry growth rate in the mid-term on average. In tandem with this growth target, Geberit also aims to maintain its leadership position in terms of profitability, with unadjusted EBITDA margins of between 23% and 25% (FY 2008: 26.4%) translating into a sound cash-flow generation capacity. To achieve these goals, the company's strategy is based on four pillars: "Focus on Sanitary Technology," "Commitment to Innovation," "Selective Geographic Expansion" and "Continuous Business Process Optimization." On the back of its well-established distribution network, Geberit will continue to ship its products to installers via wholesalers, thereby avoiding the pricing pressure of the mass market. The strong innovation track record is supported by focusing on R&D in areas such as hydraulics, statics, hygiene and acoustics, resulting in pricing flexibility on the back of the high technology content of the products. To improve its geographical sales diversification and reduce its dependency on certain markets, such as Germany, Geberit intends to enter or further expand its presence in markets with promising growth potential, such as Eastern Europe (e.g. Poland), the USA, the Middle East and China with its vast market potential. The focus in business process optimization is to further reduce the cost structure.

Business profile The European sanitary market is fragmented and can be divided into the following product groups: bathroom equipment, sanitary fittings and sanitary technology. Geberit focuses on technology-based higher-value-adding plumbing products that offer higher margins than visible bathroom equipment and many sanitary fittings. Geberit's products are applied in two markets � the new construction market and the market for renovations. While the market for new construction tends to be more cyclical and accounts for somewhat over 30% of total sales, the renovation market is less cyclical and accounts for around 70% of Geberit's sales. Sales in the new construction market tend to be more volume-driven and price-sensitive compared to the renovation market, which is characterized by a demand for quality and branded products, and hence is less exposed to pricing pressure. Geberit's market share for concealed installation systems is above 50% in some countries, while it also enjoys a very good market share in flushing systems.

Financial profile Geberit posted a good set of results in 2008, despite increasing challenges in the global construction market. While sales softened YoY to reach a total of CHF 2,455 m, the continued focus on innovation, cost savings, pricing and some relief on the raw material side resulted in an increase of the adjusted EBITDA margin to a strong 26.2%. This translated into a considerable increase of Geberit's cash flow generation capacity, with an adjusted FFO of CHF 564 million and an adjusted FCF of CHF 402 million. Geberit's management continued to adhere to its conservative financial policy by maintaining a sound level of liquidity combined with a vast equity base. Despite Geberit undertaking the CHF 270 million share buyback in 2008, metrics have remained very strong as underlined by the adjusted FFO/Net debt, which is well above the required 40% to 50% threshold level over the cycle. The current market environment and further downturn is likely to result in several good acquisition opportunities for Geberit, in our view. Geberit's liquidity is solid, in our opinion, with cash amounting to CHF 303 million at year-end 2008, in addition to a committed credit facility of CHF 400 million maturing in October 2009. On the other hand, debt refinancing needs are very limited and more than covered by the available cash.

Event risk/outlook According to Euroconstruct, the European building industry will experience an increased downturn in 2009 in most markets followed by a selective improvement in 2010. Similar developments are expected for North America and parts of Asia, such as China. Despite these challenges, Geberit is convinced that it is well positioned to face the challenging market developments and will thus even be able to increase its market shares. As we expect several of Geberit's competitors to face additional challenges regarding their financial profiles such as high leverage levels, limited cash and less efficient cost structures, the likelihood of Geberit being able to take advantage of acquisition opportunities is increasing, in our view. Based on Geberit's past conservative financial policy, however, we do not expect to see the financial profile being pressured by such transactions.

John Feigl

Geberit (CS: High BBB, Stable) Sector: Building Materials

Company description

Geberit is the leading European sanitary plumbing systems manufacturer, with sales of CHF 2,455 million in 2008. The Sanitary Systems division (installation systems, flushing systems, public and waste fittings and traps) recorded sales of CHF 1,375 million, while the Piping Systems division (building drainage systems and water supply systems) posted sales of CHF 1,080 million. Germany, with 32% of group sales, accounted for the largest part of Geberit's sales. The majority of Geberit's sales are generated in Europe. As of year-end 2008, Geberit had some 5,697 employees.





00186281 / 1% Geberit AG 14/6/2010* n.r. Geberit AG BBB+, Stable n.r. CHF 170

* convertible bond n.r. = not rated


P&L

Sales 2,184 2,487 2,455 2,113

Gross margin 70.9% 68.5% 69.9% 67.9%


Margin 25.8% 25.4% 26.2% 24.0%


Margin 21.8% 22.0% 22.7% 19.9%


Net Profit 355 463 466 340

Cash Flow

Adjusted FFO 440 502 564 426

AdjustedCFO 431 453 554 435

CAPEX 81 104 153 131

Adjusted FCF 349 350 402 305

Adjusted DCF 248 191 195 304

Balance Sheet



Adjusted total asset base 2,011 2,298 2,054 2,369


Total adjusted net debt (M&L Adj.) 244 -75 -36 -345

Equity (pension leverage adjusted) 958 1,282 1,204 1,494

Market Capitalization 7,813 6,176 4,863 n/a

Key ratios


Adjusted EBITDA / Net interest coverage 42.1x 79.0x 146.3x 63.0x

Adjusted EBIT / Net interest coverage 35.6x 68.5x 126.9x 52.4x


Adjusted FFO / net debt 180.4% -671.2% -1550.7% -123.4%

Adjusted FCF / net debt 143.1% -467.3% -1104.0% -88.4%

Adjusted net debt / EBITDA 0.4x -0.1x -0.1x -0.7x

Capital structure


Cash cycle -6.1d 8.4d 4.8d -4.0d

Cash / adj. Gross debt 32.4% 124.9% 118.9% 317.6%

Adjusted net leverage 20.3% -6.2% -3.1% -30.0%


Adjusted net gearing 25.5% -5.8% -3.0% -23.1%


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2009 2010 2011 2012 2013

CHF m



Strong brand and customer base

Good position in the European sanitary market

High innovation rate on the back of continuous R&D

Strong cash flow generation and capital structure


High exposure to the German sanitary market

Imbalanced geographical sales diversification


Increasing competition and consolidating wholesalers

Next events


29 October 2009: Q3 2009 results

Website

www.geberit.com




Rating rationale Our High BBB credit rating for Georg Fischer is based on the company�s average business profile and above-average financial profile. The rating reflects the company�s favorable market position due to its three distinct core businesses and global presence, its technological leadership and innovative strength, as well as its operationally streamlined corporate structure. In addition, the current rating is supported by Georg Fischer�s conservative financial policy and solid credit metrics. The rating is constrained by the cyclical vulnerability of the company�s business operations and its exposure to raw material prices, as well as its limited pricing power (resulting from constant competitive pressure). The rating outlook is Negative in view of the considerable deterioration of the current market environment (particular at GF Automotive), leading to lower sales volumes, decreasing profitability and subdued cash flow generation, which is expected to result in higher debt levels.

Corporate strategy Operating-wise, Georg Fischer follows three strategic priorities, aiming to strengthen its non-cyclical businesses (GF Piping Systems), to strengthen its global presence and to foster innovation in materials, products and applications. In order to cope with the global economic downturn and structural changes, the group is focusing on adjusting its cost base and conserving cash. In the longer term, the group is targeting average organic growth of 5% to 6% annually and intends to achieve this internal growth predominantly via innovations and the expansion of its presence in Asia, the Americas and Eastern Europe. In addition, growth will be bolstered by selected acquisitions. In terms of profitability, Georg Fischer aims to achieve a sustained average EBIT margin of 8%. As a result, the company places emphasis on safeguarding its competitiveness in its established markets.

Business profile Georg Fischer is a leading industrial group operating in three core business segments: GF Automotive, GF Piping Systems and GF AgieCharmilles. The company generated 78% of its 2008 revenue in Europe (40% in Germany), 10% in the Americas and 12% in the growth region Asia. The GF Automotive division (48% of consolidated revenue in 2008) develops high-performance iron and light-metal cast components and systems for car bodies, chassis and power-trains. The division enjoys major long-term orders from key customers, but is dependent on the volume ordered by carmakers. Its business is thus

contingent on the automobile industry cycle. The division is also slightly exposed to raw material price trends. Both cyclicality and raw material price movements negatively influenced FY 2008 results. In the long run, Asia and Eastern Europe are the division�s strongest growth markets, a trend primarily reflected by the expansion of the group�s marketing activities and production capacity in Asia. GF Piping Systems (28% of revenue in 2008) manufactures high-quality plastic and metal components for the transport of water and gas. The division supplies an extensive range of system solutions for industrial customers, gas and water utilities and the housing technology segment. Its business depends on the construction economy, manufacturing cycles and major industrial projects. However, the division is currently benefiting from the considerable growth in renovation projects in western countries, as well as from new infrastructure projects in the emerging markets. The increase in sales generated in non-cyclical markets, the emerging markets and in Asia has a positive and stabilizing impact on the division�s earnings strength. The lower dependence on the global economic development was also proven in FY 2008. The core businesses of GF AgieCharmilles (24% of revenue in 2008) are precision machinery and automation systems for tool and mold making, as well as the manufacture of precision parts. This division is the most cyclical of Georg Fischer�s business segments and is essentially driven by technological innovation. In addition, the segment offers comprehensive services for the globally installed base, which is less cyclical. Nonetheless, the division's overall high cyclicality resulted in a significant drop in operating performance in FY 2008.

Financial profile The top line in FY 2008 was CHF 4.5 billion (�0.7% compared to last year). The adjusted EBITDA margin declined significantly from 11.5% to 9.2%, as a result of the currently challenging business environment (in particular at GF Automotive). Adjusted FFO decreased substantially to CHF 290 million, reflecting a clearly softer cash flow generation capacity. The company�s adjusted net debt increased to CHF 1.0 billion. As a result, GF�s balance-sheet structure softened compared to last year's very solid levels, resulting in an adjusted net leverage of 44.6%. At the same time, adjusted net liquidity decreased to CHF 120 million. The adjusted FFO/Net debt ratio of 27.8% (prior year: 65.8%) clearly fell short of our minimum required level of 45% for the current rating, thereby pressuring the group's financial profile.

Event risk/outlook The continued economic downturn is expected to put further pressure on Georg Fischer's sales figures. According to the management, all possible short-term operational and structural measures to adjust capacities and to cut costs and have been taken and are expected to have an effect in the course of FY 2009. Nonetheless, we do not expect a significant recovery in FY 2009, in view of the continued difficult market environment, and the suffering global automotive industry (which is a key market for Georg Fischer) in particular. Accordingly, credit metrics are expected to remain insufficient in FY 2009 for the current rating. Should the company not be able to recover its credit metrics over the cycle, a downgrade to Mid BBB would be likely.

Michael Gähler

Georg Fischer (CS: High BBB, Negative) Sector: Mechanical Engineering

Company description

Georg Fischer AG is a technology group that operates worldwide through three divisions: GF Automotive (high-performance components and systems for the automotive industry), GF Piping Systems (production and marketing of piping systems for the conveyance of a variety of liquids) and GF AgieCharmilles (machinery and system solutions for tool and mold making). The company�s global presence is based on a marketing and service network in around 200 locations worldwide. Georg Fischer�s main sales market is Europe. Other key markets are Asia and the Americas, with the emerging markets (particularly China) set to become increasingly significant for the company.





001922452 / 3.50% Georg Fischer AG 15/09/2010 HOLD Georg Fischer AG n.r. n.r. CHF 175

n.r. = not rated


P&L

Sales 4,048 4,497 4,465 3,338

Gross margin 52.9% 51.4% 50.1% 48.6%


Margin 12.6% 11.5% 9.2% 4.7%

Adjusted EBIT 326 324 198 -48

Margin 8.1% 7.2% 4.4% -1.5%


Net profit 229 232 56 -73

Cash flow


Adjusted CFO 381 473 239 192

CAPEX 145 234 247 180

Adjusted FCF 236 239 -8 12

Adjusted DCF 164 128 -117 -10

Balance sheet




Total adjusted debt (M&L adjusted) 972 976 1,161 1,108

Total adjusted net debt (M&L adjusted) 749 714 1,041 1,044



Key ratios



Adjusted EBIT/Net interest coverage 8.4x 7.4x 2.0x -0.4x



Adjusted FCF/Net debt 31.5% 33.4% -0.8% 1.2%


Capital structure


Cash cycle 47.2d 41.6d 48.2d 67.0d






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2009 2010-2014 >2014

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Technological leadership in the automotive segment 17 July 2009: H1 2009 results

Focus on organic growth

Innovative strength

Growth opportunities in China

Website

www.georgfischer.com


Cyclicality (in particular Automotive exposure)

Adverse currency effects

Germany�s dominance as a sales market

Slight exposure to volatile raw material prices




Rating rationale Givaudan's rating is based on its leading market position in the flavors and fragrances market, with a market share of around 25% (following the acquisition of Quest), its vast product portfolio fueled by an ongoing focus on R&D, its well-diversified customer base and its good geographical diversification. Givaudan's business profile has gained strength as a result of the Quest acquisition, with improved access to more markets with promising growth potential, and an expanded product and customer portfolio. However, as a result of the aforementioned transaction anda substantial increase in debt, Givaudan's financial profile has weakened considerably and we therefore consider it as being �average.� Despite the continued solid cash flow generation capacity with an adjusted FFO of CHF 494 million supported by a good improvement of its adjusted EBITDA margin to 21.4%, this was not sufficient to cover Givaudan�s adjusted net debt, as the adjusted FFO/Net debt amounted to 16.4% in 2008, well below the threshold level of 30% for the current rating. As a result we have assigned a Negative outlook to the High BBB rating in anticipation of Givaudan not being able to return its key metrics to levels required for the current rating by 2010. However, we understand that management is strongly committed to regaining past metric levels in the shortest time period possible, and hence will closely monitor Givaudan�s metrics development, while not ruling out a negative rating action in the event that there is no near-term improvement in metrics.

Corporate strategy On the back of ongoing pricing pressure, increasing competition and high raw material prices, Givaudan undertook a major performance-enhancement program in 2003 that was completed in 2005 and showed good results. Following this, Givaudan initiated another business transformation program ("Outlook") during 2006, which targets the supply chain, regulatory and finance areas, thus allowing Givaudan to establish an integrated enterprise architecture, improve processes and attain higher profitability. Low-value-adding products are to be discontinued in both businesses, while the focus on high-value-adding products and promising market launches is to be further enforced. In search for new formulas and applications, Givaudan is entering into biotechnology joint ventures that are expected to increase the innovation rate. The acquisition of Quest allows Givaudan to support its strategy by gaining access to new markets with promising growth potential, as well as strengthen its position in established markets, obtain access to new products and clients and expand its technology platform, thus turning it into the clear leader in

the flavors and fragrances market, with a market share of around 25%.

Business profile The global market for flavors and fragrances is valued at around CHF 18 billion and carries relatively low growth rates of 1% to 2% for fragrances and 2% to 3% for flavors. The industry is driven by quite high R&D expenditures targeted at offering innovative products that enable higher pricing flexibility and allow a clear differentiation among highly specialized manufacturers versus the more bulk-oriented suppliers. With sales of CHF 4.1 billion, Givaudan holds a share of around 25%, combined with further margin improvements to pre-Quest acquisition levels, ranking it number one in the highly consolidated market, clearly ahead of IFF and Firmenich at around 16% each. With its strong product portfolio, well-diversified customer base and an ongoing commitment to innovation, Givaudan has managed to outgrow the market in the past, while generating good margins compared to other companies that have experienced several challenges in the form of increasing competition, pricing pressure and ongoing high raw material prices. While Givaudan and major players are gaining market share, smaller competitors with less R&D, marketing and sales capacity are recording market share losses. However, a consolidating customer base could result in sustained or even increasing pricing pressure, in addition to the ongoing need to fuel the product pipeline with new value-adding products.

Financial profile Given the consolidation of Quest and higher raw material prices, Givaudan posted a lower adjusted EBITDA margin of 18.7% in 2007, which, however, increased considerably in 2008 to 21.4% thereby nearly matching pre-acquisition levels. Management�s aim of achieving these levels by 2010 continues to be very well on track, in our view. While Givaudan�s cash flow generation capacity remains solid, with an adjusted FFO of CHF 494 million in 2008, it remains well below the level required to cover adjusted net debt of just over CHF 3 billion and hence resulted in a weak adjusted FFO/Net debt of 16.4%. This level remains well below the required threshold level of 30% for the High BBB rating over the cycle. As a result of negative currency developments, the adjusted equity base declined to CHF 2.8 billion, thus increasing the adjusted net leverage to above 50%, a relatively high level in our view, that does not lend support to Givaudan�s debt coverage metrics. As a result of the continued soft key metrics in 2008 and a relatively cautious outlook for the near future, we have changed the outlook to Negative from Stable and will closely monitor the development of key metrics.

Event risk/outlook The market for flavors and fragrances is likely to remain very competitive, with persistent pricing pressure, resulting in further consolidation. With the successful integration of Quest, Givaudan is well positioned to take further advantage of its enhanced product and customer portfolio, its expanded market reach and cost advantages in terms of sourcing, for example. Despite markets turning more challenging in some areas for Givaudan, we remain confident that the company will be able to further improve its adjusted EBITDA margin, which will lend good support to increase its cash flow generation capacity to levels deemed necessary for the current rating.

John Feigl

Givaudan (CS: High BBB, Under Review) Sector: Specialty Chemicals

Company description

Givaudan is the world's leading manufacturer of natural and synthetic flavors and fragrances, with sales of CHF 4.1 billion in 2008, following the acquisition of Quest, and a market share of around 25%. Its product portfolio is well diversified, supplying a broad range of customers in the perfumes, food, beverage and consumer goods industries. The Flavors division accounted for some 54% of group sales, while the Fragrances division accounted for the remaining 46%. Europe, Givaudan's largest market, accounted for some 42% of total sales in 2008. Givaudan had some 8,772 employees as of year-end 2008.





003409743 / 3.375% Givaudan SA 18/10/2011 SELL Givaudan SA n.r. n.r. CHF 275

002156208 / 2.25% Givaudan SA 1/6/2012 SELL Givaudan SA n.r. n.r. CHF 300

002075734 / 4.25% Givaudan SA 19/3/2014 SELL Givaudan SA n.r. n.r. CHF 300n.r. = not rated


P&L

Sales 2,909 4,132 4,087 3,961

Gross margin 52.5% 49.9% 48.6% 46.5%


Margin 22.7% 18.7% 21.4% 20.7%


Margin 18.2% 9.5% 12.0% 12.9%


Net Profit 412 94 111 218

Cash Flow

Adjusted FFO 496 530 494 500

Adjusted CFO 434 452 446 526

CAPEX 169 252 270 205

Adjusted FCF 265 200 176 321


Balance Sheet


Core working capital 847 1,147 1,088 1,045


Total adjusted debt (M&L Adj.) 1,492 3,348 3,352 3,315

Total adjusted net debt (M&L Adj.) 923 2,996 3,006 2,834

Equity (Pension leverage adj.) 2,713 3,355 2,814 2,889


Key ratios






Adjusted FCF / Net debt 28.7% 6.7% 5.9% 11.3%


Capital structure

Core W/C / Sales 29.1% 27.8% 26.6% 26.4%

Cash conversion cycle 82.3d 67.8d 69.3d 73.0d


Adjusted Net leverage 25.4% 47.2% 51.6% 49.5%

Adjusted Leverage 35.5% 49.9% 54.4% 53.4%

Adjusted Net gearing 34.0% 89.3% 106.8% 98.1%


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Leading market position with 25% market share

Strong and innovative product portfolio

Sound cash flow generation capacity

Good geographical and customer diversification


Increasing competition and ongoing pricing pressure

Raw material price volatility

Higher-than-expected slowdown in demand

Key metrics remaining on below threshold levels

Next events



Website

www.givaudan.com




Rating rationale Our Mid BBB rating reflects its average business profile and average financial profile. Glencore complements its marketing activities with a sizeable portfolio of own production and distribution assets, diversified across regions and commodities. The rating is further supported by continued resilient profitability and cash flow generation, despite the currently challenging environment. We expect the overall commodity supply/demand equilibrium to be restored in the medium-to-long term, thereby supporting volumes and prices, which should allow Glencore to benefit from sound premiums and contributions from its industrial assets. That said, investing in industrial assets remains a key part of its strategy, and we believe the company will continue to participate in the ongoing consolidation of the natural resources sector. Furthermore, Glencore has a relatively high exposure to emerging markets and is active in a cyclical business segment. The financial profile is supported by the group's diversified earnings base and solid operating margins, the significant unrecognized reserves included in its portfolio of industrial assets, the availability of short-term liquidity (with USD 4.4 billion of committed undrawn bank facilities at end-2008) and the company's commitment to investment-grade ratings. The rating outlook is Stable, based on the group's adequate liquidity and debt maturity profile and our expectation that Glencore will successfully defend its leading market position, while strengthening its free cash flow generation capacity in order to reduce financial debt.

Corporate strategy Glencore aims to maintain and build upon its position as one of the world's largest diversified natural resources and physical commodity marketing companies. The group focuses on the production, sourcing and marketing of metals and minerals, energy products and agricultural products. Key elements of its strategy include maintaining a conservative financial profile and a clear commitment to its investment-grade ratings, maintaining geographic scope and diversification of operations, capitalizing on strategic investments in industrial assets, proactively mitigating and managing risk, and maintaining its employee ownership structure. In the medium-term, we expect Glencore to continue selectively seeking acquisitions in assets that complement existing operations. As a result of the global economic downturn, Glencore initiated several measures (such as focusing on CAPEX and cost-cutting, the deferral of PPS related payments, the increase of its minimum liquidity target to USD 3 billion and the strengthening of its permanent equity) to defend its financial position.

Business profile Glencore is among the world's largest physical suppliers of most of the metals and minerals it actively markets and enjoys a sizeable portfolio of industrial assets. For instance, it is the second-largest physical supplier of third-party aluminum and alumina, the largest physical supplier of bulk ferroalloys and nickel, and a leading supplier of zinc and lead concentrates. Glencore also has a significant presence in the energy markets. It is one of the largest non-integrated physical suppliers of crude oil and oil products, handling about 3% of the world's oil consumption, as well as the world's largest supplier of seaborne coal, also through its marketing arrangements with Xstrata (in which it holds a 34.5% stake). Glencore's physical marketing activities are supported through a combination of long-term marketing agreements with third-party suppliers such as Xstrata, as well as a diversified portfolio of majority-owned industrial assets. In FY 2008, about 43% of the group's segment results stemmed from industrial activities (which are exposed to commodity prices) and 57% from low-margin, volume-driven (but more stable and resilient) marketing activities.

Financial profile In FY 2008, the company's top line increased by a moderate 7.0% YoY to USD 152.2 billion, despite a drop in volumes in and prices in , following the global economic downturn. Adjusted EBITDA declined to USD 5,127 million (�8.2%), translating into an adjusted EBITDA margin of 3.4% versus 3.9% the previous year. Simultaneously, adjusted FFO dropped from USD 4.4 billion to USD 3.7 billion (�16.4%). Glencore's adjusted gross debt declined from last year's USD 20.7 billion to USD 18.8 billion, largely driven by the decrease in working capital as a result of lower commodity prices. Adjusted net debt after the deduction of readily marketable inventories (with a 30% haircut) remained stable at USD 14.7 billion. Adjusted equity was USD 16.3 billion, resulting in an adjusted net leverage ratio of 47.3% (2007: 46.9%). The debt maturity profile is manageable, in our view, given the company's internal cash flow generation capacity and the relatively moderate maturities until 2010. As a result of the subdued operating result, a softening of some key credit metrics, such as adjusted FFO/Net debt (25.0% versus 29.9% in FY 2007) and adjusted net debt/EBITDA (2.9x versus 2.6x previously) was recorded. We view an adjusted FFO/Net debt of 25%�30% over the cycle as adequate for its current rating.

Event risk/outlook In the medium-to-longer term, Glencore anticipates overall commodity supply/demand equilibrium to be restored and constrained supply as well as price spikes to re-emerge in numerous commodities. With regard to FY 2009, positive free cash flow generation and profitability from the industrial base, as well as from the marketing activities, is expected. Furthermore, we anticipate a reduction in indebtedness, based on several measures in order to maintain and ensure a strong balance sheet. Although we see a risk that adjusted FFO/Net debt could fall short of the required minimum threshold under the current rating in FY 2009, we believe Glencore will be able to defend adequate credit metrics over the cycle. However, in the event that FFO generation drops significantly more than anticipated over the cycle, without a corresponding reduction in indebtedness, this would put pressure on the rating.

Michael Gähler

Glencore International (CS: Mid BBB, Stable) Sector: Metals & Mining

Company description

Glencore is a leading, diversified natural resources group, with revenues of USD 152.2 billion in FY 2008. The Swiss-based, privately held company is globally active in the mining, smelting, refining, processing and marketing of metals and minerals, energy products and agricultural products. Glencore is the world's largest physical commodity marketing company, and directly and indirectly owns and operates 19 production assets across a range of commodities. The company manages global operations via a network of over 50 offices in more than 40 countries, providing local market penetration and local market knowledge.






Financial overview (USD m) 2006 2007 2008 2009E*

P&L

Sales 116,530 142,343 152,236 114,177

Gross margin 5.3% 4.7% 3.9% 3.5%

Adjusted EBITDA 5,161 5,587 5,127 3,421

Margin 4.4% 3.9% 3.4% 3.0%

Adjusted EBIT 4,818 5,126 4,513 2,700

Margin 4.1% 3.6% 3.0% 2.4%

Adjusted interest expense 959 1,325 1,177 1,202

Net profit 5,296 6,114 1,044 1,117

Cash flow

Adjusted FFO 4,210 4,390 3,670 2,387

Adjusted CFO 1,470 1,437 6,099 2,087

CAPEX 1,103 1,643 1,875 1,000

Adjusted FCF 367 -206 4,224 1,087

Adjusted DCF -112 -978 3,400 587

Balance sheet

Net cash & near cash 1,145.0 997.0 939.0 889.4






Permanent equity 2,717 4,267 4,215 4,662

Key ratios



Adjusted FFO/Net interest coverage 5.4x 4.3x 4.1x 3.0x

Adjusted FFO/interest & PPS payments coverage 3.8x 2.9x 2.5x 1.8x




Capital structure


Cash cycle 40d 36d 22d 20d

Current ratio 1.2x 1.2x 1.2x 1.2x




* = estimates not based on company guidance, but on general assumptions Accounting standard: IFRS

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2009 2010 2011 2012-2013

>2013

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Strengths / Opportunities World's largest physical commodity marketing company

Diversified portfolio of industrial assets

Unique business profile and high barriers to entry

Adequate and further increasing liquidity


Active in a cyclical market

High exposure to emerging markets

Strong decline in metal prices

Next events


Website

www.glencore.com




Rating rationale Hilti's rating reflects its strong business profile based on its good geographical and product diversification, its leading market share in the market for professional power tools and fastening systems, the strong brand, the company's service and quality recognition, its high innovation rate and its strong customer focus resulting in close and long-lasting relationships. Even in market downturns with declining demand, we think Hilti is well positioned to maintain a solid level of business while, on the other hand, gaining further market share based on its global business and sales network. The above-average financial profile is supported by Hilti's conservative financial policy (with an adjusted net leverage of 17.6% in 2008), its sound margins, and solid cash-flow generation capacity with an adjusted FFO of CHF 594 million in 2008, which comfortably covers the very moderate adjusted net debt level of CHF 516.8 million on 2008. Despite the increase in adjusted net debt in 2008, one of Hilti's key metrics, adjusted FFO/Net debt, is still around 115% and remains comfortably above the required threshold level of 50% to 60%, thus giving the company ample financial headroom under the rating to fund its growth strategy. Depending on the sales development of its fleet business sales and the implied funding needs, Hilti's leverage is expected to increase steadily going forward, thus likely to limit its funding capacity at some stage under the current rating. The rating is capped by the cyclicality of the industry, Hilti's size and ongoing pricing pressure from market consolidation and challenging raw material prices.

Corporate strategy An ongoing commitment to innovation and quality, direct customer relationships, effective marketing and a global delivery network form the basis of Hilti's strategy. As demonstrated in the past, Hilti clearly differentiates itself from other companies in the industry through a high degree of innovation, supported by its direct sales system leading to close customer relationships, thus further enhancing product and service development. This enables Hilti to remain close to market trends and requirements, thereby helping to identify needs at a very early stage. This ultimately translates into leading-edge products and services, allowing Hilti to attain premium prices. The company's direct distribution system, which has turned into a strong global network and allowed Hilti to circumvent the considerable pricing pressure recorded in other parts of the power tools industry, will be further supplemented in countries such as the USA and France by Hilti Professional Shops targeted at small-scale professional clients who account for considerable market volumes depending on the country and area. Hilti's reputation in the professional power tool and fastening systems industry is one of its key advantages, securing a wide range of new and established customers globally. Initiatives such as Hilti Lifetime Service, Hitli Fleet Management that also includes theft insurance will help to further strengthen the relationship with its global customer base.

Business profile The global market for power tools is worth around CHF 17 billion and shows a relatively advanced degree of maturity, with moderate cyclicality combined with a high degree of competition. The market is divided into two segments. The first segment covers products and tools distributed by do-it-yourself (DIY) channels to non-professional users, while the second segment is targeted at professional customers. However, this requires special sales channels in most cases. The DIY segment is facing increasing pricing pressure and competition from Asian manufacturers with a low-cost pricing strategy, while the professional segment is less prone to pricing pressure as it differentiates its products and services through innovative and technological advancements and products that allow for higher pricing flexibility. Supported by higher service contents, higher-value-adding components and closer customer relationships, the market for professional products tends to outgrow the market for DIY products. Hilti by far enjoys the leading position in the market for professional power tools, with only a small number of direct competitors. Innovation, quality and a strong brand, combined with a strong marketing and sales network, are key success factors that allow companies to succeed in the market for professional power tools, giving them a certain degree of pricing flexibility and, as a result, higher margins. Hilti also enjoys a very strong brand recognition and market share in the market for fastening systems, especially for medium to heavy duty applications. The company is the world leader in the area of screw fastening systems, direct fastening and firestop systems. Compared to the power tool market, the fastening system market is less consolidated.

Financial profile Hilti witnessed a very challenging year in 2008, with sales increasing by 6.8% organically, while negative currency developments caused sales to grow by only 0.7% to CHF 4,700 million. While Hilti managed to increase efficiency and implement price increases, these were not sufficient to offset the negative currency impact, thus causing a decline in the adjusted EBITDA margin from 16.9% to 14.1%, which is still a sound level in our view. Impacted by this development, HIlti's cash flow generation capacity softened compared to the record level in 2007, but with an adjusted FFO of CHF 593 million remained at a good level in our view. Despite an increase in adjusted net debt to around CHF 517 million and a minor reduction in the adjusted equity base amounting to CHF 2,420 million, Hilti's key metrics remain well above the threshold levels, with adjusted FFO/Net debt reaching nearly 115%. Bolt-on acquisitions, future growth investments and the funding of a good part of the fleet-leasing business can be comfortably covered, in our view, under the current rating. We view Hilti's liquidity position as strong, given its cash of CHF 906 million and very limited debt maturity over the next 24 months.

Event risk/outlook Based on the continued adverse economic market environment, Hilti's management stated that it expects 2009 to be very challenging, as already reflected by the sales decline during the first four months. Despite this, the company remains fully committed to its long-term growth target of reaching CHF 8 billion sales in 2015 or potentially slightly later depending on the time of recovery from the economic crisis, and hence will continue to invest in strategically important sectors such as R&D, production facilities and its sales and distribution network.

John Feigl

Hilti (CS: High A, Stable) Sector: Building Materials

Company description

Hilti is the market leader in the industry for top-range power tools and fastening systems for professional customers in the construction and building maintenance industry, with sales of CHF 4,700 million in 2008. Its product portfolio covers drilling and demolition, direct fastening, anchoring systems, firestop and foam systems, and measuring, cutting and sanding systems. Hilti's main market area, Europe, accounted for some 66% of group sales in 2008, followed by North America with 18%, Asia with 10%, Near/Middle East and Africa with 4%, and Latin America with 2%. At year-end 2008, Hilti had some 20,450 employees.

Business profile: Strong Financial profile: Above-average




003983964 / 3.5% Hilti AG 21/5/2012 HOLD Hilti AG n.r. n.r. CHF 300

002761684 / 2.75% Hilti AG 14/11/2013 HOLD Hilti AG n.r. n.r. CHF 150

010060347 / 3.25% Hilti AG 22/4/2014 HOLD Hilti AG n.r. n.r. CHF 300n.r. = not rated


P&L

Sales 4,118 4,667 4,700 4,005

Gross margin 68.3% 68.7% 67.9% 66.3%


Margin 16.1% 16.9% 14.1% 11.4%


Margin 10.5% 11.6% 8.9% 5.7%


Net Profit 344 422 243 171

Cash Flow

Adjusted FFO 582 684 593 398

Adjusted CFO 424 518 497 473

CAPEX 238 247 302 181

Adjusted FCF 186 272 195 292

Ajdusted DCF 106 167 79 207

Balance Sheet




Total adjusted debt (M&L Adj.) 1,142 819 1,282 1,555




Key ratios





Adjusted FFO / net debt 202.5% 209.3% 114.8% 89.7%

Adjusted FCF / net debt 64.7% 83.1% 37.8% 65.7%

Adjusted net debt / EBITDA 0.4x 0.4x 0.8x 1.0x

Capital structure

Core working capital / sales 31.1% 32.0% 31.0% 33.0%

Cash cycle 61.3d 61.9d 65.0d 76.0d






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Strong brand recognition

Leading market position in the power tool industry

Strong geographical diversification

Sound capital structure and cash flow generation



Raw-material and energy cost exposure

Cyclical demand

Fleet business driven funding needs

Next events

5 October 2009: 8 Months 2009 results

Website

www.hilti.com




Rating rationale Holcim's rating reflects its above-average business profile, which receives strong support from the company's excellent geographical diversification in more than 70 countries helping to stabilize sales and earnings, as well as its leading market shares, good product diversification and promising exposure to emerging and developing markets, such as China and India, which offer considerable growth potential. This geographical diversification helps Holcim to balance demand for cement and aggregates, as cement receives increasing demand from emerging and developing markets, while the more mature markets record a growing demand for aggregates. However, Holcim's average financial profile is challenged by the company's strategy of fueling growth through acquisitions, as in the case of Aggregate Industries, the acquisitions in India and the subsequent investments in China in 2006 and 2007. As a result of these acquisitions and heavy expansion investments, Holcim's adjusted net debt amounted to around CHF 16.9 billion. During 2008, Holcim experienced a sharp decline in its cash flow generation capacity due to the very challenging market developments in most markets resulting in an adjusted FFO of CHF 4.4 billion, thus resulting in an adjusted FFO/Net debt of 26.3%, well below the required 30% threshold level. As a result of the continued challenging market outlook, which is very likely to further reduce both Holcim's cash flow generation capacity, on the one hand, and its relatively high adjusted net debt level on the other, we have lowered our rating to Mid BBB and placed the rating under review.

Corporate strategy Holcim's strategy of being the preferred supplier of cement and related products, with leading global market positions, and offering a vast portfolio of value-adding products and services is anchored on three pillars � product focus, geographical diversification and local management following global standards. The product focus is geared toward cement and aggregates, rounded off by supplementary products, such as mineral components and services, resulting in a fully fledged product offering. With a presence in more than 70 countries, Holcim has the broadest geographical diversification in the cement industry, allowing it to benefit from regional developments and to balance its sales between markets in different stages and with different demand structures. The growth strategy in cement is mainly focused on markets in Latin America, Asia, Africa and the Middle East, while pursuing growth in aggregates in developed markets. Recent acquisitions in China and India underpin Holcim's focus on geographical diversification and search for growth. While Holcim manages its businesses locally, the businesses follow global standards and find support from a management team that ensures a streamlined global network on a regional basis. After reaching its previously set margin targets, Holcim has set medium-term margin

targets, covering an unadjusted EBITDA margin of 33% (27.3% in FY 2008) for the cement and mineral components segment, 27% (19.5% in FY 2008) for the aggregates segment, and 8% (4.3% in FY 2008) for the other construction materials and services segment.

Business profile The global cement and aggregates market is dominated by three large players accounting for over 40% in case of the cement market, and is characterized by a regional structure with a high cost-to-value ratio for land transportation, high barriers to entry and large CAPEX needs. In the recent past, the industry has witnessed a high rate of consolidation, with major players expanding their product range in addition to their geographical diversification. This is expected to continue, as established companies seek to build future growth, in addition to major capacity expansion investments undertaken by major market players wanting to increase their local market presence. Recent acquisitions underline Holcim's role as one of the key drivers of industry consolidation by entering new markets in terms of geographical expansion and/or in terms of product expansion. With its above-average business profile, we think Holcim is better positioned to offset economic downturns, given its global presence and strong market position in most markets and its ability to adjust capacities to changing demand developments. However, declining volumes and pricing pressure are likely to pose considerable challenges in an increasing number of markets in the near future.

Financial profile The severe market conditions in many key regions caused a considerable decline in Holcim's adjusted EBITDA margin to 22.0% prompted by lower volumes, on the one hand, and ongoing high input costs and restructuring charges on the other. This caused the previously strong cash flow generation capacity to soften, with adjusted FFO reaching CHF 4.4 billion, while the adjusted FCF even turned negative at minus CHF 687 m. Past acquisitions and major CAPEX programs resulted in a strong increase in adjusted net debt of CHF 16.9 billion and hence caused the adjusted FFO/Net debt to decline to 26.3% in FY 2008 (FY 2007: 38.1%). Due to the ongoing challenging market conditions, the cash flow generation capacity is not likely to regain past levels and hence will not be able to reduce debt in FY 2009. As a result, metrics are poised to soften further. Accordingly, we have lowered the rating and assigned a new adjusted FFO / net debt threshold level of 25% for the Mid BBB rating.

Event risk/outlook FY 2008 was a very challenging year for Holcim, as the downturn in the construction market spread outside of North America and large parts of Europe. With volumes declining and pricing becoming more difficult, additional regions such as Latin America will show negative developments, while Holcim expects to see a satisfactory development in Africa Middle East and an upturn in demand for building materials in Asia Pacific. Holcim will have to further adjust its capacities and operating cost structures to weather the very challenging market environment, which will continue to show considerable downward pressure on margins, and, as a result, the company's cash flow generation capacity, in our view. While liquidity is solid, with some CHF 4.1 billion of cash (Q1 2009) and a committed and undrawn credit line of around CHF 2.0 billion, the overall refinancing needs over the next two years will require tapping the markets and banks, especially when considering the operating cash needs. Any further deterioration of Holcim's cash flow generation capacity could pressure metrics and hence the rating in the absence of any measures to stabilize metrics.

John Feigl

Holcim (CS: Mid BBB, Under Review) Sector: Building Materials

Company description

Holcim is one of the leading manufacturers of cement, concrete, aggregates and related products, with sales of CHF 25,157 million in 2008. Sales of cement reached 143.4 million tons, while aggregates and ready-mix concrete reached 167.7 million tons and 48.5 million cubic meters, respectively, in 2008. The company enjoys a strong geographical diversification, with its mature markets accounting for some 55% of total sales (Europe 38% and North America 17%), and the emerging markets accounting for the remaining 45% (Latin America 16%, Africa Middle East 5% and Asia Pacific 23%). At the end of 2008, Holcim had some 86,713 employees.





002174201 / 2.50% Holcim Ltd. 22/06/2012 SELL Holcim Ltd. BBB, Stable Baa2, Stable CHF 500




P&L

Sales 23,969 27,052 25,157 21,147

Gross margin 62.2% 61.2% 59.7% 57.5%

Adjusted EBITDA 6,228 7,111 5,522 4,124

Margin 26.0% 26.3% 22.0% 19.5%

Adjusted EBIT 4,376 5,052 3,409 2,458

Margin 18.3% 18.7% 13.5% 11.6%

Adjusted interest expense 911 946 918 1,159

Net Profit 2,104 3,865 1,782 914

Cash Flow

Adjusted FFO 4,821 5,592 4,434 2,630

Adjusted CFO 4,602 5,500 3,831 2,903

CAPEX 2,547 3,629 4,518 2,686

Adjusted FCF 2,055 1,871 -687 217

Adjusted DCF 1,352 999 -1,792 217

Balance Sheet





Total adjusted net debt (M&L Adj.) 14,761 14,660 16,866 16,905


Market Capitalization 28541 31891 15585 N/A

Credit Metrics






Adjusted FCF / Net debt 13.9% 12.8% -4.1% 1.3%


Capital structure


Cash cycle -13.1d -12.6d -11.3d -7.0d

Adjusted cash / debt 15.7% 16.2% 15.6% 15.2%





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CHF bn



Strong market position, with leading market shares

Solid operating efficiency and cost structure

Good diversification across markets and products

Solid liquidity and limited debt profile


High adj. net debt level following M&A and CAPEX

Market cyclicality

Deteriorating cash flow generation capacity

Declining volumes and pricing pressure

Next events



Website

www.holcim.com




Rating rationale Our Mid BBB rating for Jelmoli is based on the company's above-average business profile and average financial profile. The business profile benefits from the high quality of Jelmoli's property portfolio (with a focus on retail properties concentrated at central locations in Zurich, Geneva and Basel), as well as a low vacancy rate of 3.5% and an average duration for rental contracts of 11 years, combined with a low exposure to maturing rental agreements. The average financial profile revealed a more aggressive loan-to-value (LTV) ratio of 47%, including the acquisition of the remaining 55.5% stake of Tivona, which Jelmoli communicated earlier this year. However, this ratio is still below the 50% we would like to see for the current rating category. In addition, CHF 984 million of total interest-bearing debt (including Tivona) is secured and, as such, puts unsecured bond holders into a subordinated position. The Stable outlook reflects the company's solid positioning within its newly launched strategy. Although the retail market is facing a challenging environment due the current recession, Jelmoli should be well positioned since its real estate portfolio is situated in prime locations which have even commanded increasing rents over the last few months. However, we do not rule out the possibility that record high rental prices could come under pressure in the near future.

Corporate strategy Whereas the Jelmoli department store in Zurich ("House of Brands") and the "Bonus Card" customer credit card business remain within the Jelmoli Group, along with the real estate properties and activities, the remaining businesses such as the group's participations in Russia and Algeria, the Seiler Hotels and the remaining retailing activities (Molino Restaurants, Beach Mountain sportswear shops and clothing discounter Fundgrube/Fashion Bazaars) have been spun off into the newly created Arthris. Jelmoli's focus remains on core retailing real estate properties in prime locations in Switzerland such as Zurich, Geneva and Basel. Through its development projects, the group aims to enlarge its property portfolio and to reach a full-rate rental income of approximately CHF 240 million (+10% compared to FY 2009E). Jelmoli is not planning any larger development projects in the near future, given the current difficult economic environment. However, the company does not rule out acquisitions of interesting properties which fit into Jelmoli�s portfolio and offer suitable returns.

Business profile As the second largest listed real estate company in Switzerland, Jelmoli benefits from a good footprint in the retail real estate market. Its real estate portfolio consists of 131 properties (including Tivona),

with a combined market value of CHF 4.1 billion. The low vacancy rate of 3.7% further underpins the high quality of the portfolio. An average duration of 11 years for rental contracts and a low exposure of roughly 12% to maturities until 2010 further support Jelmoli's qualitative business profile. Roughly 10% of the property value relates to development projects which should further increase the company's total portfolio value, as well as future rental income (i.e. Stücki Center in Bale). 61% of rental income in FY 2008 stemmed from high quality retail tenants. Including retail related activities such as parking and storage, this share would increase to 74%. Roughly 50% of total rental income was generated by the five largest properties, thus indicating a broad diversification.

Financial profile Given the spin-off of Arthris, we will continue to focus on Jelmoli as a real estate company. For FY 2008, Jelmoli Real Estate posted a 13.1% increase in rental income to CHF 172 million and the EBITDA of CHF 136 million (+12.9% YoY). The Retail trade segment�s reported EBITDA was CHF 27 million (FY 2007: CHF 20 million), resulting in a margin increase to 12.2% at end-December 2008. The company�s net income was impacted by several one-off items such as such as the Tivona provision, the reassessment of the engagement in Russia, and other costs due to the spin-off. Given the adjusted net debt of CHF 503 million, FFO/Net debt stood at 25.1% at end-December 2008. However, given the repositioning of Jelmoli as a pure real estate company through the spin-off of Arthris, we expect this ratio to weaken in FY 2009, given the lower contribution from operating profitability in combination with a higher expected net debt. The company's LTV ratio is expected to be around 47%, including Tivona, at end-December 2008. In addition, Jelmoli also reported CHF 892 million (including Tivona) of secured debt, reflecting a 48% share of total interest-bearing debt, which puts unsecured bondholders in a weaker position. With regard to liquidity, the spin-off resulted in a large distribution of cash to Arthris and, hence, increases the net leverage at the new real estate company. Jelmoli reported the successful renegotiation of a new credit agreement, including covenants such as an LTV of below 60%, an equity ratio of above 33% and EBITDA/financial expenses of above 2x. The company is not exposed to material short-term maturities, but the cash on the balance sheet was at a relatively low CHF 60 million. At end-December 2008, the company had access to approximately CHF 100 million under its existing credit lines.

Event risk/outlook The company expects rental income to be CHF 220 million, resulting from the full acquisition of the Tivona properties in H1 2009. The Stücki Shopping Center in Basel is expected to open its doors in autumn 2009 and the full contribution of the entire complex will bring total rental income up to CHF 240 million. Given the completion of the Stücki Shopping Center, Jelmoli guides for CHF 220 million of CAPEX. This is expected to be financed through bank debt, but given the revaluation gains through the recognition on the balance sheet, the LTV ratio should not be negatively impacted. The vacancy rate is expected to remain at a low level of about 3%�4%. The management is also in discussions about potential smaller divestments in the area of about CHF 100�200 million to further optimize the quality of the property portfolio and to increase the focus on the retail business.

Daniel Rupli

Jelmoli (CS: Mid BBB, Stable) Sector: Real Estate

Company description

In January 2009, the AGM approved the split of Jelmoli into two separate companies, an investment company (Arthris) and a real estate company (Jelmoli). The company is a leading real estate company in Switzerland with a main focus on retail properties in central locations in Switzerland such as Zurich, Geneva and Basel. Jelmoli revealed a low vacancy rate of 3.7% which compares favorably with peers. After the integration of the Tivona properties Jelmoli's property portfolio consists of 131 properties with a combined market value of CHF 4.1 billion, and expects a total rental income of roughly CHF 220 million. In addition to its real estate activities, Jelmoli Trade comprises the retail sales activities of Jelmoli, the House of Brands and Jelmoli Bonus Card AG.





001879265 / 4.25% JELZ 05/07/2011 HOLD Jelmoli Holding AG n.r. n.r. CHF 175

002190735 / 4.625% JELZ 11/07/2013 HOLD Jelmoli Holding AG n.r. n.r. CHF 200

n.r. = not rated


P&L

Sales 359 389 455 420

Gross margin 70.8% 71.8% 73.8% n.a.


Adjusted EBITDA margin 34.0% 33.8% 37.7% 59.5%


Adjusted EBIT margin 31.9% 31.0% 33.4% 56.0%

Net changes in fair value of real estate investments 106 289 112 0


Net profit 180 917 47 115

Cash flow

Adjusted FFO 158 168 142 165

Adjusted CFO 103 149 118 145

CAPEX 121 153 107 220

Adjusted FCF -17 -4 11 -75

Adjusted DCF -37 -36 -25 -110

Balance sheet




Total adjusted debt (P&L adjusted) 1,513 1,101 1,345 2,100

Total adjusted net debt (P&L adjusted) 1,481 446 503 2,040


Market capitalization 1,710 1,919 n.a n.a.

Real estate portfolio

Total portfolio value 2,738 3,321 3,321 4,300

Vacancy rate 2.9% 2.6% 2.6% 3.7%

Unadjusted Loan-to-Value 40.5% 28.6% 40.5% 47.0%

Key ratios





Adjusted FCF/Net debt -1.1% -0.8% 1.9% -3.7%


Capital structure

Adjusted net leverage 57.7% 17.6% 18.9% n.a.

Adjusted net gearing 136.3% 21.3% 23.3% n.a.


Margin development

20%

30%

40%

50%

60%

2006 2007 2008 2009E

70%

73%

75%

78%

80%




0

650

1,300

1,950

2,600

2006 2007 2008 2009E

CHF m

0%

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-5%

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-4.0x

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0

300

600

900

1,200

Year end2009E

2010 2011 2012 2013 n.a.

CHF m


1as of end-March 2009 incl. Tivona


Low vacancy rate

A leading Swiss real estate company

Prime real estate portfolio at key locations

High quality tenants with long contract duration


More aggressive leverage than peers

Bond holders subordinated to secured debt

M&A headline risk

Cash distributed to Arthris

Next events

14 July 2009: H1 2009 sales

15 September 2009: H1 2009 results

Website

www.jelmoliholding.ch




Rating rationale Lindt & Sprüngli's rating is based on its above-average business profile, which benefits from the company's strong position in the premium chocolate segment, as well as its above-market growth rate, its continuous focus on innovation, quality and marketing, its strong brand recognition and its ability to set standards based on consumer trends. Although Lindt & Sprüngli is relatively small in terms of sales, the company nevertheless enjoys a leading market position within the top-range segment, clearly differentiating itself from larger bulk manufacturers and hence able to achieve a higher pricing flexibility. Its above-average financial profile benefits from strong top-line growth, sound margins, a good cash-flow generation capacity and a strong capital base. Key metrics such as the adjusted FFO/Net debt ratio and net adjusted leverage have reached impressive levels of above 272% and around 9%, respectively. This gives the company sufficient financial headroom under the current rating to support its organic growth strategy going forward. However, the rating is constrained by increasing competition, the company�s limited global reach and the ongoing challenges stemming from key ingredients, such as cocoa beans and butter, milk powder and almonds.

Corporate strategy Despite ranking seventh in the global chocolate market with an estimated market share of around 4%, Lindt & Sprüngli is nevertheless very strongly positioned in the premium class segment in which its market share is considerably higher. While the global market is expected to grow at around 2.9% over the next five years, Lindt & Sprüngli aims to generate organic sales growth of between 2% and 5%, with an unadjusted EBIT of between CHF 260 million and CHF 280 million in 2009 and 2010, while returning to its long-term target of 6% and 8% and over-proportional growth in its unadjusted EBIT, thereby clearly further increasing its market share. During the next two years, the company will continue to focus on strengthening its market position by focusing on marketing and innovation, its distribution network, and further cost reductions and efficiency potential. The company plans to achieve these targets through ongoing investments in existing and new markets on the back of a highly innovative and customer-tailored product portfolio. To fuel further growth and better handle capacity, the company announced a CHF 750 million investment program in 2008 to be completed within three years. Lindt & Sprüngli grows its top line by systematically establishing a premium segment in each market, based on a detailed market and customer analysis and by subsequently developing its products to fully meet customers� tastes in each market. In addition, the company continuously seeks to further improve its production

processes, thereby shortening the time-to-market and giving it a first-mover advantage. Geographically, Lindt & Sprüngli plans to further increase its market share in established markets such as Europe and the USA, while closely analyzing entry opportunities in promising growth markets such as China and Russia. Despite not being able to exclude external growth investments, these are fairly unlikely given the very limited availability and strong need for strategic and quality fit.

Business profile The global market for chocolate is valued at around CHF 105 billion, with an expected growth rate of around 2.9% annually over the next five years. Pralines account for the largest part of the market with around 35% of market share, followed by countlines with 26%, tablets with 25%, seasonal products with some 11% and other chocolates with the remaining 4%. Europe and the USA represent around 62% of the global market, but carry substantially lower growth rates (0.9% and 1.2% respectively) than the markets of Africa/Middle East, Eastern Europe, Asia Pacific and Latin America (around 4% to 7%), but with considerably lower market sizes. The market is characterized by an oligopoly, with seven companies sharing around 60% of the total market. Despite its size and market share compared to the other six players, Lindt & Sprüngli holds a strong position in the market for premium chocolates. This segment, compared to the overall market, offers considerably higher growth rates of up to 10% in markets such as Europe and the USA, while additionally offering higher margins.

Financial profile In 2008, Lindt & Sprüngli experienced an increasingly challenging market environment, with organic growth of 5.8% falling slightly below the long-term target growth level. Raw material prices remained very challenging, but were met by a good pricing flexibility of 3.9%. The lower sales growth and a slight reduction in the adjusted EBITDA margin to 15.4% resulted in a softened cash generation capacity, with an adjusted FFO of CHF 402 million. While adjusted net debt remained flat at a very modest CHF 149 million, the adjusted equity base continued to strengthen, thereby reaching CHF 1,460 million. As a result, the adjusted net leverage decreased to a very strong 9.3%, while key metrics such as the adjusted FFO/Net debt (amounting to 269%) remained very strong. Lindt & Sprüngli's liquidity is very sound, in our view, with cash reaching CHF 203 million in 2008 and only a very limited refinancing need in 2009. The cash on hand combined with the continued sound metrics give the company ample financial leeway to fund its operational needs, in our view.

Event risk/outlook Lindt & Sprüngli has guided towards lower organic growth of 2% to 5% for 2009 and possibly 2010, with an unadjusted EBIT of CHF 260�280 million for 2009 and back to 2008 levels in 2010 due to the considerably weaker economic environment. While the company expects commodity prices to remain high and volatile, pricing flexibility is not expected to provide the same countermeasure as in the past. Lindt & Sprüngli plans to benefit from the challenging environment by increasing marketing efforts, investing in PP&E, further developing synergies and restructuring the own US retail chain. Once markets rebound, the company will likely be in an even stronger market position and thus well on track to meet its long-term growth and margin targets, in our view.

John Feigl

Lindt & Sprüngli (CS: High A, Stable) Sector: Food

Company description

Lindt & Sprüngli is one of the leading specialty chocolate manufacturers focused on the top-range segment, with sales of CHF 2,937 million in 2008. The company offers a wide range of premium products and, due to its strong R&D and marketing platform, has managed to outgrow the market in the past, thereby generating above-industry-average margins. Its key markets are Europe (i.e. Switzerland, Germany, France, Italy, UK), which accounted for around 70% of total sales, followed by the USA with some 23% and the remaining 7% split among Asia, Australia and South America. At year-end 2008, Lindt & Sprüngli had some 7,712 employees





No CHF bonds outstanding


P&L

Sales 2,586 2,946 2,937 2,780*

Adjusted gross margin 70.1% 69.4% 67.4% 67.0%


Margin 14.5% 16.0% 15.4% 13.3%


Margin 10.6% 12.2% 11.5% 9.1%


Net Profit 209.0 250.5 261.5 199.6

Cash Flow

Adjusted FFO 522 562 402 298

Adjusted CFO 486 439 312 323

CAPEX 146 235 199 136

Adjusted FCF 339 204 114 187


Balance Sheet


Core working capital 892 1,040 979 948






Key ratios








Capital structure


Cash cycle 56.4d 62.1d 78.4d 83.0d





* = change in reporting structure as of 2009 n.a. = not available Accounting standard: IFRS

Margin development

0%

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10%

15%

20%

2006 2007 2008 2009E

0%

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100%




0

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CHF m

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2006 2007 2008 2009E

0x

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Year end2008

2009 2010 2011 2012 2013

CHF m




High innovation rate and strong marketing force

Well-diversified product and market sales

Sound capital structure and cash-flow generation



Volatility of raw material prices

Consumer sentiment

M&A, integration and large-scale investment risks

Next events


19 January 2010: FY 2009 sales

Website

www.lindt.com




Rating rationale Lonza's rating is based on its average business profile, which is supported by its strong position as a leading supplier of specialty products to the biotechnology and pharmaceutical industry, its strong R&D platform, solid customer base and a vast portfolio of products. Following the acquisition of Cambrex's two businesses and the IPO of the polymer business, Lonza's business profile has gained strength, as this is likely to further enhance its market position and global reach as a leading specialty chemicals company focused on life science. The average financial profile reflects the good margins, with an adjusted EBITDA margin of 22.5% and a solid cash-flow generation capacity, with an adjusted FFO of CHF 571 million in 2008. Following the acquisition of amax in addition to an ongoing large scale CAPEX spending, Lonza's adjusted net debt increased to CHF 1,791 million, causing the adjusted FFO/Net debt metric to decline from a comfortable 43.6% to 31.9%, below the 35% threshold level for the current rating. The rating remains pressured by Lonza's ongoing high capital needs, the announced strategy of either increasing shareholder remuneration or seeking growth through acquisitions, its dependency on key products, increasing competition and a challenging pricing environment.

Corporate strategy Following the divestiture in autumn 2006 of the Polymer Intermediates business through the Polynt SpA IPO, for which Lonza received a total consideration of more than CHF 400 million, Lonza has further enforced its strategy of focusing on defined life science markets through its life science platform, containing Organic Fine & Performance Chemicals, Exclusive Synthesis, Biopharmaceuticals and Bioscience, with more than 90% of group sales being generated in life sciences. While strengthening its existing divisions through acquisitions and divestments of core and non-core businesses, the announced and completed acquisition of the two Cambrex businesses, Research Bioproducts and Microbial Biopharmaceuticals, has helped to considerably strengthen Lonza's overall position as a leading supplier of products and services to the biopharmaceutical industry. Lonza's overall strategy now focuses on an annual unadjusted EBIT growth of 15% to 20% up to 2013. While the Exclusive Synthesis & Biopharmaceutical division is considered to be the key driver of profitability going forward, with the Biopharmaceutical business expected to post the strongest growth, the Organic Fine & Performance Chemicals division is positioned to fuel Lonza's growth in the longer term through the generation of sufficient liquidity. To fuel further organic growth, Lonza has announced a substantial increase in

CAPEX of CHF 250 million to around CHF 400 million in the near future, while utilizing the increased debt capacity following the conversion of the remaining part of the convertible bond in 2009 to either increase shareholder focus or seek external growth opportunities, as was the case in 2008 when Lonza acquired amaxa, a supplier to the cell discovery market for a total consideration of CHF 153 million.

Business profile With its leading-edge technologies and know-how resulting in R&D-intensive products and services, Lonza has managed to reach a strong position in the pharmaceutical and biotechnology industry. Lonza's core strength is its ability to offer customized solutions, binding a vast range of customers to long-lasting relationships. As demonstrated during 2008, Lonza has expanded its production capacities, thereby targeting an enlarged customer base and a more balanced planning of its production, thus reducing its dependency on single key customers. While overcapacity remains challenging in some of Lonza's businesses, such as Exclusive Synthesis, the company expects very promising growth from its biopharmaceutical business, with growth rates exceeding market growth.

Financial profile Lonza posted sales of CHF 2,937 million in 2008, an increase of 2.3%. The adjusted EBITDA margin remained at a good level of 22.5%. As a result, Lonza's cash flow generation capacity was robust and resulted in an adjusted FFO of CHF 571 million. Due to a high negative working capital swing of minus CHF 355 million and CAPEX investments reaching a high CHF 648 million, Lonza's adjusted FCF turned strongly negative, thereby reaching minus CHF 432 million. Prompted by this, and the amaxa acquisition, the adjusted net debt increased to CHF 1,791 million. As a result, key metrics softened, such as the adjusted FFO/Net debt, which declined from a solid 43.6% to 31.9%, below the required 35% threshold level. We view Lonza's liquidity position as average, given its CHF 570 million in cash and the committed CHF 500 million credit facility maturing in 2011. This compares to refinancing needs of CHF 761 million in 2009, and the refinancing of the CHF 300 million 2.625% 2010 bond. We therefore expect Lonza to actively seek different options to refinance its maturing debt well in advance.

Event risk/outlook Lonza has managed to position itself well as a leading specialty chemicals company, focusing on the life science market with a vast range of products and service offerings. According to management, all strategic projects are on track, with capacity utilization being very good. Based on the visibility of contracts, projects and the current market conditions, Lonza expects to achieve unadjusted EBIT growth in the mid-to-high teens on average until 2013. Due to the current market challenges, Lonza expects the overall unadjusted EBIT growth to fall below the mid-term guidance of 15% to 20%. While the remaining part of the convertible bond maturing in 2009 will lend the company some financial headroom, a continued cash outflow relating to CAPEX, working capital or acquisitions could continue to weigh on Lonza's key credit metrics and thus result in rating pressure going forward.

John Feigl

Lonza (CS: Mid BBB, Stable) Sector: Specialty Chemicals � Life Science

Company description

Lonza is a life-science-driven specialty chemicals company, with sales of CHF 2,937 million in 2008. The company is split into three divisions: Exclusive Synthesis & Biopharmaceuticals, with sales of CHF 1,512 million, Life Science Ingredients with sales of CHF 1,196 million, and Bioscience with sales of CHF 222 million. With around 37%, North America was Lonza's biggest sales region in 2008, followed by Europe with some 35%, Switzerland with around 13% and the remaining 15% being split among other countries. As of year-end 2008, Lonza had some 8,462 employees.





002202831 / 1.5% Lonza Finance 15/07/20091 n.r. Lonza Group n.r. n.r. CHF 4302

002145711 / 2.63% Lonza Group 02/06/2010 HOLD Lonza Gruop n.r. n.r. CHF 300

010154138 / 3.75% Lonza Finance 27/05/2013 HOLD Lonza Group n.r. n.r. CHF 3001 convertible bond 2 oustanding amount CHF 395 million n.r. = not rated


P&L

Sales 2,914 2,870 2,937 3,007

Gross margin 53.2% 66.8% 66.8% 66.3%


Margin 18.3% 22.8% 22.5% 23.9%


Margin 10.6% 13.7% 13.7% 14.7%


Net Profit 222 301 419 316

Cash Flow

Adjusted FFO 473 624 571 540

Adjusted CFO 469 706 216 554

CAPEX 371 533 419 427

Adjusted FCF 98 173 -203 127

Adjusted DCF 37 101 -286 44

Balance Sheet








Key ratios






Adjusted FCF / net debt 7.5% 12.1% -11.3% 9.0%


Capital structure


Cash cycle 72.6d 40.9d 64.7d 69.2d






Margin development

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2009 2010 2011 2012 2013

CHF m



Strong position in synthesis and biopharmaceuticals

High barriers to entry due to R&D and relationships

Good growth opportunities in biopharmaceuticals

Efficiency enhancement and margin potential


Considerable funding needs


Weaker credit metrics due to acquisitions and CAPEX


Next events


27 January 2010: FY 2009 results

Website

www.lonza.com




Rating rationale Migros' above-average business profile reflects the group�s number one position in the Swiss food retail market and significant brand recognition in the increasingly challenging domestic food-retail market. The group's above-average financial profile weakened slightly as a result of the Denner acquisition in 2007, as well as underfunded pension liabilities at end-December 2008 resulting in a doubling of adjusted net debt. In our view, an adjusted FFO/Net debt ratio of above 35% is adequate for Migros over the cycle (FY 2008: 47.1%). Given the difficult economic environment, together with the entrance of another hard discounter into the already competitive domestic food market, pressure on Migros' profitability margins will remain. While we believe the food sector should not be affected as much by a change in consumer sentiment, the non-food retail market could be exposed to a bigger challenge this year.

Corporate strategy Migros aims to further extend its leading position in the Swiss retailing market by focusing on quality (mainly freshness) and price, which it reflects in its recently launched advertising campaign "One M better." To address the price competition, Migros aims to lower prices for its customers by passing on its optimized cost-base through the recently joined sourcing cooperation AMS. Own-label brands account for about 90% of food/near-food products, and the group�s mix of own brands is divided in terms of price and quality criteria into four main categories: Basic (low-price segment, i.e. M-Budget), Premium and Deluxe (prime quality, i.e. M-Sélection), which are supplemented by brands focused on fitness/health (Actilife, Léger), convenience (Subito, Anna�s Best), �swissness� (Heidi) and sustainability (TerraSuisse). To modernize and expand the floor space of its supermarkets and hypermarkets, Migros invested roughly another CHF 1.0 billion in its cooperatives in 2008. Migros' management indicated that � similar to the foreign hard discounters (Aldi, Lidl) � the company aims to increase sales floor space areas outside city centers. A main focus will remain on the refurbishment of older sales floor spaces and in particular the modernization of the large-scale retail units. The group also aims to extend its convenience stores and offer longer opening hours. These are mainly located in the group�s Migrol and some Shell gas stations, as well as in train stations. Hence, Migros intensified the cooperation with Shell and cancelled the joint-venture with Valora in 2008. The group is also focusing on repositioning its specialty store formats (Micasa, DO IT + Garden, M-Electronics).

Business profile Migros' business profile benefits from the group�s number one position in the Swiss food retail market. Additionally, the company also benefits from a very high brand recognition, which is certainly helpful as the pressure on the already challenging domestic food-retail market is picking further up through the entrance of another hard discounter. Through its ten regional cooperatives and Denner, Migros is primarily a food/near-food retailer. The group is also active in non-food retailing (Globus Group, Office World, ExLibris), travel business (Hotelplan), gas stations, heating oil and convenience stores (Migrol), food & near-food processing and banking (Migrosbank).

Financial profile In our assessment of Migros' financial profile, we isolated Migrosbank from the other businesses to better reflect the company's importance as a retailer. The retail unit presented a top-line growth of 5.2% to CHF 15.2 billion, mainly attributable to good growth at the three largest cooperatives, which profited from the sale of Carrefour Switzerland to Migros' biggest competitor and, as such, a shift of price-sensitive clients towards Migros, according to the company. The trading unit presented a strong 64.0% revenue increase to CHF 6.2 billion, which was mainly attributable to the full consolidation of Denner. Migrol, with 21.3% YoY sales growth, was another key growth driver in FY 2008. The industry and wholesale unit revealed a firm 8.3% increase in net sales to CHF 5.0 billion, whereas the travel business recorded a negative revenue trend. Adjusted EBITDA improved to CHF 2.0 billion, but the adjusted EBITDA margin declined 10 basis points to 8.0%, negatively affected by the lower business margins at Denner. Migros benefited from the increased profitability, which resulted in an adjusted FFO of CHF 2.1 billion. However, adjusted total net debt increased to CHF 4.4 billion due to underfunded pension liabilities. Hence, the adjusted FFO/Net debt ratio dropped further to 47.1% which, however, still lies above the required 35.0% over the cycle. The adjusted total net debt/EBITDA ratio stood at 2.2x, which compares favorably to its lower-rated industry peers, but reflects a rather high level for the current rating category. The liquidity situation of Migros remains strong, as reflected in a large portion of cash, and the company is not expecting any material debt maturities in the near future. According to the management, Migros is confident it can refinance the large capital expenditure program with cash generated from operating activities, as already seen in the past.

Event risk/outlook Migros guided for a conservative 2.0% growth rate, which is in line with figures communicated by other retail companies in Switzerland. Migros highlighted that it saw the first signs of achieving the announced growth rates in the first three months of the year, but final figures have not yet been confirmed. The company expects inflation to be negative in the food segment and slightly higher in the non-food business. To further support the growth of the company, Migros plans to continue its increased CAPEX program by investing CHF 5.0 billion over the next three years, which is in line with the record spending of FY 2008.

Daniel Rupli

Migros (CS: High A, Stable) Sector: Retailing

Company description

Migros is Switzerland's largest retailer, with retail sales totaling CHF 21.6 billion following the full integration of the Denner acquisition. Migros' total market share stood at 20.5% (food: 28.6%; non-food 12.9%) at end 2008. Through its ten regional cooperatives (over two million cooperative members) and Denner, Migros is primarily a food/near-food retailer. The group is also active in non-food retailing (Globus, Interio, Office World, LeShop, Ex Libris), services (Hotelplan, Migrol, Migrosbank) and food & near-food processing (14 companies grouped under Migros-Industrie). Outside Switzerland, Migros operates a small number of retail outlets in Germany and France.





001833656 / 2.5% MIGROS 03/05/2011 HOLD MGB A, Stable n.r. CHF 200

003405577 / 3.125% MIGROS 28/09/2012 HOLD MGB A, Stable n.r. CHF 150

003087408 / 2.875% MIGROS 04/06/2013 HOLD MGB A, Stable n.r. CHF 200n.r. = not rated

Financial overview (CHF m)1 2006 2007 2008 2009E

P&L

Sales 20,132 21,342 24,451 24,940

Gross margin 40.2% 39.5% 37.0% 37.0%

Adjusted EBITDA 1,547 1,738 1,962 1,858

Margin 7.7% 8.1% 8.0% 7.4%


Margin 2.5% 2.9% 3.2% 2.2%


Net profit 625 722 644 568

Cash flow

Adjusted FFO 1,859 1,914 2,054 1,868

Adjusted CFO 1,797 1,596 2,109 1,853

CAPEX 982 1,402 1,579 1,550

Adjusted FCF 815 194 530 303

Adjusted DCF 815 194 530 303

Balance sheet








Key ratios








Capital structure


Cash/adjusted gross debt 46.8% 38.9% 31.1% 32.4%



Adjusted net gearing 23.2% 33.0% 40.7% 38.0%1 excluding Migrosbank n.a. = not available Accounting standard: IFRS

Margin development

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35%

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2009 2010-2014

> 2014

CHF m

Cash Bonds & loans


Number one retailer in Switzerland


Extensive store network, with a good amount of megastores

Solid balance sheet metrics


Limited growth opportunities

Increased adjusted leverage

Highly competitive retail market

Recession could hamper non-food retail units

Next events


Website

www.migros.ch




Rating rationale Nestlé's rating reflects the strong business profile based on its leading market shares (e.g. mineral water, infant nutrition, milk, dehydrated, etc.) as the world's largest manufacturer of branded and packaged foods, its vast product portfolio featuring many strong brands, its broad geographical diversification and its strong and diversified business and customer network. In addition to the strong business profile, Nestlé also enjoys a strong financial profile based on solid margins, with an adjusted EBITDA margin of 17.4% in FY 2008 that feed into the sound ongoing cash-flow generation, with the adjusted FFO reaching CHF 15.1 billion. However, the announced share buyback program amounting to CHF 25 billion and past acquisitions have led to a considerable increase in Nestlé's adjusted net debt base to CHF 21.4 billion, despite the latter increasing compared to 2007. Despite a clear improvement compared to 2007, the adjusted FFO / net debt of 70.6% in 2008 remains below levels seen in 2005 and 2006. The Mid AA rating allows Nestlé to support its shareholder policy on the one hand, while actively participating in the expected near term market consolidation on the other.

Corporate strategy Nestlé's strategy is targeted at further increasing market share in its covered product segments such as beverages, milk products and nutrition, while at the same time driving its geographical expansion into promising growth markets. Management has defined a long-term organic growth target of 5% to 6%, which is well above the average market growth rate. However, on the back of its strong business profile with an excellent product portfolio and global business structure, we think this target is achievable over the cycle, and was clearly beaten in 2008 when organic growth reached 6.6%. Although volume growth remains a very important factor, management has initiated several projects to support additional pricing flexibility, such as an increased focus on value-adding products related to nutrition, health and wellness. In 2008, this effort showed a very good result, as pricing contributed some 3.8% to top line growth. To date, Nestlé has achieved considerable cost savings, resulting in an even better cash-flow generation as a result of efficiency programs. While organic growth is the key driver going forward, Nestlé has continuously undertaken acquisitions to further strengthen its market position both in terms of products and geographically.

Business profile The branded food industry benefits from stable demand, while facing increasing challenges from limited volume growth on the one hand, and increasing competition from both branded food and no name

producers, as well as a consolidating customer base, on the other. This trend has been especially prevalent in the European market, where private labels have increased their market share over the last couple of years due to their low-price strategy. As a result, lower-tier branded goods competitors have lost market share to either private label companies following a low-price strategy, or premium-tier branded goods companies that differentiate their products from their competitors through innovation, strong marketing and sales efforts, and high quality, resulting in better pricing conditions. With its leading brands, strong market shares and extensive marketing and distribution networks, Nestlé is well positioned to further increase market share, while differentiating itself from competitors by supplying innovative and value-enhancing products that offer a higher pricing flexibility, even in more challenging times.

Financial profile In 2008, Nestlé continued to beat its organic growth target of 5% to 6% by posting a good 6.6%. Despite facing high raw material prices, energy costs and increasingly challenging market developments, Nestlé managed to further improve its adjusted EBITDA margin from 17.3% to 17.4% by increasing prices and achieving further cost savings. This performance continued to drive the strong cash-flow generation capacity, resulting in a very impressive adjusted FFO of CHF 15.1 billion. Following the announced share buyback in 2007, Nestlé has up to year-end 2008 repurchased shares worth CHF 13.1 billion. On the other hand the divestment of a 25% stake in Alcon to Novartis brought some relieve to Nestlé's balance sheet and together with the ongoing strong cash flow generation capacity reduced the adjusted net debt from CHF 26.4 billion to CHF 21.4 billion. As a result, key metrics strengthened during 2008, with the adjusted FFO/Net debt ratio increasing to 70.6%, well above the required 50% for the Mid AA rating over the cycle. The company announced that it would reduce its share buyback to CHF 4 billion in 2009, reflecting the need for financial flexibility in the near future in anticipation of actively participating in the expected acquisition opportunities.

Event risk/outlook Driven by the increasingly challenging market environment, as experienced in H2 2008, Nestlé has somewhat reduced its organic growth target for 2009 by setting the targeted level near 5%, as well as further improving the unadjusted EBIT margin. This is to be achieved through its vast product portfolio (with key brands continuing to enjoy good demand and new products coming from the strong R&D base), its global reach, further streamlining of operations and reductions in its cost structure. This strong setup will allow Nestlé to achieve solid results, in our view, despite 2009 turning out to be very challenging in terms of both growth and margin development. Supported by its sound capital structure, the high level of liquidity and credit facilities finding good support from the ongoing strong cash flow generation capacity, we believe Nestlé's debt profile and operating cash needs are well manageable. Nestlé continues to hold both a 52.3% share in Alcon and a 28.9% share in L'Oreal valued at around CHF 14.5 billion and CHF 12.7 billion, respectively. While we expect the divestment of the remaining Alcon stake to result in a cash inflow for Nestlé, we consider the stake in L'Oreal as representing an additional cash source for Nestlé at some stage as we don't see any strategic fit that could materialize should Nestlé consider purchasing the Bettencourt stake in the future.

John Feigl

Nestlé (CS: Mid AA, Stable) Sector: Food

Company description

Nestlé is the world's leading manufacturer of branded food and beverages, with sales of CHF 109,908 million in 2008. Its product portfolio features a vast range of top brands with leading market shares such as Nestlé, Maggi, Perrier, Nescafé and Nestea. Its largest product group in terms of 2008 sales is Milk products and Ice cream with 28%, followed by Beverages with 26%, Prepared dishes and cooking aids with 16%, Petcare and Chocolate, Confectionary, Biscuits with 11% each, and Pharmaceutical products accounting for the remaining 7%. At year-end 2008, Nestlé had some 283,000 employees.

Business profile: Strong Financial profile: Strong




003100563 / 2.75% Nestle Holding 14/06/2010 HOLD Nestle Holding AA, Stable Aa1, Negative CHF 625

003378479 / 3% Nestle Holding 09/10/2012 HOLD Nestle Holding AA, Stable Aa1, Negative CHF 675

002864464 / 2.63% Nestle Holding 14/02/2018 SELL Nestle Holding AA, Stable Aa1, Negative CHF 250n.r. = not rated


P&L

Sales 98,458 107,552 109,908 110,785

Gross margin 61.8% 61.1% 59.9% 59.3%

Adjusted EBITDA 16,716 18,581 19,162 19,291

Margin 17.0% 17.3% 17.4% 17.4%

Adjusted EBIT 13,220 14,886 15,425 15,571

Margin 13.4% 13.8% 14.0% 14.1%

Adjusted interest expense 1,344 1,633 1,244 1,086

Net Profit 9,197 10,649 18,039 10,831

Cash Flow

Adjusted FFO 12,888 14,411 15,137 16,299

Adjusted CFO 13,236 14,493 13,350 16,694

CAPEX 4,889 5,590 5,454 5,011

Adjusted FCF 8,347 8,903 7,896 11,684

Adjusted DCF 4,876 4,899 3,323 6,384

Balance Sheet








Key ratios








Capital structure


Cash cycle -38.1d -39.9d -28.7d -29.0d






Margin development

0%

4%

8%

12%

16%

20%

2006 2007 2008 2009E

0%

20%

40%

60%

80%

100%




0

12,000

24,000

36,000

48,000

60,000

2006 2007 2008 2009E

CHF m

0%

8%

16%

24%

32%

40%



0%

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40%

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80%

100%

2006 2007 2008 2009E

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16x

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Adj. FFO / net debtAdj. FCF / Net debtAdj. EBITDA / Net fixed charge coverage (r.h.s.)


0

5,000

10,000

15,000

20,000

25,000

Year end2008

2009 2010 2011 2012 2013

CHF m



Leading market position in the branded food industry

Strong product, regional and customer diversification

Strong cash-flow generation capacity

Sound liquidity and equity base





Strong shareholder focus with major cash outflow

Next events



Website

www.nestle.com




Rating rationale Our Low AA credit rating for NOK is based on the company�s above-average business profile and strong financial profile. The rating reflects the company�s leading position as a producer and distributor of electricity in eastern Switzerland, the stability of its sales to the cantons, its relatively high level of internal power generation, and its integration within the Axpo Group. In addition, the company displays a solid financial structure and is indirectly 100% owned by the public sector. The rating is constrained by the impact of the deregulation of the Swiss electricity market, growing regulatory pressure (particularly in conjunction with transmission grids) and NOK�s heavy reliance on nuclear power, which is exposed to political risk factors. Based on the company�s conservative financial policy, the stability of its electricity sales and its considerable financial flexibility, the rating outlook is Stable, despite NOK�s rising investment outlays.

Corporate strategy NOK aims to guarantee a secure, reliable and sustainable supply of electricity, following a holistic corporate strategy, in order to cope with economic, environmental and society-linked requirements. The company places emphasis on cost efficiency and invests in the maintenance and renovation of its existing facilities. Faced with the electricity market deregulation, NOK focuses on ensuring market-competitive production costs by taking advantage of synergies (e.g. with the Axpo Group) and achieving efficiency gains. With regard to its generation capacities, the group is maintaining its 2/3 nuclear power and 1/3 hydropower (and therefore low CO2 emission linked) production mix. In this regard, together with BKW, NOK (via its parent company Axpo) submitted two framework permit applications for the replacement of the nuclear power plants in Beznau and Mühleberg. Furthermore, in order to increase its output, NOK is planning to transform its Linth-Limmern facility from a storage to a pump-storage power station. NOK also continues to expand its production portfolio in the new energy segment.

Business profile In our opinion, NOK exhibits a balanced sales mix. Energy sales volumes in FY 2008 amounted to 29,764 GWh (�7.9% YoY), of which 15,659 GWh was sold to NOK�s customers in northeastern Switzerland, and 13,686 GWh was sold through its energy trading operations and its international power distribution business. Electricity is primarily delivered to the cantonal utilities in northeastern Switzerland via NOK�s wholly owned subsidiary Axpo Vertrieb AG. NOK�s production mix is largely geared to nuclear power (16,963

GWh in FY 2008). The electricity derived from nuclear power is predominantly used as baseload electricity, which runs continuously at a constant output. Alongside the company�s own nuclear power stations Beznau 1 and 2, nuclear power is also obtained from the nuclear power plants at Leibstadt (22.8% interest) and Gösgen-Däniken (25.0% interest). In addition, the company procures power from the drawing rights held by the Kernkraftwerk-Beteiligungs-Gesellschaft AG (33.3% interest), as well as from EDF�s portfolio of nuclear power plants. With hydraulic power generation of 6,134 GWh, NOK is also Switzerland�s leading producer of hydroelectric power. Overall, the company owns interests in more than 30 run-of-river and storage power stations. However, the production of hydroelectricity is dependent on weather-related factors (including water flows at the company�s run-of-river power plants and rainfall levels in the catchment area of its pump-storage power stations). In addition, NOK also has an extensive power transmission and distribution network with which it supplies the customers in its supply area. NOK�s heavy reliance on nuclear power (approximately 2/3 in FY 2008) and the company�s exposure to technical and weather-related risks associated with its electricity production represent potential risk factors. In addition, political influence on electricity prices in Switzerland also entails risk. NOK is 100% controlled by Axpo Holding AG, which in turn is owned by the cantons and cantonal electrical utilities of northeastern Switzerland. We see NOK's operations as key with regard to the security of electricity supply in Switzerland.

Financial profile NOK recorded solid top-line growth of 0.7% in FY 2008 to CHF 2.6 billion. Adjusted EBITDA was CHF 626 million, while the adjusted EBITDA margin decreased to 23.8%, which was primarily due to higher energy procurement costs, expenses related to large-scale projects and a decrease in the market valuation of the decommissioning and waste disposal funds for nuclear installations. Nonetheless, we expect profitability to continue to be solid. Adjusted FFO was CHF 591 million, reflecting the company�s strong cash-flow generation. With a net cash position of CHF 98 million and net liquidity of CHF 654 million, NOK exhibits an extremely solid balance-sheet structure, in our view, underscoring what we regard as the company�s considerable financial headroom under the current rating.

Event risk/outlook We expect NOK's FY 2009 results to be below last year's high levels (both in terms of growth and margins), in view of the economic slowdown, further potential impairments of the financial assets for the federal nuclear funds and the uncertainties related to the impact of the market liberalization. The planned expansion of NOK�s production capacity will result in considerable capital requirements in the years ahead. Nevertheless, the group�s projected capital expenditure will be spread across a number of years and, in some cases, lies far in the future. Given that this investment will underpin an expansion of NOK�s production capacity and in view of the company�s strong position in Switzerland and the ongoing strength of its FFO and FCF, we anticipate that this expenditure will have only a moderate impact on NOK�s rating in the near term.

Michael Gähler

NOK (CS: Low AA, Stable) Sector: Electrical Utilities

Company description

NOK (Nordostschweizerische Kraftwerke AG) is the largest domestically oriented supracantonal power company in Switzerland. The company�s operating activities consist of nuclear energy, hydraulic energy and electricity grids, as well as trading, distribution and new energies. NOK supplies around 30% of Switzerland�s electricity requirements. The company generates electricity from both nuclear power and hydraulic energy, but nuclear power accounts for over two thirds of its total output. In addition, NOK owns almost 25% of Switzerland�s power transmission grid. The company is 100% owned by Axpo Holding.







P&L

Sales 2,255 2,605 2,624 2,591

Gross margin 46.7% 48.8% 36.6% 34.5%


Margin 34.4% 37.2% 23.8% 21.7%


Margin 25.5% 28.7% 14.6% 11.5%


Net profit 647 625 585 296

Cash flow

Adjusted FFO 602 750 591 508

Adjusted CFO 539 767 617 523

CAPEX 186 411 231 300

Adjusted FCF 353 356 386 223


Balance sheet


Core working capital 36 61 -78 -88



Total adjusted net debt (M&L adjusted) -450 -38 -98 110



Key ratios


Adjusted EBITDA/Net interest coverage -61.5x -62.9x -189.6x 144.3x

Adjusted EBIT/Net interest coverage -45.6x -48.5x -116.3x 76.7x


Adjusted FFO/Net debt -133.7% -1949.6% -600.5% 461.1%

Adjusted FCF/Net debt -78.5% -924.6% -392.1% 202.4%

Adjusted net debt/EBITDA -0.6x 0.0x -0.2x 0.2x

Capital structure

Core working capital/Sales 1.6% 2.3% -3.0% -3.4%

Cash cycle 25.5d 20.6d 29.8d 29.8d


Adjusted net leverage -15.7% -1.0% -2.4% 2.5%


Adjusted net gearing -13.6% -1.0% -2.4% 2.6%


Margin development

0%

10%

20%

30%

40%

2006 2007 2008 2009E

20%

30%

40%

50%

60%




-1,250

0

1,250

2,500

3,750

5,000

2006 2007 2008 2009E

CHF m

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-15%

-10%

-5%

0%

5%



-3000%

-2000%

-1000%

0%

1000%

2006 2007 2008 2009E

-200x

-100x

0x

100x

200x



0

200

400

600

800

Year end2008

2009 2010-2014 >2014

CHF m

Cash Bonds & loans



Stable sales structure in northeast Switzerland No information given

Very solid financial profile (net cash position)

Favorable internal production and sales profile

Indirect public-sector ownership

Website

www.nok.ch


Deregulation of the Swiss electricity market

Growing regulatory pressure


Heavy reliance on nuclear power




Rating rationale The rating of Novartis reflects its strong business profile, which is supported by its strong product portfolio with five blockbuster or near blockbuster status products, its diversified treatment areas in which it holds very strong or leading market shares, its ongoing above-average R&D investments, the good product pipeline with a large number of projects in development and the limited product patent expiration structure. Its strong financial profile benefits from good growth rates, combined with sound margins stemming from its ethical products, its continued strong cash-flow generation capacity translating into a very strong adjusted FFO of around USD 10.7 billion, its vast equity base and sound capital structure. Following a portfolio reshuffle between 2005 and 2007, Novartis acquired a 25% stake in Alcon for USD 10.4 billion in cash and holds an option to acquire the remaining 52% by 2011, valuing the potential value of the transaction up to around USD 39 billion. The first step of the transaction and the acquisition of the remaining shares of Speedel resulted in an increase of the adjusted net debt to some USD 7.1 billion, up from an adjusted net cash position of USD 3.3 billion and an according softening of key metrics, such as the adjusted FFO/Net debt with around 150%. The current Mid AA rating already factors in the acquisition of the remaining 52% stake in Alcon, a company that is highly cash generative, with an FCF of some USD 1.2 billion in 2007.

Corporate strategy Following the acquisition of the remaining shares of Chiron Corporation during the first half of 2006, Novartis created a new division called Vaccines and Diagnostics, consisting of the two activities human vaccines and diagnostic activities. The biopharmaceutical operations of Chiron were integrated into the Pharmaceutical division of Novartis. Hence Novartis has increased its number of divisions to four: Pharmaceuticals, Consumer Health, Sandoz and Vaccines & Diagnostics. To fuel future growth, Novartis is expanding its position in the biotechnology area, with a special interest in monoclonal antibodies and proteins. While acquisitions are being monitored closely and, following the Gerber Food and Medical Nutrition divestments, Novartis can easily afford to pursue suitable opportunities up to certain volumes, the company is also considering different cooperation possibilities. The acquisition of the 25% and, in a second phase, 51% stake in Alcon supports the existing contact lens and ophthalmic pharmaceutical business, thereby underpinning Novartis' strategy to focus on growth segments in healthcare, such as the fast-growing ophthalmic specialty area.

Business profile With sales of USD 26.3 billion equaling a global pharmaceutical market share of around 5% in 2008, the Pharmaceutical division

accounts for the largest part of group sales and around 85% of unadjusted EBIT in 2008. The product portfolio covers a wide range of fast-growing treatment areas such as oncology (31%), cardiovascular and metabolism (31%), neuroscience and ophthalmics (17%), respiratory (4%), immunology and infectious diseases (11%), among others, with leading market positions in many areas. The top three products (Diovan/Co-Diovan, Gleevec/Glivec, Zometa) accounted for some 41% of the division's sales, while the top ten accounted for around 65%. Sandoz, the generics division, with sales of over USD 7.6 billion, is one of the world's leading generics companies with strong top-line growth , but low margins on the other due to a lack of patent protection of generics drugs. Future growth in the generics industry is expected to be higher than in the ethical market due to patent expirations on key drugs and governmental support for generic drug usage. The Consumer Health division, with sales of USD 5.8 billion in 2008, covers OTC products, Ciba Vision and animal health. The OTC business is one of the leading suppliers of nonprescription drugs, while Ciba Vision holds a leading position in the market for ophthalmic and optical products that will be further strengthened through the Alcon business. With sales of around USD 1.8 billion, the Vaccines and Diagnostics division is the smallest division of Novartis, but holds a strong position in the market for vaccines with a very strong position in the USA.

Financial profile Novartis posted sales of USD 41.5 billion, with a volume increase of 6% in 2008 and a good increase of its adjusted EBITDA margin from 26.0% to 28.9%. This resulted in a further strengthening of the cash flow generation capacity, with an adjusted FFO of USD 10.4 billion and an FCF of a very strong USD 7.4 billion. This was, however, not sufficient to offset the increase in adjusted net debt to USD 7.4 billion as a result of recent acquisitions and a continued high focus on shareholders. Novartis continues to enjoy a strong cash flow generation capacity that, together with the very sound adjusted equity base amounting to USD 50.2 billion on 2008, will enable Novartis to support its current rating despite the expected strong increase in debt following the acquisition of the second stake in Alcon from Nestlé of 52% by 2011 and regain the necessary threshold levels within a relatively short time period in the absence of any further large-scale acquisitions and aggressive shareholder focus. Novartis' liquidity is solid, in our view, covering all operating and refinancing needs in the near term, with cash amounting to USD 6.3 billion at year-end 2008 and some USD 5 billion bond issues in February 2009, with maturities of 5- and 10 years, while refinancing needs amount to some USD 5.1 billion in 2009.

Event risk/outlook Novartis expects to post another year of record sales and earnings in 2009, with sales set to increase at a mid-single-digit rate in local currencies for the group, and a mid- to high single-digit rate for the Pharmaceutical division, both in local currencies. At the end of 2007, Novartis launched the "Forward" initiative to streamline operations and increase productivity. This initiative resulted in realized savings of USD 1.1 billion in 2008 and is expected to deliver further savings in 2009, with the aim of achieving annual savings of USD 1.6 billion by 2010. Given the Alcon transaction and the ongoing shareholder-friendly focus, we do not expect Novartis to undertake any medium- to large-scale acquisitions in the near term, as this would likely result in considerable rating pressure, given the very limited headroom under the current rating.

John Feigl

Novartis (CS: Mid AA, Stable) Sector: Pharmaceuticals

Company description

Novartis is one of the largest pharmaceutical companies, with sales of USD 41.5 billion in 2008. The company operates in four divisions covering Pharmaceuticals accounting for 64% of group sales, Consumer Health with 14%, Sandoz with 18% and Vaccines and Diagnostics with 4% of total sales. Targeted pharmaceutical treatment areas include cardiovascular, oncology, respiratory, dermatology, transplantation and ophthalmics. The Americas accounted for 39% of group sales, Europe for 44% and Asia/Africa/Australia contributing for the remaining 17%. At year-end 2008, Novartis had some 96,717 employees.





004308818 / 3.5% Novartis 26/06/2012 HOLD Novartis AA�, Stable Aa2, Stable CHF 700

004308900 / 3.625% Novartis 26/06/2015 SELL Novartis AA�, Stable Aa2, Stable CHF 800


P&L

Sales 37,020 38,072 41,459 41,570

Gross margin 77.7% 78.8% 79.1% 78.9%

Adjusted EBITDA 10,241 9,883 11,961 12,255

Margin 27.7% 26.0% 28.9% 29.5%

Adjusted EBIT 7,924 6,664 8,940 9,681

Margin 21.4% 17.5% 21.6% 23.3%


Net Profit 7,175 11,946 8,195 8,364

Cash Flow

Adjusted FFO 9,195 10,011 10,660 10,458

Adjusted CFO 9,057 9,476 10,030 10,414

CAPEX 2,322 3,133 2,316 2,402

Adjusted FCF 6,735 6,343 7,714 8,012

Adjusted DCF 4,651 3,705 4,319 3,769

Balance Sheet





Total adjusted net debt (M&L adjusted) 2,879 -3,256 7,130 7,353



Key ratios


Adjusted EBITDA / Net interest coverage -521.4x -96.9x 468.0x 76.2x

Adjusted EBIT / Net interest coverage -403.5x -65.3x 349.7x 60.2x


Adjusted FFO / net debt 319.4% -307.4% 149.5% 142.2%

Adjusted FCF / net debt 233.9% -194.8% 108.2% 109.0%

Adjusted net debt / EBITDA 0.3x -0.3x 0.6x 0.6x

Capital structure


Cash cycle -5.1d -20.3d -29.9d -23.5d


Adjusted net leverage 6.6% -7.1% 12.4% 12.6%


Adjusted net gearing 7.1% -6.6% 14.2% 14.5%


Margin development

0%

10%

20%

30%

40%

2006 2007 2008E 2009E

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25%

50%

75%

100%




-15,000

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30,000

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0%

300%

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900%

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-600x

-300x

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600x

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4,800

6,400

8,000

end 2008 2009 2010 2011 2012 2013

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Cash Bonds & loans


Good and well-diversified product portfolio

Sound patent expiration profile

Strong cash flow generation capacity

Good product pipeline


Increasing shareholder focus

Slightly underrepresented in the US market


Generic competition and pricing pressure

Next events



Website

www.novartis.com




Rating rationale PSP's Low A rating is based on its above-average business profile as the largest listed real estate company in Switzerland, maintaining a geographically diversified portfolio with the bulk being in central top regions such as Zurich and Geneva. However, the portfolio's main focus remains on office space usage, which represented two thirds of total lease capacity. At end-December 2008, the company further reduced its vacancy rate to 8.3%, which was below its previously announced target rate of 9.0%, but still relatively high compared to direct peers, in our view. Although PSP was able to improve its credit metrics slightly due to the solid operating performance, we view the financial profile as average. Key credit metrics strengthened in 2008, resulting in an adjusted debt/EBITDA ratio of 10.6x and an adjusted loan-to-value (LTV) ratio of 41.6%. In our view, a debt/EBITDA ratio of below 6.0x and an LTV ratio of clearly below 40% over the cycle are more commensurate measures for a Low A rating. Given the high shareholder focus due to the share buyback program and a high 85.0% payout ratio, we question the company's ability to further improve its credit metrics. In addition, the company highlighted its acquisition intentions, which could result in a further deterioration of credit quality as we do not expect any larger investment to be financed through operating cash flow generation. The vacancy rate, which PSP aims to reduce further, is still a core ratio that needs to be closely monitored, particularly given the current economic downturn and the potential deterioration in demand for commercial lending facilities.

Corporate strategy PSP is dedicated to its core businesses and the optimization and further development of its own real estate portfolio, with a focus on prime office and commercial real estate in Zurich, Geneva, Basel, Bern and Lausanne. To diversify risks, the potential rent per individual property shall not exceed 10% of overall potential portfolio rent, "Other locations" rental income should not be higher than 30% of the total rental income and the development properties are limited to 10% of the company's real estate portfolio. The stabilization of the successfully reduced vacancy rate will be on top of the company's agenda in the immediate future. PSP also aims to expand the real estate portfolio through takeovers, portfolio acquisitions or purchase of individual properties.

Business profile PSP is the largest listed real estate company in Switzerland and its portfolio is geographically diversified among central top regions such as Zurich and Geneva. However, the portfolio lacks in terms of

utilization diversification, as two thirds represent office space. The entire portfolio is valued at approximately CHF 5.1 billion and consists of 191 properties and seven development sites as of end-December 2008. Over the recent months, the company was able to reduce its vacancy rate from 10.6% to below its target range of 9.0% for 2008. Although PSP aims to further reduce this rate, it guided for a flat trend in 2009, which still reflects a relatively high number, in our view.

Financial profile Rental income increased 3.7% to CHF 256 million, mainly driven by the reduction in the vacancy rate to 8.3% at end-December 2008 and partially by still-growing rents in prime locations like Zurich. In addition, PSP reduced its real estate operating and maintenance costs by 8.6% and its general and administration costs by 19.2% ending up with a higher adjusted EBITDA of CHF 202 million and a 346 basis points margin hike to 77.9%. Below the line, revaluation gains almost halved to CHF 121 million compared to the prior year, resulting in a decrease in net income to CHF 224 million for FY 2008. In FY 2008, PSP maintained a solid equity ratio of 49.1% which was only slightly lower than the 49.4% reported in the prior year. The adjusted LTV ratio decreased 30 basis points YoY to 41.6% as a result of the increasing property value and the stable adjusted gross debt of CHF 2,144 million. Unadjusted total debt/total assets stood at 40.7%, which was clearly below the company's targeted 50.0%. PSP's interest-bearing debt consists of only unsecured liabilities, which were split into various bank loans and bonds. In February 2009, PSP revealed CHF 580 million of unused credit lines, of which CHF 530 million were committed, but also highlighted that a one-year facility of CHF 200 million is maturing this year. As such, we see good financial flexibility for PSP in the near term. Adjusted FFO improved to CHF 142 million due to the stronger profitability, and resulting in a higher adjusted FFO/Net debt ratio of 6.8%. Given the relatively aggressive payout ratio of 85.0% in FY 2008, discretionary free cash flow generation was somewhat pressured, despite the solid profitability. We expect PSP to purchase additional shares through its share buyback program, as long as the share price lies below the net asset value ,which could lead to further pressure on the adjusted net debt figure and leverage. PSP's adjusted net debt/EBITDA improved somewhat to 10.6x in FY 2008, whereas adjusted net leverage progressed 50 basis points to 44.5%.

Event risk/outlook The company remained confident in terms of the medium- to long-term view, and reiterated its efforts to further reduce the vacancy rate and optimize its real estate portfolio, including the evaluation of further acquisition opportunities. PSP targets a portfolio size of about CHF 8�10 billion in approximately five year's time. Among acquisitions, the company also maintains seven development sites, which are planned to be completed in the coming years. For the upcoming year, PSP guides for a flat trend, given the current difficult economic environment, and EBITDA is expected to slightly increase to CHF 210 million. The vacancy rate should stay below 9.0%, leaving some headroom compared to the 8.3% the company reported at end-December 2008. CAPEX guidance is around CHF 86 million for FY 2009 of which CHF 46 million is committed and the rest is subject to regulatory and legal issues, which can vary depending on current legal cases and outstanding building permits.

Daniel Rupli

PSP Swiss Property (CS: Low A, Negative) Sector: Real Estate

Company description

PSP Swiss Property (PSP) is the largest listed Swiss real estate company as measured by its property portfolio valued at CHF 5.1 billion, consisting of office (66%), retail (15%), parking (6%), gastronomy (4%) and other (9%) properties. Rental income in FY 2008 amounted to CHF 256 million. The focus remains mainly on office and business premises at exclusive locations in Switzerland's key economic centers such as Zurich, Geneva, Basel, Bern and Lausanne. At end-December 2008, PSP's biggest shareholder with 15.9 % was Viterius Ltd, an Israeli real estate company wholly owned by Alony Hetz who classifies as a long-term-orientated strategic investor. PSP had 10.8% of treasury shares on its balance sheet, which it intends to use for potential future acquisitions.





002208829 / 2.25% PSPREL 27/07/2012 HOLD PSP Swiss Property n.r. n.r. CHF 250



n.r. = not rated


P&L

Sales 245 250 260 268


Adjusted EBITDA margin 76.3% 74.5% 77.9% 77.9%


Adjusted EBIT margin 73.0% 73.2% 77.4% 77.4%

Net changes in fair value of real estate investments 126 219 121 0


Net profit 225 291 224 132

Cash flow

Adjusted FFO 148 113 142 134

Adjusted CFO 133 104 161 134

CAPEX (excl. purchases of investment properties) 62 50 68 69


Adjusted DCF -26 -39 -9 -35

Balance sheet


Core working capital -2 -4 -2 -3


Total adjusted debt (M&L adj.) 1,898 2,095 2,144 2,144

Total adjusted net debt (M&L adj.) 1,865 2,073 2,079 2,114



Real estate portfolio

Total value of property portfolio 4,757 5,001 5,149 5,200

Value of investment properties 4,514 4,840 4,983 5,000

Vacancy rate 13.9% 10.6% 8.3% 8.3%

Sites and development properties 243 161 166 200

% of total portfolio 5.1% 3.2% 3.2% 3.8%

Key ratios


Adjusted EBITDA/interest coverage 3.4x 3.3x 3.5x 3.6x

Adjusted debt/EBITDA 10.2x 11.3x 10.6x 10.3x


Capital structure

Adjusted loan-to-value 39.9% 41.9% 41.6% 41.2%




Margin development

70%

73%

75%

78%

80%

2006 2007 2008 2009E

80%

83%

85%

88%

90%




0

750

1,500

2,250

3,000

2006 2007 2008 2009E

CHF m

40%

43%

45%

48%

50%



0%

3%

5%

8%

10%

2006 2007 2008 2009E

2.0x

2.5x

3.0x

3.5x

4.0x



0

150

300

450

600

Year end2008

2009 2010 2011 2012 2013 2010-2014 n.c.

CHF m



Largest listed real estate company in Switzerland

Focus on primary center locations

Stable and increasing rental income

Improving LTV ratio, with only unsecured debt


Despite improvement, vacancy rate still high

Reliance on office space in a difficult economic environment

Declining yields due to rising property prices

High shareholder focus with 85% payout ratio

Next events



Website

www.psp.info




Rating rationale Our Low AA rating for Raiffeisen Switzerland is supported by the group's above-average business profile and its strong financial profile. The business profile is based on a strong and steadily growing market position, making Raiffeisen the third-largest banking group in Switzerland. Despite the fact that Raiffeisen only operates throughout Switzerland, it has a broad diversification in terms of geographical areas and clients. The strong financial profile results from Raiffeisen�s sound capital base, its sustainable lending policy (about 93% of gross loans are mortgages), and its strong legal and operational cohesion within the bank. The Stable outlook reflects Raiffeisen's ability to further improve top-line growth, despite the headwinds from the financial crisis. In contrast, the company revealed a weakening cost-income ratio and a pressured operating profitability trend. Raiffeisen seems to be on track to implement its growth strategy and grow its market share; but we expect the current recession to make it more difficult to maintain profitability and keep credit losses at the low levels seen in the recent boom years. We also note that this pressure is likely to continue, particularly under the assumption that the two big banks will increase their focus on their core businesses and domestic home markets.

Corporate strategy Raiffeisen aims to become Switzerland�s leading retail bank. To achieve its target for a growth rate of 1%�2% above the market average, it intends to grow its core businesses further by strengthening existing client relationships, expanding into cities and urban agglomerations (with a focus on Lake Zurich, Lake Geneva and Basel regions). Additionally, the group is building up its investment business through a cooperation agreement with the Vontobel Group, in which Raiffeisen holds a 12.5% stake, and extending its bancassurance business through a cooperation agreement with Helvetia, in which it holds a 4% stake. The group also plans to further expand its corporate clients business, with an emphasis on small- and medium-sized enterprises (SMEs), which could expose the company to increasing credit risk exposure, given the current economical conditions, in our view. In cooperation with Swiss One Finance, the third-largest car leasing and consumer financing provider in Switzerland, Raiffeisen aims to expand its currently small market share in this business area. In order to improve efficiency, Raiffeisen outsourced the securities administration of all client custody accounts to Vontobel. Raiffeisen will also invest in its IT infrastructure over the next several years through the implementation of the Avaloq system, a well-known banking IT platform.

Business profile Raiffeisen consists of 367 legally independent, locally active cooperative banks (with a total of 1,151 branches), as well as Raiffeisen Switzerland (the group�s central bank and a cooperative bank itself) and a number of subsidiaries. The Raiffeisen banks are grouped into 22 regional associations. At end-2008, Raiffeisen had more than 1.5 million cooperative members. As principal party, Raiffeisen Switzerland (CHF 837 million equity capital as of end-December 2008) guarantees the liabilities of all Raiffeisen banks and thus the group as a whole. The group�s solidarity fund (CHF 307 million disposable assets) covers employee claims and operating losses of the Raiffeisen banks, and is fed through annual contributions from the banks. Furthermore, each Raiffeisen bank has an unconditional legal obligation to provide additional funding to Raiffeisen Switzerland if needed, up to the amount of its own equity (aggregate funding obligation of about CHF 7.3 billion). In addition, should the cooperative capital no longer be covered, each cooperative member has an additional funding obligation of up to CHF 8,000 (totaling CHF 12.4 billion).

Financial profile In FY 2008, Raiffeisen grew its net revenues by 1.3% to CHF 2.3 billion as a result of higher net interest income (NII) and other income partially offset by lower net fee & commission income. Raiffeisen increased NII, which remained the group's main revenue contributor, to CHF 1.9 billion due to increased lending volumes, but it had to reveal an 8 basis points drop in its interest rate margin to 1.51%, the weakest ratio in the past five years. In line with its strategy to expand into urban areas, Raiffeisen further increased headcount. Hence, increased personnel expenses together with other project-related cost increases caused a hike in the cost-income ratio from 58% to 62%. The ratio lies at the upper end, in our view, and misses Raiffeisen�s target of 55% by far. The balance sheet was further strengthened due to another increase in gross customer loans to CHF 108.6 billion, as well as a hike in the mortgage lending business to CHF 101.4 billion. Both grew above the market average, in line with the group's strategy. Customer deposits rose 10.6% to CHF 104.1 billion, also reaching the CHF 100 billion threshold for the first time. Key capitalization metrics remained fairly stable reflecting a strong Tier 1 ratio of 12.7% and a firm total capitalization ratio of 18.8%. Raiffeisen had no subordinated debt or hybrid financial instruments outstanding, which further underpins the group's solid equity position. Non-performing loans (NPL) remained at a very low rate of 0.4%, which mirrors the company's prudent lending policy, in our view.

Event risk/outlook Raiffeisen started well in FY 2009 as shown by the continued net new money inflows. An enlarged headcount base combined with further expansion into urban areas should help to increase Raiffeisen�s businesses further. To reach its goals of growing market share in the corporate banking business, the company plans to further expand its product offering and has built three competence centers in Switzerland. However, the management also highlighted the current recession and the increasing focus of all banks on their core markets in Switzerland, which will see competition intensify even more and, as such, place pressure on the net interest margin, which is very important for Raiffeisen.

Daniel Rupli

Raiffeisen Switzerland (CS: Low AA, Stable) Sector: Banking

Company description

The Raiffeisen Group (Raiffeisen) is the third-largest banking group in Switzerland, reflected in total assets of CHF 131.6 billion at end-December 2008. The group primarily focuses on retail banking, where it has further increased its market share in mortgages and savings to about 14.7% and 19.7%, respectively. Raiffeisen consists of 367 legally independent, locally active cooperative banks, Raiffeisen Switzerland, as well as a number of subsidiaries. Raiffeisen Switzerland acts as the group�s central bank and is responsible for the group�s business policy and strategy, as well as risk management, but it also offers banking services and runs branches. Raiffeisen counted over 1.5 million cooperative members at end-December 2008.





001176417 / 4% SVR 02/02/2011 SELL Raiffeisen Switzerland n.r. n.r. CHF 600

001839146 / 3% SVR 05/05/2014 SELL Raiffeisen Switzerland n.r. n.r. CHF 400

002555225 / 3.125% SVR 30/05/2016 SELL Raiffeisen Switzerland n.r. Aa1, Stable CHF 550

n.r. = not rated


Income statement summary

Net interest income (NII) 1,802 1,881 1,926 !

Net fee & commission income 250 243 230 "

Net trading income 85 113 109 #

Operating expenses 1,349 1,472 1,674 !

Operating profit 810 791 617 "

Loan loss provisions (LLP) 11 3 11 !

Net income 655 701 564 "

Balance sheet summary

Total assets 113,523 122,642 131,575 !

Risk-weighted assets 58,146 56,976 61,513 !

Gross customer loans 95,110 101,527 108,979 !

Impaired loans 1,528 1,437 1,329 !

Non-performing loans 375 391 393 !

Loan loss reserves 475 433 385 !

Customer deposits 88,025 94,155 104,098 !

Senior debt 7,316 7,757 7,946 !

Subordinated debt 0 0 0 "

Hybrid Tier 1 capital 0 0 0 "

Equity 6,686 7,402 7,979 !


Key ratios

Profitability %

Net interest margin 1.7% 1.7% 1.6% "

Cost/income ratio 62.5% 65.1% 73.1% #

Return on average equity (ROAE) 10.3% 9.96 7.34 "

Return on average assets (ROAA) 0.6% 0.6% 0.4% "

Net interest income/Operating revenues 83.4% 83.2% 84.1% "

Capital adequacy %

Tier 1 ratio 11.5% 12.6% 12.7% "

Total capital ratio 16.5% 18.7% 18.8% "

Equity/Net loans 7.1% 7.3% 7.4% "

Equity/Total assets 5.9% 6.0% 6.1% "

Asset quality & liquidity %

LLP/NII 0.6% 0.2% 0.6% !

Coverage ratio 126.7% 110.9% 97.9% "

Non-performing loan ratio 0.4% 0.4% 0.4% !

Deposits/Net loans 93.0% 93.1% 95.9% "

n.a. = not available Accounting standard: Swiss GAAP

Profitability

0.0%

0.3%

0.5%

0.8%

1.0%

2005 2006 2007 2008

60%

65%

70%

75%

80%

Return on average assets (ROAA)

Cost/income ratio (r.h.s.)

Asset quality

0.0%

1.0%

2.0%

3.0%

4.0%

2005 2006 2007 2008

0.0%

0.1%

0.3%

0.4%

0.5%

LLP/NII Non-performing loan ratio (r.h.s.)

Capital adequacy

0%

5%

10%

15%

20%

2005 2006 2007 2008

Tier 1 ratio Total capital ratio

Revenue split

CHFm

0

600

1,200

1,800

2,400

2005 2006 2007 2008

Net interest income Net Fee & Commission IncomeNet trading income Other operating income


Strong Tier 1 and total capital ratios

Prudent lending policy reflected in low NPL

Market share in mortgage and lending businesses expanded further

Strengthened its position as third-largest Swiss bank


Expansion strategy going into a recession

High cost-income ratio

Credit cycle has peaked

Highly competitive domestic banking market

Next events


5 March 2010: FY 2009 results

Website

www.raiffeisen.ch




Rating rationale The Low BBB credit rating for Rieter is based on the company�s average business profile and average financial profile. The rating reflects Rieter�s strong position in the automotive and textile industries, which is supported by the company�s innovative products and close ties to its customers. Moreover, Rieter has an average financial profile characterized by adequate liquidity and access to credit facilities, as well as a solid equity base. The rating is constrained by the group's strong cyclicality, its exposure to the structurally suffering global automotive market (and its related reliance on large customers in the automobile industry), as well as to volatile raw material prices and pricing pressure in both the automotive and textile industries. Furthermore, the rating suffers from currently insufficient cash flow debt coverage, following the severe impact on cash generation as a result of dramatically softened demand in both divisions. The rating outlook is Negative in view of the ongoing very difficult market environment (which is expected to result in further declining sales) and its continued vulnerability with regard to declining demand as well as the projected subdued cash generation, increasing indebtedness and further weakening credit metrics.

Corporate strategy Rieter will continue to focus on its two industrial activities (Textile Systems and Automotive Systems). The company focuses on innovation, as well as optimized production and business processes in order to respond to its customers� changing needs and to lay the foundations for ongoing, profitable growth. In the medium-to-long term, the emerging markets in Asia and Eastern Europe are of increasing significance to Rieter, since they offer growth opportunities. In view of the global economic downturn, Rieter�s top priority is to maintain a solid balance sheet and adequate liquidity. The company will therefore continue with capacity reduction and cost-saving measures. In order to cope with the significant drop in demand, Rieter initiated several restructuring measures in both divisions. The restructuring programs and transfers of manufacturing facilities are intended to respond to both the structural changes in the two sectors and the cyclical downturn. The cost-cutting action is being complemented by price discipline and selective increases in product prices in order to compensate for cost inflation.

Business profile Rieter Automotive Systems (around two thirds of revenue) develops and produces components, modules and integrated systems for acoustic comfort and thermal insulation applications in motor vehicles, based on fibers, plastics and metals. The division is well placed to

focus on faster-growing customers thanks to its high innovation rate, broad product range and close customer ties. It serves all leading automobile manufacturer worldwide and has a broadly diversified customer portfolio. However, the global automotive industry continues to suffer significantly from the global economic downturn, and the division is experiencing a significant drop in demand and lagging profitability. Rieter Textile Systems is a market leader in systems and machines for converting natural and man-made fibers (and blends) into yarns, as well as for nonwoven technologies. Staple fiber machinery is the division�s core business. Thanks to its high degree of innovation, broad product range, customer focus and high level of service capability, Rieter is in a good position in the textile market. That said, the division is also suffering from a significant drop in demand (particularly in Asia) and a dramatic deterioration in profitability as a result of the global economic downturn.

Financial profile Rieter recorded a significant drop in sales by �20.4% to CHF 3.0, billion following a heavy drop in demand. Also profitability deteriorated substantially, with the adjusted EBITDA margin falling from 12.0% to 6.4%, and adjusted EBIT declining from 7.5% to �2.3%, which reflects the group's operating loss at the EBIT level. Adjusted FFO dropped from CHF 413 million to CHF �119 million, reflecting the deterioration in cash generation. With adjusted net debt of CHF 277.0 million and adjusted net leverage of 27.9%, Rieter�s balance-sheet structure remained solid, despite significantly higher indebtedness and was further strengthened by the sale of Rieter shares to the PCS Holding AG. (leading to a cash inflow of CHF 57 million). The liquidity remains adequate, with adjusted net cash of CHF 140 million and undrawn committed credit facilities, which are intended to cover both the operating cash needs and the restructuring-related cash outflows. Adjusted FFO/Net debt was �43.0%, reflecting the negative adjusted FFO, and has fallen short of our minimum required level of 25% over the cycle under the Low BBB rating. In order to protect liquidity, Rieter prematurely terminated its share buyback program and no dividends will be paid for the 2008 financial year.

Event risk/outlook FY 2009 is expected to be another challenging year. The significant decline in the Textile Systems' operating performance, combined with a continued depressed automotive business, is likely to put substantial pressure on the company and points to a limited diversification benefit from Rieter's business mix. We expect Rieter�s operating performance to remain under pressure in FY 2009 and FY 2010 due to the continued demanding market conditions. We acknowledge the implementation of the cost-cutting and restructuring measures, but do not expect a considerable supportive impact on FY 2009 figures. In contrast, the group�s already subdued cash flow generation will be further pressured by restructuring-related cash payments (estimated at CHF 150 million). As a result, we expect the company�s cash flow generation capacity to clearly remain insufficient, which will lead to a further increase in indebtedness and continued inadequate credit metrics. If the company proves unable to adapt its capacities quickly enough and thus fails to restore its credit metrics over the credit cycle (some 3 years), a further downgrade by at least one notch could follow.

Michael Gähler

Rieter (CS: Low BBB, Negative) Sector: Automobile and Machinery Industry

Company description

Rieter Holding AG is a leading supplier of products and services to the textile and automotive industries. The company is organized into two divisions, Rieter Automotive Systems (acoustic and thermal components for motor vehicle; around two thirds of revenue) and Rieter Textile Systems (machines for the spinning industry; around one third of revenue). Rieter�s product manufacturing and distribution is carried out at an international level. Europe is the company�s most important sales market, with around 46% of 2008 sales, followed by the Americas (27%) and Asia (25%). The company currently has approximately 14,000 employees.







P&L

Sales 3,435 3,783 3,012 2,286

Gross margin 53.5% 52.2% 50.7% 49.4%

Adjusted EBITDA 400 453 191 -1

Margin 11.6% 12.0% 6.4% 0.0%

Adjusted EBIT 248 286 -69 -149

Margin 7.2% 7.5% -2.3% -6.5%


Net profit 147 197 -406 -175

Cash flow

Adjusted FFO 364 413 -119 -185

Adjusted CFO 275 419 67 -85

CAPEX 186 204 141 80

Adjusted FCF 89 215 -74 -165

Adjusted DCF 47 153 -139 -165

Balance sheet






Equity (pension leverage adjusted) 1,316 1,312 715 547


Key ratios



Adjusted EBIT/Net interest coverage 15.2x 27.7x -1.1x -2.1x

Adjusted FFO/Debt 87.6% 126.1% -27.4% -31.2%

Adjusted FFO/Net debt 323.9% 285.4% -40.3% -42.9%

Adjusted FCF/Net debt 79.1% 148.5% -25.1% -38.3%

Adjusted net debt/EBITDA 0.3x 0.3x 1.5x -675.5x

Capital structure


Cash cycle 29.6d 19.5d 24.1d 24.0d






Margin development

-10%

0%

10%

20%

2006 2007 2008 2009E

40%

45%

50%

55%




0

500

1,000

1,500

2006 2007 2008 2009E

CHF m

0%

20%

40%

60%



-125%

0%

125%

250%

375%

2006 2007 2008 2009E

-10x

5x

20x

35x

50x



0

100

200

300

400

Year end2008

2009 2010-2014

>2014

CHF m

Cash Bonds & loans


Both divisions are market leaders 12 August 2009: H1 2009 results

Good geographical and product diversification 29 January 2010: FY 2009 sales figures

High level of innovative strength

Website

www.rieter.com


Insufficient cash flow debt coverage

Exposure to the suffering automotive market

Continued high competition and pricing pressure

Volatile raw material costs




Rating rationale Roche's rating is based on its strong business profile, with its leading position in the fast-growing area of oncology accounting for some 55% of the Pharmaceutical division's sales in 2008, the strong pharmaceutical franchise containing nine blockbusters, the broad and very promising product pipeline, the ongoing high commitment to R&D, its leading position in the field of diagnostics that supports the overall business model while on the other hand constituting a negative rating factor in terms of its lower growth potential, and a good patent protection profile due to relatively young products. In addition, the rating is heavily supported by the strong financial profile, with high growth rates and healthy margins in both the Pharmaceutical and Diagnostics divisions that translated into an adjusted group EBITDA margin of 37.4% in 2008, the continued strong cash-flow generation capacity with an adjusted FFO of CHF 13.4 billion in 2008, the conservative capital structure with an adjusted net cash position of CHF 3.2 billion and a very conservative adjusted net leverage. Following the announcement of Roche to acquire the remaining stake in Genentech for some USD 44 billion in 2008, we cut Roche's rating to Low AA with a Stable outlook. In March 2009, Roche announced the successful acquisition of the remaining shares in Genentech for some USD 47 billion. The transaction is financed through debt, thus resulting in a considerable softening of Roche's key metrics. Due to its strong cash flow generation capacity, we expect Roche to reduce its debt levels in a reasonable timeframe, thereby reaching the necessary metric thresholds.

Corporate strategy The three businesses Genentech, Chugai (Roche holds a 59.9% stake) and Pharmaceuticals are managed on a relatively independent basis, as evidenced, for example, by their R&D activities clearly focused on expanding the company's oncology and virology franchise, while establishing new franchises (autoimmune, metabolic, CNS), which are managed locally instead of being centralized. This approach gives Roche the flexibility to buy in specific products if considered promising. The company further aims at gaining competitive advantages by integrating the Pharmaceutical and Diagnostics divisions into one unit, thereby building on the expertise of the diagnostics business to support pharmaceutical product development through diagnosis, selection of appropriate treatment, patient-tailored monitoring and personalized medication. The strategy for Diagnostics is targeted at offering patients a full range of services and products covering several areas that allow patient-specific treatment and monitoring to be increased, while expanding the supply of high-value-adding markers and further increasing efficiency in patient treatment. In terms of external growth, management successfully acquired the remaining 44% stake in Genentech for a consideration of some USD

47 billion in March 2009. In addition to this transaction, bolt-on acquisitions cannot be ruled out, although management is clearly committed to reducing the level of debt following the Genentech transaction.

Business profile The Pharmaceutical division of Roche continued to outgrow the global pharmaceutical market in 2008 and generated sales of CHF 36.0 billion. Roche's key therapeutic area, oncology, recorded a very strong 15% growth rate in local currencies resulting in sales that accounted for 55% of the Pharmaceutical division's sales, strongly supported by three of its seven blockbuster products (MabThera/Rituxan, Herceptin and Avastin). Roche's top three products accounted for 45% of the division's sales, while the top ten contributed 73%. With its strong oncology franchise, Roche is the clear global market leader and is expected to further increase its position on the back of a relatively young product portfolio, with considerable growth and further margin potential. Additionally, Roche enjoys leading market positions in transplantation, virology and dermatology. With an estimated market share of around 22% and sales of CHF 9.7 billion (an increase of 3% YoY), the Diagnostics division is the world's largest in-vitro diagnostics supplier. The division covers areas such as diabetes care, near-patient testing, centralized diagnostics, molecular diagnostics and applied sciences. Despite growing at considerably lower rates, Roche has managed to generate a very good unadjusted EBITDA margin of 23.9%, thus clearly demonstrating the strong market position Roche enjoys in the diagnostics market.

Financial profile Roche posted good results in 2008, with the adjusted EBITDA margin remaining at a very good 37.4%, translating into a strong adjusted FFO of CHF 13.4 billion and a very impressive FCF of CHF 9.0 billion. When fully factoring in the cash cushion of its stakes in Chugai and Genentech, Roche posted an adjusted net cash position of CHF 3.2 billion at year-end 2008, with a strong adjusted equity base amounting to CHF 50.9 billion Following the announcement to acquire the remaining 44% stake in Genentech, Roche launched a major bond issuance program in February and March 2009 raising more than USD 40 billion to support the funding of the transaction. The Low AA rating factors in a total transaction volume of just over USD 45 billion, resulting in the near-term key metrics falling short of the required threshold level. However, supported by the strong cash flow generation capacity and a clear commitment to reduce debt levels, we think Roche should be able to regain the necessary metrics levels in the near future, such as an adjusted FFO/Net debt of above 50%. Roche's liquidity is strong, in our view, with cash amounting to just over CHF 20 billion (some CHF 13 billion excluding the cash held at Chugai and Genentech) and limited short-term refinancing needs of around CHF 5.1 billion when including the CHF 4 billion bond issued in spring 2009.

Event risk/outlook Roche expects sales growth for the group and the Pharmaceutical division to remain strong, reaching mid-single-digit rates and hence growing above market in 2009. Following the Genentech transaction, Roche's credit profile has changed considerably. While the business profile should remain strong, the financial profile softened substantially following the successful bond issuance program (EUR 11.3 billion, USD 16.5 billion, GBP 1.3 billion and CHF 8 billion) at the beginning of 2009, and hence require management's attention to regain pre-transaction levels in a relatively short period of time.

John Feigl

Roche (CS: Low AA, Stable) Sector: Pharmaceuticals

Company description

Roche ranks among the top six pharmaceutical companies, with sales of CHF 45.6 billion in 2008. The company targets treatment areas such as oncology, anemia, virology, osteoporosis and diagnostics. Its main division Pharmaceuticals, consisting of Roche Pharmaceuticals and its stakes in Genentech and Chugai, contributed 79% of group sales, while the Diagnostics division accounted for the remaining 21%. Geographically, Europe accounted for the largest part of group sales with 39%, the Americas with 38%, Asia with 14% and Africa/Australia and Oceania contributing the remaining 9%. At year-end 2008, Roche had some 80,080 employees.





003836511 / CHF 2.5% 23/3/2012 HOLD Roche Holding AA�, Stable A2, Stable CHF 2,500

003913926 / CHF 4.5% 23/3/2017 BUY Roche Holding AA�, Stable A2, Stable CHF 1,500


P&L

Sales 42,041 46,133 45,617 49,292

Gross margin 78.2% 75.8% 76.1% 76.3%

Adjusted EBITDA 14,667 17,397 17,056 18,069

Margin 34.9% 37.7% 37.4% 36.7%

Adjusted EBIT 11,750 14,493 13,967 15,423

Margin 27.9% 31.4% 30.6% 31.3%

Adjusted interest expense 404 377 313 1,541

Net Profit 7,880 9,761 8,969 10,144

Cash Flow

Adjusted FFO 12,551 14,021 13,408 14,134

Adjusted CFO 10,654 12,814 12,884 13,564

CAPEX 4,154 4,465 3,557 4,322

Adjusted FCF 6,500 8,349 9,327 9,242

Adjusted DCF 4,243 5,322 5,276 4,826

Balance Sheet





Total adjusted net debt (M&L adjusted) -10,139 -8,538 -3,198 38,378



Key ratios


Adjusted EBITDA / Net interest coverage -38.2x -25.0x -44.3x 20.6x

Adjusted EBIT / Net interest coverage -30.6x -20.9x -36.2x 17.6x


Adjusted FFO / net debt -123.8% -164.2% -419.3% 36.8%

Adjusted FCF / net debt -64.1% -97.8% -291.7% 24.1%

Adjusted net debt / EBITDA -0.7x -0.5x -0.2x 2.1x

Capital structure


Cash cycle 38.1d 65.0d 57.1d 36.0d

Cash / adj. gross debt 178.4% 159.8% 119.7% 28.0%

Adjusted net leverage -30.1% -20.4% -6.7% 39.9%


Adjusted net gearing -23.2% -17.0% -6.3% 66.3%


Margin development

0%

10%

20%

30%

40%

50%

2006 2007 2008 2009E

0%

20%

40%

60%

80%

100%




-20,000

0

20,000

40,000

60,000

80,000

2006 2007 2008 2009E

CHF m

-50%

-20%

10%

40%

70%

100%



-500%

-380%

-260%

-140%

-20%

100%

2006 2007 2008 2009E

-60x

-36x

-12x

12x

36x

60x



0

5,000

10,000

15,000

20,000

25,000

Year end2008

2009 2010 2011 2012 2013

CHF m



Excellent position in the area of oncology indications

Above pharmaceutical market growth

Strong product pipeline and R&D franchise

Vast cash-flow generation capacity


Underrepresented in the US pharma market

Increasing pressure from healthcare reforms

Integration risk related to the Genentech transaction

Considerable softening of key metrics

Next events



Website

www.roche.com




Rating rationale Schindler's rating reflects its above-average business profile, supported by the strong product portfolio with innovative and high-quality products, its leading share in the market for escalators, with a market share of around 23% in 2008, and its strong number two position in the elevator sector, its focus on R&D that results in a good level of new product launches, the strong brand and sound service platform, the vast installation base, and its global marketing and distribution network. The rating further benefits from the above-average financial profile, with a solid cash-flow generation capacity with a very good adjusted FFO of CHF 921 million, resulting in a very good adjusted FFO/Net debt ratio of 113% in 2008, as well as its high and very comfortable adjusted cash cushion of around CHF 1.6 billion accounting for around 66% of the adjusted debt. This underpins Schindler's strong liquidity position, which covers all necessary operating cash needs and debt refinancing by far. However, the rating is constrained by increasing competition and pricing pressure, the cyclical and increasingly challenging market development, and the company's exposure to raw material prices and energy costs. We consider Schindler's majority stake in ALSO to be a negative rating factor, given the increasing size of the low-margin business.

Corporate strategy Schindler's vision is to attain "leadership through service" in the elevator and escalator business. To achieve this target, the company is focusing on expanding and strengthening its global presence by providing highly innovative quality products on the one hand, and accompanying services on the other. Besides this, Schindler continues to focus on its core competencies, thereby further reducing production depth and costs, as well as launching innovative and value-adding products, improving its profitability and increasing market share. Schindler's ongoing focus on R&D has helped the company to ensure some pricing flexibility in a market that faces fierce competition and shorter product lifecycles. With its global reach, high innovation rate, quality and brand reputation Schindler continues to drive organic growth, thereby increasing its global market share. ALSO acquired a majority stake of 50.1% in the Finnish ICT distribution company GNT Holding Oy in 2006, making ALSO one of the largest ICT distributors in Europe. On the back of increasing competition, ALSO considers it necessary for sales volumes to reach some CHF 8 billion to CHF 10 billion. ALSO therefore intends to follow its growth strategy rapidly over the next few years. However, this strategy does not comply with Schindler's intended investment volume. Schindler is therefore analyzing options for the future development of ALSO. Due to the current market crisis ALSO is to first regain past strength during which time period Schindler will continue to support the company.

Business profile The global elevator and escalator market is valued at above CHF 50 billion and is dominated by a small number of large players, of which the biggest three account for around 50% of the overall market. In 2008, the new installation business was worth around CHF 26 billion, representing an increase of 3.5% YoY, with the larger part being generated from the maintenance, modernization and service business. The production of elevators and escalators is a relatively low-margin business that requires a limited amount of maintenance CAPEX, know-how and scale, while the service business offers substantially higher margins and shows a less cyclical structure due to the ongoing legal service requirements on the installed base. On the back of strong construction growth in Asia, the region accounted for the largest part of new installations, with around CHF 14 billion or some 61% of total units, while Europe and the Americas accounted for around CHF 7 billion and just below CHF 5 billion in terms of value, and 30% and 9%, respectively, in terms of units. The industry is facing fierce competition, resulting in shorter product lifecycles, a need for increasing innovation, substantially reduced product fading rates and a clear cost focus. As the service business offers higher margins than the production business, companies are increasing their efforts to gain access to large installation bases globally by means of organic growth to an increasing extent.

Financial profile The E&E business recorded flat sales growth in 2008 due to a strong CHF, while growth in local currencies amounted to 6.4%, resulting in sales of CHF 8.8 billion. Schindler managed to further reduce its operating cost base by continuing to focus on efficiency, which, together with its good product offering, resulted in an increase of its unadjusted EBITDA margin to a good 11.5%, up from 10.1%. On the other hand, ALSO, facing considerable challenges during 2008, witnessed a decline of its unadjusted EBITDA from 1.3% to a low 0.8%. Schindler, however, on a consolidated base, managed to improve its adjusted EBITDA margin to 8.9%. The good operational performance translated into a significant increase of Schindler's cash flow generation capacity, with an adjusted FFO of CHF 921 million that boosted FCF to CHF 934 million. As a result, the capital structure improved considerably, with adjusted net debt decreasing to CHF 815 million and an adjusted net leverage of a low 31.4%. In line with this development, Schindler's key metrics reached very strong levels, such as adjusted FFO/Net debt increasing from 46.8% to 113.0% in 2008, well above the 70% level required for the rating over the cycle.

Event risk/outlook Schindler anticipates that 2009 will pose major challenges in the E&E market that could well extend into 2011. Due to its good global reach, high innovation, and good order backlog, management expects to be able to post an unadjusted EBIT margin of above 10% and continues to target a margin of 14% and a net profit of around CHF 900 million in the next three to four years following the recovery of the global economy. For ALSO, management expects a positive bottom-line result based on previously implemented key measures that will help to offset the negative impacts from a declining demand for IT products in 2009. While we expect Schindler's cash flow generation capacity to decline in 2009, the sound capital structure and high liquidity will lend the company ample financial headroom going forward, in our view.

John Feigl

Schindler (CS: High A, Stable) Sector: Mechanical Engineering

Company description

Schindler is the largest manufacturer of escalators and moving walkways, and holds the number two position in elevators, with sales of CHF 8.8 billion in 2008. The remaining CHF 5.3 billion of the group's total sales stems from Schindler's majority stake in the ICT distribution company ALSO Holding AG. In the E&E business, Europe accounted for 54% of sales in 2008, followed by the Americas with 30%, and Asia, Australia and Africa with 16%. ALSO Holding generated 21% of its sales in Switzerland, with the major 79% being generated in European countries. At year-end 2008, Schindler had some 45,063 employees.





No CHF bonds outstanding


P&L

Sales 11,106 13,835 14,027 12,346

Gross margin 50.6% 45.3% 45.5% 44.4%

Adjusted EBITDA 965 1,174 1,249 1,160

Margin 8.7% 8.5% 8.9% 9.4%


Margin 6.6% 6.6% 7.0% 7.4%


Net Profit 488 254 615 531

Cash Flow

Adjusted FFO 739 545 921 776

Adjusted CFO 619 755 1,204 824

CAPEX 143 117 128 106

Adjusted FCF 476 638 1,076 718

Adjusted DCF 345 464 865 503

Balance Sheet





Total adjusted net debt (M&L adjusted) 1,179 1,164 815 416

Equity (Pension leverage adjusted) 1,933 1,841 1,782 2,085

Market Capitalization 9,381 8,838 5,711 n/a

Key ratios








Capital structure


Cash cycle 6.9d 9.8d 5.8d 13.8d






Margin development

0%

2%

4%

6%

8%

10%

2006 2007 2008 2009E

0%

12%

24%

36%

48%

60%




0

500

1,000

1,500

2,000

2,500

2006 2007 2008 2009E

CHF m

0%

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40%

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40%

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2006 2007 2008 2009E

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2,000

Year end2008

2009 2010 2011 2012 2013

CHF m



Leading market positions in the E&E market

Good innovation rate and product pipeline

Sound liquidity and cash-flow generation capacity

Global network and customer base


Increasing competition, pricing and margin pressure


Cyclical construction market

Exposure to the low-margin ICT distribution market

Next events



Website

www.schindler.com




Rating rationale Sika's rating reflects the above-average business profile that finds support from the strong position in the market for construction chemicals as the number two player globally, the sound market share for industrial adhesives and sealants, its good geographical diversification, the solid product portfolio, its high innovation rate supporting solid top-line growth and enabling good margins, and its diversified customer base. The Sarnafil acquisition in 2005 has helped Sika to broaden its product range into the premium segment and further widened its geographical reach, thus adding support to the business profile. Following the Sarnafil acquisition Sika managed to regain its threshold metrics level in 2006 and 2007, thus fully supporting its above average financial profile. However, 2008 proved to be a very challenging year with lower growth and margins which negatively impacted the company�s cash flow generation capacity. As a result key metrics softened from 55.0% to 39.8% in the case of the adjusted FFO / net debt, well below the required threshold level of 45% for the rating. Based on the challenging market outlook and the expected decline of Sika's cash flow generation capacity and metrics we cut the rating to a Low A with a Stable outlook in spring 2009.

Corporate strategy Sika's strategy is based on its core competencies covering additives, coatings, adhesives, sealants and related products for use in construction materials, while concentrating on sealants, adhesives and baffles applied mainly in the automotive and transportation industry. On the back of its strong market positions, high innovation rate and diversified customer base, Sika is targeting annual average organic top-line growth rates of 8% to 10% in the mid-term. In addition, the company targets an unadjusted EBITDA margin of 12% to 14% and an operating free cash flow of 4% to 6% of sales. While the company already achieved these goals in 2007 with the unadjusted EBITDA margin reaching 14% and the unadjusted CFO amounting to 7.9% of sales, 2008 was considerably more challenging producing an organic growth rate of 5.9%, an unadjusted EBITDA margin of 12.0% while the unadjusted CFO amounting to a good 8.1%. Geographically, Sika is striving to penetrate and further expand its presence in markets that have not or not sufficiently been covered, thus possessing high growth potential, such as Asia, North America and Eastern Europe, while further strengthening its market position in established markets such as Europe. On a product base, Sika is continuously searching for new application fields for its products that offer clear advantages, thereby substituting existing products and techniques. While Sika is clearly focusing on organic growth, further acquisitions of new products, technology and market share will form part of Sika's overall growth strategy with an annual acquisition volume of below CHF 100 million for bolt-on acquisitions.

Business profile With sales of CHF 3,700 million in 2008, the Construction division is the number one player in the local and fragmented market for construction chemicals, with a market share of around 12%. The market is expected to further consolidate as large players continue to increase market share through broadened product offerings, innovation and customer relationships. The acquired higher-price product portfolio from Sarnafil in 2005 clearly supports the division's market position with a more diversified product portfolio and geographical reach. Sika's Industry division, with 2008 sales of CHF 925 million, holds a strong position in the market for products used in the automotive and transportation industry. The overall market for industrial adhesives and sealants is fragmented and is therefore likely to see further consolidation with key players further expanding their market share. On the back of its innovative, value-enhancing products and client focus, Sika is well positioned to benefit from growth driven by the implementation of adhesive techniques.

Financial profile In 2008 Sika recorded considerably lower sales growth rates than in the past with an organic growth rate amounting to 5.9%, compared to the double digit rate in the previous year. In addition to the lower organic growth rate, the strong negative currency impact pressured sales that amounted to CHF 4,625 million in 2008. The combination of challenging raw material prices, high energy costs and a drop in demand towards the end of the year resulted in a decline of the adjusted EBITDA margin from 14.6% to 13.0% The lower growth and the weakened margin pressured Sika�s cash flow generation capacity resulting in an adjusted FFO of CHF 372 million, down from CHF 489 million. On the other hand the adjusted net debt increased to CHF 934 million as a result of higher CAPEX and an increased shareholder focus causing a considerable decline of the adjusted FFO / net debt to 39.8%, below the required threshold level of 45%. Close attention will have to be paid to regaining former metrics levels to support the financial profile sufficiently over the cycle. With cash of CHF 321 million and a committed credit facility of CHF 450 million maturing 15 November 2010 we view Sika�s liquidity as sound given its very limited refinancing needs of CHF 13 million in 2009 and the next major refinancing need being the CHF 275 million 2.75% bond maturing in 2011.

Event risk/outlook Sika guided very cautiously for 2009 and expects clear growth signals at the earliest in 2010 on the back of the spreading economic crisis that cause demand in many markets to contract substantially. Sika will continue to exploit growth possibilities thereby making use of the demand for higher value adding technologies and service. The company will continue to focus on efficiency increase of production facilities and the global supply chain. Despite the major market challenges Sika remains confident of achieving its growth and margin targets on mid-term annual average. The company views the present market conditions as offering interesting acquisition opportunities in regions such as North America, India, the Middle East and East Asia. While these opportunities are likely to increase in number, we nevertheless stress the fact that Sika will have to focus on increasing its cash flow generation capacity to regain metrics in line with the newly assigned threshold levels as we currently do not see any financial headroom under the current rating.

John Feigl

Sika (CS: Low A, Stable) Sector: Specialty Chemicals

Company description

Sika is a specialty chemicals company with a leading position in the market for construction chemicals and holds a leading market share as a manufacturer of industrial adhesives and sealants mainly used in the automotive and transportation industry. In 2008, Sika generated sales of CHF 4,625 million, of which the Construction division contributed 80%, while the Industry division added the other 20%. Regionally, Northern Europe accounted for 38% of group sales, followed by Southern Europe with 23%, North America with 14%, and the remaining 25% being split among Latin America, IMEA and Asia Pacific. At year-end 2008, Sika had some 12,900 employees.





002729577 / 2.75% Sika AG 26/10/2011 SELL Sika AG A�, Stable n.r. CHF 275

002421780 / 2.38% Sika AG 15/02/2013 SELL Sika AG A�, Stable n.r. CHF 250

002480374 / 2.88% Sika AG 23/03/2016 SELL Sika AG A�, Stable n.r. CHF 250n.r. = not rated


P&L

Sales 3,896 4,573 4,625 4,060

Gross margin 53.6% 53.3% 51.3% 50.2%


Margin 13.8% 14.6% 13.0% 11.5%


Margin 9.5% 11.2% 9.4% 7.5%


Net Profit 232 344 267 185

Cash Flow

Adjusted FFO 445 489 372 315

Adjusted CFO 362 391 410 339

CAPEX 140 186 230 166

Adjusted FCF 222 206 179 172


Balance Sheet








Key ratios








Capital structure


Cash cycle 34.7d 33.7d 37.4d 40.0d






Margin development

0%

4%

8%

12%

16%

20%

2006 2007 2008 2009E

0%

20%

40%

60%

80%

100%




0

400

800

1,200

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50%



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1,000

Year end2008

2009 2010 2011 2012 2013

CHF m



Strong market position in construction chemicals

Highly innovative with a strong customer focus

Good geographical and product diversification

Cash flow generation capacity improvement


Exposure to the cyclical construction industry

Raw material and energy prices volatility

Acquisition and integration risk

Softening metrics that limit financial flexibility

Next events



Website

www.sika.com




Rating rationale Skyguide�s AAA rating is primarily supported by its strong business profile, based on the Swiss Confederation�s majority ownership and the company�s legal mandate to provide civil and military air navigation services within Swiss airspace and in the adjacent airspace of neighboring countries. Skyguide�s activities are of strategic importance to the Swiss economy, public safety and defense capability. Through its four-point plan, Skyguide aims to align its corporate strategy closer to the changing European air navigation environment, and it aims to position itself as a strong air navigation service provider within the context of the "Single European Sky." Given its limited size versus European peers, Skyguide aims to pursue a collaboration strategy while retaining its own identity. We view Skyguide�s financial profile as strong. The charging regime allows for full recovery of operational costs and debt service cover over time. Further, as illustrated in the past, there is a strong intrinsic support from the Swiss government.

Corporate strategy The Swiss Federal Council prescribes a clear strategic direction for Skyguide every four years. Accordingly, Skyguide ensures the safe, smooth and cost-effective management of air traffic in Swiss airspace and in the adjacent airspace of neighboring countries delegated to its control. The legal mandate encompasses civil and military air navigation services, the aeronautical information service, telecommunications services, as well as technical services required for the installation, operation and maintenance of air traffic control systems. In flight-kilometer terms, just less than 55% of civil air traffic controlled by Skyguide is managed within Swiss airspace, while 45% is handled in the adjacent airspace of neighboring countries assigned to its control. In the future, European airspace is to be organized independently of national borders, but responding to operational requirements. On 5 February 2008, Skyguide announced a four-point plan to further concretize its overall corporate strategy in preparation for anticipated pan-European air traffic developments, such as the Single European Sky (SES) or Functional Airspace Block European Central (FABEC). The feasibility study of Functional Airspace Block European Central, published in July 2008, clearly showed that the goals specified could be achieved by means of the FABEC project and concluded that FABEC was not only feasible but also necessary. After the approval of the agreement in November 2008 by the six participation nations and seven air navigation providers, the FABEC project has now entered its implementation phase. Specifically, the aforementioned four-point plan includes a further strengthening of the newly defined firm-wide safety culture, solving the current structural earnings shortfall, increasing airspace capacity and adopting a modular service provision approach. Through its efficiency

enhancement program "Challenge 07," Skyguide aims to achieve cost savings of about CHF 135 million by 2012. The remaining structural deficit (loss of revenue for services that are not reimbursed estimated at roughly CHF 65 million p.a.) needs to be resolved with the Swiss government and various political bodies. The Swiss parliament will debate the first partial revision to the Federal Aviation Act in spring 2009, which could place Skyguide on firm financial footing. Currently, Skyguide only receives full compensation for delegated traffic control services from France.

Business profile Despite rising traffic levels at the beginning of 2008, air traffic volumes were negatively affected by the dwindling economy and therefore flights under instruments (IFR) remained more or less stable at 1.24 million (up 0.3% YoY). About 40% of the total traffic handled by Skyguide consists of arrivals and departures at Swiss airports, while the remaining 60% comprise international en-route traffic. Despite another increase in air traffic movements in FY 2008, punctuality improved by 31.9% and over 93% of daily traffic volume was handled on time. The improvement reflected a substantial decrease to 1.10 minutes in departure delay in average air traffic flow management (2007: 1.64 minutes). Thereby the average delay per delayed flight decreased from 16.5 minutes to 15.6 minutes, which compares favorably to Europe peers (19.2 minutes). In line with the aforementioned slight increase in growth in air traffic volumes, air navigation services (ANS) revenue rose 0.7% to CHF 367 million. Route fees accounted for 62% of ANS and approach charges for 27%, while the Swiss Air Force�s contribution added a further 9%. According to Skyguide, just over 45% of the total civil revenue stems from five airlines (Swiss, Lufthansa, EasyJet, Air France and Ryanair), while the remaining 55% is highly fragmented with no airline accounting for more than 3.3% of the total civil revenue.

Financial profile Skyguide�s operations are financed almost entirely by fees, which must cover all costs (personnel costs, general operational costs, depreciation and interest). Since Skyguide is a non-profit company, it passes on any surplus on the cost or income side in the form of fee reductions or in-creases. Given that Skyguide sets the fees to balance its annual result rather than to maximize profit, the usual profitability ratios are not very meaningful metrics in assessing the company, in our view. As a result of the reported net loss, adjusted FFO decreased by 6.1% to CHF 97 million. Turning to capital structure, the adjusted net debt increased to CHF 269 million (up 44.7% YoY) due to the negative free cash flow as well as the increase in pension debt. Accordingly, the adjusted FFO/Net debt decreased to 36.0% (2007: 55.5%). However, adjusted FFO/interest coverage increased further from 13.8x to 16.8x, which is more than adequate given Skyguide�s strong business profile and implicit government support. Adjusted equity declined to CHF 278 million (end-2007: CHF 288 million), mainly negatively affected by the performance decline.

Event risk/outlook Skyguide registered an 11.4% decrease in air traffic volume in Q1 2009, resulting from the ongoing economic downturn. Overall, Skyguide expects a decline in traffic volume of some 12% for FY 2009, which is projected to reduce annual operating revenue by around CHF 30 million. Management highlighted that these negative effects should be compensated by additional costs.

Fabian Keller, Daniel Rupli

Skyguide (CS: AAA, Stable) Sector: Air traffic control

Company description

Skyguide is responsible for managing and monitoring civil and military air traffic in Switzerland, and in designated sectors of adjacent foreign airspace. It is a non-profit, limited company under Swiss private law, and is 99.94%-owned by the Swiss Confederation (statutory minimum stake 51%). Skyguide generated air navigation services revenue of circa CHF 367 million in 2008, with overflight and approach fees being the main sources of income. Skyguide is active at the two national airports (Geneva, Zurich), five regional airports and a further seven primarily military aerodromes.





001957462 / 2.625% SGSANS 19/10/2011 HOLD Skyguide n.r. n.r. CHF 200

n.r. = not rated


P&L

Sales 329 364 367 334

Gross margin 91.6% 92.7% 92.4% 92.4%


Adjusted EBITDA Margin 16.2% 15.9% 18.4% 15.9%

Adjusted EBIT -1 -4 -3 -14

Adjusted EBIT Margin -0.2% -1.2% -0.7% -4.1%


Net profit 19 3 -10 0

Cash flow



CAPEX 78 63 50 49

Adjusted FCF -14 -24 -2 0

Adjusted DCF -14 -24 -2 0

Balance sheet








Key ratios



Adjusted EBIT/Net interest coverage -0.1x -0.9x -0.6x -2.9x



Adjusted FCF/Net debt -8.3% -12.8% -0.9% 0.1%


Capital structure

Core working capital/sales 9.5% 9.8% 10.5% 18.8%

Cash cycle -41d -39d -98d -68d






Margin development

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2009 2010 2011 2012 2013

CHF m

Cash Committed credit facilities Bond


Monopoly position

Implicit support from the Swiss Confederation

FAB EC and Single European Sky initiatives


Continued earnings shortfalls

Litigation risk arising from potential accidents

Restructuring of European airspace

Volatile air travel sector

Next events


Website

www.skyguide.ch




Rating rationale Our Mid A credit rating for SRG is based on the company�s above-average business profile and above-average financial profile. The rating is supported by SRG�s close ties to the Swiss government due to its public service mission, its dominant market position in Switzerland, its stable license-fee income, the company�s financial supervision by DETEC and its conservative financial policy. The rating is constrained by the company�s limited growth prospects in Switzerland, regulatory limitations on its advertising and sponsorship income (and the fact that this income is cyclical in nature), mounting competitive pressure, the cost-intensive regulatory requirements of SRG�s public service mission, the company�s financial independence from the Swiss government (no explicit support mechanism) and the ongoing financing gap. The rating outlook is Stable in view of SRG�s proven close ties to the Swiss government and continued dominant market position in Switzerland, and our expectation that the existing financing gap will be closed in the medium term.

Corporate strategy SRG is legally obliged to fulfill its public service mission as stipulated by the Swiss Federal Constitution, the new Radio and Television Act (RTVG) of 24 March 2006, and the terms of its new license granted on 1 January 2008. Accordingly, the company is required to provide the public with high-quality, independent radio and television programs. In realizing this strategy, the company pays particular attention to Switzerland�s special situation with four language regions. SRG also provides an internet platform to complement and support its radio and television programming (added-value strategy). Following recent changes to the media landscape, SRG will focus on two strategic aspects in the coming years, i.e. structural reforms and media convergence. The former involves focusing on a uniform strategy and streamlining the operating functions. The new organizational structure is planned to be finalized at the end of June 2009 and should be implemented in 2010. In line with the ongoing demand for multimedia services (media convergence), SRG SSR will refocus internal processes and structures to enhance the company's service portfolio and thereby provide improved market services. The corresponding structural and organizational changes are planned to be implemented by 2010.

Business profile SRG is a civil-law association pursuant to Article 60 et seq. of the Swiss Civil Code. The group is comprised of seven business units (SF, SR DRS, TSR, RSR, RTSI, RTR and Swissinfo) and controls

three subsidiaries. As Switzerland�s largest electronic media company, SRG occupies a strong position in its home market; the company is also able to keep most of the license fees it collects in Switzerland. Around 70% of the company�s activities are financed by license fees, which create extremely stable and regular income flows, but are limited by geographical and regulatory constraints. The new Radio and Television Ordinance (RTVV), which came into force in April 2007, has imposed strict regulatory conditions on the company�s income from commercial activities (around 30%). For example, the new ordinance forbids advertising and sponsorship in the rapidly expanding online segment and supports foreign broadcasters with its new provisions governing commercial breaks. These sources of income are further limited by Switzerland�s comparatively small population. The RTVG confirmed the need for a robust public audiovisual service. The new license, granted to SRG on 1 January 2008, approved the company�s prior programming schedule, but also called on the company to bolster its quality management. In other words, SRG�s public service commitment will remain demanding (e.g. provision of information on a nationwide basis across four language regions, sign language, subtitles, audio description, etc.) and cost-intensive.

Financial profile Group revenue remained stable at CHF 1.6 billion, negatively affected by a lower commercial income following the ongoing economic downturn. The adjusted EBITDA margin declined from 4.2% to 2.9%, illustrating the insufficient coverage of the company's program and production costs related to major sporting events such as EURO 2008 and the Olympic Games in Beijing. Additionally, SRG�s profitability is once again well below the historical average. With an adjusted FFO of CHF 24 million, the company�s cash-flow generation capacity has further softened from an already low level. In 2008, adjusted net debt increased from CHF 90 million to CHF 317 million negatively affected by its net pension debt of CHF 178 million compared to last years net pension surplus, while the adjusted liquidity position decreased from CHF 116 million to CHF 69 million. Therefore, the adjusted FFO/Net debt ratio deteriorated from 92.6% to 7.6%, thereby clearly missing our threshold of above 40% over the credit cycle. An increase in expenditure (partially driven by regulation) coupled with stable income over the past years has created an income/expenditure gap, which again resulted in a net loss of CHF 79 million in 2008. However, SRG cannot apply to increase its license fees until 2010. In addition, the new RTVG has further narrowed the company�s financial prospects in terms of revenue. Event risk/outlook Management guides for a further net loss in FY 2009, given the unfavorable economical environment, further increasing competition and the lower income from commercial activities in particular. Accordingly, the company�s financial figures will likely remain under pressure in 2009 due to ongoing subdued cash flow generation and increasing indebtedness. In order to counteract the persistent income/expenditure gap, SRG announced it would increase its cost-saving program by CHF 20 million to CHF 120 million. Although the cost reduction initiatives are challenging, in our view, we anticipate that the cost-saving measures coupled with potential new sources of income will close the income/expenditure gap in the medium term.


SRG SSR idée suisse (CS: Mid A, Stable) Sector: Media

Company description

The Swiss radio and TV broadcasting company SRG SSR idée suisse (SRG) is a media company established under private law and managed in accordance with the principles of stock corporation law. The company operates eight television channels and 16 radio stations in Switzerland�s four national languages and provides supplementary services via Teletext and an internet platform. The company is organized as a group, with seven regional business units, as well as subsidiaries and investment companies. SRG is an association run as a non-profit organization which, in accordance with the system of mixed financing, receives around 70% from radio and television license fees and around 30% from commercial revenues.







P&L

Sales 1,599 1,629 1,626 1,642

Gross margin 62.5% 65.0% 64.0% 67.5%


Margin 4.8% 4.2% 2.9% 4.8%

Adjusted EBIT -27 -13 -45 -8

Margin -1.7% -0.8% -2.7% -0.5%


Net profit -24 -17 -79 -15

Cash flow



CAPEX 102 109 114 137

Adjusted FCF -22 -17 -51 -56

Adjusted DCF -22 -17 -51 -56

Balance sheet








Key ratios


Adjusted EBITDA/Net interest coverage -20.8x 22.3x 129.6x 12.5x

Adjusted EBIT/Net interest coverage 7.3x -4.3x -124.9x -1.3x



Adjusted FCF/Net debt -28.0% -19.4% -16.0% -16.1%


Capital structure

Core working capital/sales 5.0% 3.9% 0.9% 1.4%

Cash cycle 2.0d 3.3d -1.0d -1.0d






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2009 2010 2011 2012 2013

CHF m

Cash Committed credit facilities (maturing in 2013) Loans


Dominant market position in Switzerland

Close ties to government

Entitlement to license fees


Income/expenditure gap

Restrictions on advertising/sponsorship income

Increased competition due to RTVG

Cost-intensive public service mission

Next events

End-April 2010: FY 2009 result

Website

www.srg.ch




Rating rationale Our Mid A credit rating for Swisscom is based on the company�s above-average business profile and above-average financial profile. The rating reflects Swisscom�s leading position in the Swiss telecommunications market, its attractive operating margins compared to the rest of Europe, robust cash-flow generation, ready access to the international capital market, largely conservative financial policy, the Swiss government�s majority shareholding and the license granted to the company to provide basic telecommunication services throughout Switzerland (2008�2017). The rating is constrained by the ongoing deregulation of the telecommunications market, which increases competition and negatively impacts margins. Moreover, the company has limited growth opportunities in the Swiss market, while the integration of Italian provider Fastweb has not only had a considerable impact on the company�s balance sheet, but also entails integration risks. The rating outlook is Stable in view of Swisscom�s continued solid cash flow generation, its announced focus on debt reduction and the government�s majority stake in the company.

Corporate strategy Swisscom focuses primarily on enhancing growth across the group. In order to achieve this growth, the company�s strategic targets are based on a three-pillar approach. The first pillar focuses on maximizing the company�s core business in Switzerland by delivering leading products with the best possible profitability. In addition, the company aims to optimize its services in line with its new customer-focused organization. The second pillar centers on extending the company�s existing core business. The aim here is to offset the constant erosion of core business revenues by providing an extended range of products and services along the value-added chain. The third pillar focuses on tapping new sources of revenue in growth segments in order to strengthen the company�s existing business and, above all, to offset declining margins in Switzerland.

Business profile From 1 January 2008, Swisscom�s organization has become more customer-oriented and reflects technological developments within the industry. The group's previous companies � Fixnet, Mobile and Solutions � have been replaced by the Residential Customers, Small and Medium-sized Enterprises and Corporate Business divisions, all operating under the auspices of Swisscom (Switzerland) AG. The three other operating units consist of Swisscom IT Services, Swisscom Participation and Fastweb. The group's revenue is mainly

driven by the two main operating segments Swisscom (Switzerland) AG and the Italian provider Fastweb. The former account for around 71% of consolidated revenue, mainly driven by a stable development in the residential segment whereas Fastweb contributes another 22%, benefiting from its position as the second largest provider of telecom services in Italy, one of Europe's most attractive broad markets. The Swiss telecommunications market offers limited growth potential due to its size and level of saturation, and undergoes a continuous process of deregulation. As a result, Swisscom�s growth prospects in its domestic market are limited, while margins, especially in the company�s core businesses, are being consistently eroded due to increased competition and growing regulatory pressure to lower tariffs. Swisscom aims to counteract these effects by expanding its range of products and services, utilizing earnings potential and advancing into new growth markets.

Financial profile Net revenue increased by 10.0% relative to the prior year to CHF 12.2 billion, mainly driven by Fastweb. The adjusted EBITDA margin declined in 2008 from 42.4% to 41.6%. Nevertheless, Swisscom�s profitability is at a solid level. The cash flow generation capacity continues to be sound and the adjusted FFO increased from CHF 4.1 billion to CHF 4.4 billion. Adjusted net debt increased further in 2008 to CHF 13.2 billion (up 3.4%) resulting from higher pension and leasing liabilities. Accordingly, the company�s balance sheet structure deteriorated further, with adjusted net leverage of 69.7% (prior year: 68.3%). However, the company's liquidity position remains solid, given the adjusted net cash position of CHF 969 million compared with the group's short-term financial debt of CHF 216 million. Additionally, no major refinancing needs are due in 2009, whereas only moderate refinancing needs occur in 2010, with a volume of CHF 739 million (bonds CHF 350 million / private placement CHF 374 million). The adjusted FFO/Net debt ratio slightly increased to 32.9% (up 1.0%), and adjusted net debt/EBITDA improved from 2.7x to 2.6x. We expect an adjusted FFO/Net debt ratio of at least 35% and a maximum adjusted net debt/EBITDA of 2.5x over the cycle for the current rating. While Swisscom�s financial headroom is currently limited due to its high level of debt, we believe that the company�s key figures will rebound during the credit cycle. Therefore, we appreciate management's announcement to speed up the reduction of net debt by proposing a lower dividend payment of CHF 19 per share (approximately 40% of the company's OPFCF). In addition, neither a special dividend nor a share buyback program is planned for FY 2009.

Event risk/outlook Swisscom gives a cautious outlook for FY 2009. We project lower net revenue of around CHF 11.9 billion and adjusted EBITDA of approximately CHF 4.8 billion. CAPEX should come in around CHF 2.0 billion. We expect Swisscom to post a lower operating profitability in FY 2009 due to the ongoing challenging market environment, particularly the continued competition in its saturated home market, as well as the ongoing regulatory pressure. Given the company�s current high debt level, any major change in the Swiss government�s majority shareholding (which we do not see as very likely at the moment) would exert some pressure on the current rating.


Swisscom (CS: Mid A, Stable) Sector: Telecommunications

Company description

Swisscom AG is the leading telecommunications provider in Switzerland and offers a complete range of services and products for mobile, fixed and IP-based voice and data communication. Since January 2008, Swisscom is made up of four operating areas: Swisscom Switzerland, Swisscom IT Services, Swisscom Participation and Fastweb. The company meets a good two thirds of domestic demand from both private and business customers. In addition, through the Italian provider Fastweb, Swisscom has a foothold in one of Europe�s most attractive broadband markets. The company is also active in IT infrastructure outsourcing and the management of communication infrastructure.





0032254705 / 3.50% Swisscom AG 19/07/2013 HOLD Swisscom AG A�/Stable A2/Stable CHF 550

003913932 / 3.50% Swisscom AG 08/04/2014 HOLD Swisscom AG A�/Stable A2/Stable CHF 1,250

0038496751 / 4.00% Swisscom AG 17/09/2015 HOLD Swisscom AG A�/Stable A2/Stable CHF 500


P&L

Sales 9,652 11,089 12,198 11,906

Gross margin 80.9% 78.8% 77.5% 76.0%

Adjusted EBITDA 3,925 4,697 5,079 4,837

Margin 40.7% 42.4% 41.6% 40.6%

Adjusted EBIT 2,362 2,517 2,650 2,483

Margin 24.5% 22.7% 21.7% 20.9%

Adjusted interest expense 178 659 1,648 880

Net profit 1,598 2,068 1,756 1,710

Cash flow

Adjusted FFO 3,559 4,084 4,352 4,146

Adjusted CFO 3,264 3,437 3,795 3,766

CAPEX 1,324 2,025 2,050 2,000

Adjusted FCF 2,219 1,606 2,025 2,046

Adjusted DCF 736 430 697 782

Balance sheet


Core working capital 97 -37 -57 -236






Key ratios








Capital structure

Core working capital/sales 1.0% -0.3% -0.5% -2.0%

Cash cycle -225.8d -268.9d -200.8d -201.4d





Margin development

10%

20%

30%

40%

50%

2006 2007 2008 2009E

50%

60%

70%

80%

90%




0

4,000

8,000

12,000

16,000

2006 2007 2008 2009E

CHF m

55%

60%

65%

70%

75%



10%

20%

30%

40%

50%

2006 2007 2008 2009E

0x

20x

40x

60x

80x



0

1,000

2,000

3,000

4,000

Year end2008

2009 2010 2011 2012 2013

CHF m

Cash Bonds & loans


Solid profitability

Leading position in Swiss market

Sustained solid cash-flow generation

Swiss government�s majority shareholding


Increased competition

Declining profitability

Focus on Swiss market

Regulatory risk

Next events



Website

www.swisscom.com




Rating rationale Swiss Life's High BBB rating is based on its above-average business profile and an above-average financial profile, which nevertheless suffered from a weak FY 2008 performance. The global deterioration of the financial markets in 2008 led to a negative performance in the company�s operating activities, driven by losses on investments and lower premiums earned. Thanks to one-offs related to the sales of the Dutch and Belgian businesses, as well as Banca del Gottardo, Swiss Life still presented a net profit in FY 2008, but which was significantly lower than the previous year. The financial metrics were further pressured due to Swiss Life�s weaker capitalization measures, which were already more aggressive than some of its peers. The company's business profile benefits from its leading market position in Switzerland with an overall market share of 28%. In addition, the cooperation agreement with the Talanx group should help to strengthen its market position in Germany and also help to accelerate revenues at AWD Group, in our view. After the rating downgrade due to the weak FY 2008 results, we changed the outlook back to Stable from Negative as we think Swiss Life's credit metrics are comfortably positioned within the new category for now. However, we do not rule out further downward pressure, given the relatively large share of BBB and lower-rated corporate bonds in its investment portfolio (CHF 8.5 billion).

Corporate strategy Swiss Life focuses primarily on the life and pension business in a number of key European markets (Switzerland, Germany, France, Luxembourg, Liechtenstein), and is also active in institutional asset management. Swiss Life aims to position itself as a leading specialist for life insurance and pension solutions and to achieve long-term growth. The focus remains on growing profits in its core business areas. In addition, Swiss Life aims to enhance its distribution capability through its strategic partnership with AWD Group (Swiss Life held 96.7% at end-December 2008), as well as its cooperation agreement with Talanx, which Swiss Life recently announced. The company also targets a further reduction of its MLP stake to below 10%, after selling 8.4% to Talanx earlier this year. At its Investor's day in December 2008, Swiss Life announced that it will not be able to achieve the rather ambitious targets it set the previous year in the near future, as a result of the changed economic environment. So far, we have only seen that Swiss Life's primary focus for the current year will be on profitability and cost savings and await further guidance with regard to the mid- to long-term outlook.

Business profile The group�s activities are split into seven segments: Insurance Switzerland (accounting for 57% of the group's net premiums earned in FY 2008), Insurance France (25%), Insurance Germany (13%), Insurance Other (1%), Investment Management (CHF 94 million segment profit in FY 2008), Other (includes various finance and service companies; CHF 9 million), and AWD (CHF �41 million). The insurance businesses primarily consist of life insurance operations and � to a very small extent � non-life. Gross written premiums, policy fees & deposits dropped 4% to CHF 18.5 billion due to the weak performance in Switzerland and Germany offset by good demand in France. As such, the company�s market share declined 200 basis points to 32% at end-December 2008. The market share for individual insurers also declined slightly to 19%, whereas the overall market in Switzerland share stood at 28%. The embedded value was CHF 8.5 billion, reflecting a 34% drop versus the prior year, particularly due to the negative trend in the financial markets, as well as reduced expected future earnings as seen with other insurance companies.

Financial profile Swiss Life revealed a net income of CHF 345 million thanks to the gains from the aforementioned disposals. Continuing operations revealed a net loss of CHF 1.1 billion for the full year 2008, compared to a profit of CHF 726 million in the same period the previous year. Capitalization deteriorated due to investment losses as well as CHF 1.2 billion payouts to shareholders. Hence, shareholders� equity dropped 9.2% to CHF 6.6 billion. However, as the financial debt position has been reduced, the company reported improved gearing and leverage ratios. Core capital was also down 13.7% due to the aforementioned negative trend in shareholders� equity and decreased hybrid instruments, and stood at CHF 10.0 billion (FY 2007: CHF 11.6 billion). The group�s solvency ratio dropped just slightly to 159% from 162% the previous year, despite the negative trend in core capital. The insurance business investment portfolio declined 5.6% to CHF 106.3 billion in FY 2008. Swiss Life reduced its gross exposure to equities to 2.2% from 8.0%, and its exposure to alternative investments to 3.1% from 5.3%. Thanks to hedges, the net equity exposure stood at 0.8%. Bonds accounted for 59%, of which corporate bonds and government bonds were split 50-50. Within the corporate bonds, we highlight the relatively large exposure of CHF 8.5 billion in BBB and lower-rated bonds. Swiss Life only had a CHF 538 million exposure to CDO/CLO, ABS and RMBS.

Event risk/outlook Gross written premiums dropped by �3% to CHF 6.4 billion in Q1 2009 due to high competition in France, partially offset by a solid trend in its home market in Switzerland. The company stressed that its primary focus is on profitability for FY 2009. Cost-saving initiatives, such as a potential CHF 90 million in savings have been implemented. The long-term perspective for life insurance continues to be strong due to demographics and greater pressure on governments across Europe with respect to retirement provision laws. The largely de-risked investment portfolio should further help to address earnings volatility. However, we highlight the large share of corporate bonds, which could adversely affect performance in the future, given the generally deteriorating trend in corporate credit quality.

Daniel Rupli

Swiss Life (CS: High BBB, Stable) Sector: Insurance

Company description

Swiss Life is among the leading European providers of pension and life insurance products active in Switzerland, France, Germany, Luxembourg, Liechtenstein and Singapore. It is the market leader in its home market of Switzerland, with a 28% market share (32% in group insurance and 19% in individual insurance). The group is also active in institutional asset management. Since March 2008, Swiss Life is the majority shareholder of the AWD Group, a leading independent European financial services provider. To further expand its market presence in Germany, Swiss Life announced in March 2009 a cooperation with Talanx which itself acquired 5.9% of Swiss Life shares (intention to increase to 9.9%), as well as an 8.4% stake in MLP previously held by Swiss Life.





No straight CHF-denominated bonds outstanding

Financial overview (CHF m) 2006* 2007 2008 2009E

P&L

Gross premiums written 12,493 13,552 13,558 "

Net premiums earned 12,283 13,316 13,254 "

Investment income 4,129 4,878 4,563 "

Net realized investment gains/losses 1,235 45 -3,963 !

Net income (from continuing operations) 576 726 -1,143 !

Discontinued operations 378 642 1,488 #

Net attributable profit 954 1,368 345 !

Comprehensive income 146 316 393 !

Balance sheet



Acquired present value of future profits 17 24 21 "

Goodwill & other intangibles 718 507 2,205 "

Total assets 185,981 178,782 134,344 "

Technical liabilities 136,864 105,005 99,723 !

Less: Reinsurer share of technical provisions -969 -975 -447 "

Financial debt 2,712 3,621 3,123 "

Operational debt 98 0 0 "

Equity 7,579 7,277 6,609 !

Market capitalization



Insurance segment result 949 1,047 -715 !

Embedded value 10,665 12,837 8,457 "

New business sales (APE) 876 764 974 "

Value of new business 105 118 78 "



Gross premiums written n.a. n.a. n.a. n.a.

Combined ratio n.a. n.a. n.a. n.a.

Other key ratios

Return on average equity 12.5% 18.4% 5.0% !

Comprehensive return on average equity 1.9% 4.3% 5.7% !

Gearing (financial debt/equity) 34.5% 49.4% 46.9% #

Leverage (financial debt/[debt + equity]) 25.7% 33.1% 31.9% #


Solvency margin 194.0% 162.0% 159.0% "

* = restated n.a. = not available Accounting standard: IFRS

Split segment result

CHF m

-1500

-750

0

750

1500

2006 2007 2008Insurance Switzerland Insurance FranceInsurance Germany Insurance OtherInvestment Management AWDOther

Embedded value - Life CHF m

0

3,500

7,000

10,500

14,000

2005 2006 2007 2008

0.0%

5.0%

10.0%

15.0%

20.0%

Embedded value

New business margin (r.h.s.)

Equity and leverage CHF m

0

2,000

4,000

6,000

8,000

2005 2006 2007 2008

20.0%

25.0%

30.0%

35.0%

40.0%



Bonds

Loans

Equities

Real Estate

Cash

MortgagesAlternative Inv.


Market leader in home market Switzerland

Strengthening distribution channels through AWD

Talanx cooperation agreement should help to increase market presence in Germany

Focus on core business activities


Weak performance in FY 2008

Relatively large exposure to lower-rated corporate bonds in its investment portfolio

More aggressive capital management

Difficult markets in harsh economical environment

Next events



Website

www.swisslife.com




Rating rationale Swiss Re's Low AA rating is based on its strong business profile and above-average financial profile, which have deteriorated, however, given the loss recorded in FY 2008. The group's business profile benefits from a very strong competitive position as the world's largest reinsurer active in more than 25 countries. The company enjoys a broad diversification not only geographically, but also through its wide range of products in the property, casualty, life and health segments. In contrast, the above-average financial profile has suffered over the last few quarters as a result of the investment losses related to the exposure in its structured CDS portfolio. We acknowledge the company's ability to raise capital through the transaction with Warren Buffet�s Berkshire Hathaway, which invested CHF 3.0 billion in Swiss Re in the form of a convertible perpetual capital instrument. To our surprise, the group decided not to conduct a rights issue, which it had previously considered as an option to raise another CHF 2 billion. In addition to the pullback of another capital increase, we also note that the company still carries a relatively large exposure to securitized products and that these markets, in particular, are still exposed to large volatility. As such, we set Swiss Re's outlook to Negative on the back of further potential mark-to-market losses driven by current economic conditions.

Corporate strategy Swiss Re�s core competence is risk transfer and capital management, and it aims to be the market leader within its field. The group concentrates on four strategic key objectives: generating economic profit growth, improving the quality and stability of earnings, enlarging market scope, and advancing organizational excellence. Swiss Re focuses on sustainable and profitable growth on a risk-adjusted basis. Aimed at reducing earnings volatility and improving capital efficiency, Swiss Re also transfers insurance risks to the capital markets through securitizations. With the presentation of its Q1 2009 results, Swiss Re provided an update on its new mid-term targets: 1) to generate sufficient organic capital before March 2012 to avoid dilution for existing shareholders. 2) 14% return on capital in reinsurance. 3) capital adequacy for the AA level. 4) CHF 400 million cost-savings by end-2010. Swiss Re targets a combined ratio of 95%, assuming a normal level of natural catastrophes. The group aims to grow both organically and through acquisitions as seen in the past with several acquisitions being successfully completed.

Business profile Swiss Re operates through four business segments. The P&C segment (CHF 14.4 billion premiums earned in FY 2008) accounted

for 56% of the group's premiums earned and consists of property (34% of the segment's premiums earned), casualty (36%), specialty lines (27%), and non-traditional business (3%). Swiss Re's combined ratio increased to 97.7%, mainly due to the impact of natural catastrophe claims, particularly from Hurricane Ike, and the deterioration in the credit reinsurance business. Through its L&H segment (CHF 11.1 billion premiums earned in FY 2008), Swiss Re offers a variety of business lines, such as traditional life (accounting for 20% of operating profit), traditional health (42%), and Admin Re (38%). The Asset Management unit focuses mainly on two mandates, the asset management of the reinsurance activities (CHF 125 billion of assets under management) and providing capital market solutions for insurance risks to its clients. The return on investment in FY 2008 stood at 4.7%, despite the dislocated financial markets. The company's other capital market activities have been discontinued or put in run-off in the Legacy unit, which focuses on the risk reduction efforts for these activities. The unit accounted for a CHF �5.9 billion operating loss in FY 2008.

Financial profile Despite a 19% drop in premiums earned to CHF 25.5 billion in FY 2008, Swiss Re revealed a good operating result in its traditional businesses P&C (weakened due to the quota agreement with Berkshire Hathaway and FX) and L&H (adverse FX impact). However, net profit was negative and stood at CHF �864 million as a result of the mark-to-market loss in its Legacy unit, resulting in a loss of CHF �5.9 billion. Capitalization suffered heavily due to the negative result presented in FY 2008. Shareholders� equity recorded a significant drop to CHF 20.5 billion at end-December 2008. Based on Swiss Re�s internal capital model, available capital was CHF 30.9 billion (�38% YoY), which nevertheless still resulted in a solid capital adequacy ratio of 207% (299% at end-2007). Although this figure still lies within Swiss Re�s internal target range of 175%�200%, it has deteriorated markedly. On the back of the aforementioned recapitalization through Berkshire Hathaway via the issuance of a CHF 3.0 billion convertible bond, Swiss Re's capitalization strength will increase, but we highlight the ongoing exposure to its investment portfolio, which could further impact profitability and capitalization. Swiss Re�s investment portfolio (excluding unit-linked and with-profit business) decreased to CHF 160.2 billion, primarily as a result of sales and lower market values in the securitized products and corporate bond portfolios. The company has reiterated its intention to further reduce risk and that it had already done so in the past few months. However, the company still carries CHF 32.5 billion of securitized products in its AM & Legacy unit, which is split into 36% Agency securities products, 22% Residential mortgage backed securities (RMBS), 19% Commercial mortgage backed securities (CMBS), 19% Other asset backed securities (ABS), and 4% Others.

Event risk/outlook Swiss Re reported a solid set of Q1 2009 figures in its core businesses, with P&C revealing a 5% rise in premiums to CHF 3.9 billion due to attractive contract renewals, partially offset by L&H posting a slight 2% drop in operating revenues. Strong underwriting results and fewer natural catastrophes led to a strong 90.2% combined ratio. Swiss Re reiterated the improving outlook in terms of client demand and reinsurance pricing for both P&C and L&H.

Daniel Rupli

Swiss Re (CS: Low AA, Negative) Sector: Insurance

Company description

Swiss Re is the world�s largest reinsurer by gross written premiums, following the acquisition of GE Insurance Solutions. The group provides an excellent diversification not only geographically, but also offers a broad range of traditional life and non-life reinsurance products covering the entire spectrum of underwriting risks, supplemented by insurance-based corporate finance solutions and risk management services. Its operating activities are split across the three business segments, Property & Casualty (P&C), Life & Health (L&H), and Asset Management (AM). The company created a fourth segment "Legacy," which manages other capital market activities. Through Admin Re, Swiss Re has a growing franchise in the management of run-off life assurance businesses.





002104265 / 2.0% SCHREI 26/04/2010 HOLD Swiss Re A+, Stable A1, Stable CHF 600

000801104 / 3.75% SCHREI Perp-11 (subordinated) HOLD Swiss Re A�, Stable A3, Stable CHF 500

001249133 / 4.0% SCHREI 29/06/2015 HOLD Swiss Re A+, Stable A1, Stable CHF 150


P&L

Net premiums written 29,079 31,217 25,659 !

Net premiums earned 29,515 31,664 25,501 !

Fee income from policyholders 879 955 808 "

Net investment income 7,991 10,692 7,881 "

Net realized investment gains/losses 2,106 -739 -9,482 !

Net attributable profit 4,560 4,162 -864 !

Comprehensive income 3,041 3,311 -9,104 !

Balance sheet


Deferred acquisition costs 5,270 5,152 4,311 #

Acquired present value of future profits 7,550 6,769 6,139 "

Goodwill 4,838 4,897 4,265 "

Total assets 272,601 293,055 227,943 "

Technical liabilities: Life (other than linked) 59,519 65,383 52,619 !

Technical liabilities: Life (linked business) 42,834 41,340 34,518 !

Technical liabilities: Non-life business 80,391 73,171 62,802 !

Less: Reinsurer share of technical provisions -18,699 -14,232 -11,934 !

Financial debt 9,890 9,877 7,326 "

Equity 30,884 31,867 20,453 !

Market capitalization 37,115 29,798 18,285 !



Operating profit (excl. non-participating net realized inv. gains) 1,381 1,320 697 "

Embedded value 22,639 n.a. n.a.



Operating profit 5,613 4,471 2,746 "

Loss ratio 63.2% 61.9% 68.9% "

Expense ratio 27.3% 28.2% 29.0% "

Combined ratio 90.5% 90.1% 97.9% #

Other key ratios

Return on average equity 16.5% 13.3% -3.3% !

Comprehensive return on average equity 11.0% 10.6% -34.8% !

Gearing (financial debt/equity) 32.0% 31.0% 35.8% "

Leverage (financial debt/[debt + equity]) 24.3% 23.7% 26.4% "

Shareholders' equity/Net premiums written 106.2% 102.1% 79.7% !

Hybrid debt/Total capital 13.8% 17.5% 20.3% "


Capital adequacy

CHF bn

0

15

30

45

60

2005 2006 2007 2008

200%

238%

275%

313%

350%

Available capitalRequired at 99% VaRCapital adequacy ratio (r.h.s.)

Capital management

0

13

25

38

50

2005 2006 2007 2008

CHF bn

0.0%

6.3%

12.5%

18.8%

25.0%

Shareholders' equity Mandatory convertsHybrid capital Senior l-t financial debtHybrid cap./total cap. (r.h.s.) Senior debt/total cap. (r.h.s.)

Equity and leverage

0

10

20

30

40

2005 2006 2007 2008

CHF bn

20%

23%

25%

28%

30%



Government bonds

Corporate bonds

Agency securitized

d

Loans

Cash & cash equiv.

Other securitized products

S-t investments

Equities

Other investments

(incl. real estate)

Mortgages


Strong competitive market position

Broad geographical and product diversification

Successful recapitalization

Transfer of insurance risk to investors

Weaknesses / Threats Significant exposure to structured products in its investment portfolio

Hike in combined ratio in its P&C unit

Intensifying competition due to recession

M&A headline risk

Next events

5 August 2009: Q2 2009 results


Website

www.swissre.com




Rating rationale Syngenta's rating reflects the above-average business profile as a globally leading supplier of crop protection products and seeds, its vast and well-diversified product portfolio, the high innovation rate fueled by its above-industry R&D commitments (with an investment of nearly USD 1 billion in 2008), its sound geographical diversification, the sound growth outlook based on demographic structure developments, and the high barriers to entry. The rating further benefits from the above-average financial profile that is based on sound and stable margins, its strong cash-flow generation capacity with an adjusted FFO of over USD 2 billion in 2008, the conservative capital structure and the very solid metrics as reflected by an adjusted FFO/Net debt ratio of above 70% at year-end 2008, giving Syngenta sufficient financial headroom to pursue its organic and external growth strategy, while maintaining its high shareholder focus. However, factors such as the cyclicality of the industry, agricultural legislation, the uncertain development of biotechnology and its impact on genetically modified products, and the ongoing high shareholder focus constrain the rating to some extent.

Corporate strategy Syngenta's strategy is based on several pillars ranging from above-industry growth through to an ongoing R&D commitment resulting in innovative high-value-adding products, the identification of new market and application opportunities, and continued efforts to further reduce the cost base. In terms of top-line growth, Syngenta intends to fuel this through high R&D investments accounting for around 10% of sales and resulting in a product pipeline with innovative crop protection products and seeds expected to result in a sustainable and promising product launch. Examples of recently launched products include AVICTA, AXIAL, DURIVO, REVUS. In addition, Syngenta is actively pursuing ways to achieve higher crop yields and quality by leveraging its germplasm resources and know-how in advanced breeding technologies. Based on the promising development of biotechnology, the company intends to increase its presence in the US corn and soybean market, thereby benefiting from a growing acceptance of this technology. In terms of identifying new opportunities, Syngenta is actively pursuing opportunities in the area of biofuels that offer high growth and are expected to increasingly substitute common fuels in the coming years. In terms of its ongoing effort to reduce its cost base, the company announced and implemented several efficiency-improvement and cost-saving programs. While Syngenta is strongly positioned globally, further bolt-on acquisitions such as the 49% stake in Sanbei Seeds, SPS Argentina, Goldsmith Seeds and Yoder Brothers altogether totaling an acquisition volume of USD 173 million, with a focus on acquiring new technologies or geographical expansion will likely support Syngenta's overall strategy. Given its financial

headroom and the increasingly challenging market environment, we expect Syngenta to play an active role in the expected near-term market consolidation.

Business profile A small number of global crop protection and seed manufacturers dominate the global market, which is valued at around USD 64 billion. With a market share of around 23%, Syngenta holds the leading market position in the crop protection market, valued at around USD 40 billion, while enjoying the number two position in seeds with a market value of around USD 24 billion. The demand for crop protection products, commercial seeds and fertilizers is driven by the ongoing demand to increase productivity on a shrinking amount of hectares per person. Despite a good growth outlook for the industry, cyclical factors such as price changes for agricultural goods on the back of harvest quality and weather conditions can negatively affect growth patterns. Overall, demand is also influenced by the agricultural policies of governments. With its strong geographical diversification, its considerable R&D spending, and its large capital base to fund the development, production and registration of products, we think Syngenta is well positioned to further increase its market share, geographical reach and product offering, thereby achieving good margins driven by both volume growth and improved pricing besides cost efficiency on a sustained basis.

Financial profile 2008 was an outstanding year for Syngenta, with sales increasing by around 26% to USD 11.6 billion. While volumes increased by a very good 15%, pricing was good at 6%. The achieved cost savings and strong volume growth and pricing flexibility managed to offset the high raw material prices, thereby supporting a further increase in the adjusted EBITDA margin from 21.1% to 21.3%. As a result, Syngenta's adjusted FFO increased to above an impressive USD 2 billion, up from USD 1.5 billion. Despite an increase in its adjusted net debt base from nearly USD 2.0 billion to just over USD 2.9 billion, key metrics such as the adjusted FFO/Net debt ratio, with a value of more than 70%, give the company plenty of financial headroom under the current rating, considering an adjusted FFO/Net debt threshold of 45%. We view Syngenta�s liquidity as very solid, given its cash cushion of USD 808 million in addition to its committed USD 1.2 billion credit facility maturing 20 July 2013. This is more than sufficient to cover the USD 116 million of maturing debt in addition to funding the dividend, CAPEX and any additional operating expenses in 2009.

Event risk/outlook Following an excellent year in 2008, Syngenta issued a somewhat more cautious outlook for 2009 on the back of the increasingly challenging market environment. In addition, the company is refraining from undertaking a further share buyback in 2009, while increasing the dividend by 25%. This measure will give Syngenta additional financial headroom of around USD 500 million, in our view. We would not be surprised to see the company taking advantage of materializing acquisition opportunities in the near future. We estimate that Syngenta could spend up to USD 1.5 billion on acquisitions without immediately torpedoing its rating. Despite the more cautious outlook for 2009, we expect solid results based on Syngenta�s strong product portfolio and the good demand outlook for agricultural products. The good geographical diversification is likely to benefit sales growth and hence result in further market share gains.

John Feigl

Syngenta (CS: Mid A, Stable) Sector: Specialty Chemicals

Company description

Syngenta is the leading manufacturer of crop protection products and holds the number two position in commercial seeds, with sales of USD 11.6 billion in 2008. The larger Crop Protection division, with sales of 9.2 billion, offers a vast range of herbicides, fungicides, professional products and insecticides, while the smaller Seeds division, which generated USD 2.4 billion of sales, supplies seeds for field crops, vegetables and flowers. Regionally, Europe/Africa/Middle East and NAFTA accounted for 37% and 31% of total sales, respectively, while Latin America and Asia Pacific generated 19% and 13% in 2008. At year-end 2008, Syngenta had some 24,148 employees.





004863723 / 3.5% Syngenta Finance AG 19/12/2012 HOLD Syngenta AG A, Stable A2, Stable CHF 375 m

003843549 / 3.375% Syngenta Finance AG 8/4/2013 HOLD Syngenta AG A, Stable A2, Stable CHF 500 m


P&L

Sales 8,046 9,240 11,624 11,882

Gross margin 79.4% 75.1% 73.4% 73.5%

Adjusted EBITDA 1,637 1,947 2,474 2,535

Margin 20.3% 21.1% 21.3% 21.3%

Adjusted EBIT 1,039 1,484 2,008 2,045

Margin 12.9% 16.1% 17.3% 17.2%


Net Profit 634 1,109 1,385 1,434

Cash Flow

Adjusted FFO 1,184 1,489 2,094 1,724

Adjusted CFO 1,048 1,297 1,490 1,649

CAPEX 325 421 562 679

Adjusted FCF 723 876 928 970

Adjusted DCF 459 575 476 405

Balance Sheet








Key ratios


Adjusted EBITDA/Net fixed charge coverage 26.9x 40.0x 47.2x 32.3x

Adjusted EBIT/Net fixed charge coverage 17.1x 30.5x 38.3x 26.1x





Capital structure


Cash cycle -147.0d -101.3d -83.3d -84.0d

Cash/Adjsuted Gross debt 18.5% 16.8% 16.4% 27.1%





Margin development

0%

5%

10%

15%

20%

25%

2006 2007 2008 2009E

0%

20%

40%

60%

80%

100%




0

2,000

4,000

6,000

8,000

10,000

2006 2007 2008 2009E

USD m

0%

10%

20%

30%

40%

50%



0%

20%

40%

60%

80%

100%

2006 2007 2008 2009E

0x

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50x



0

500

1,000

1,500

2,000

2,500

2008 2009 2010 2011 2012 2013

USD m

Bonds & loansCommitted credit facility (maturing 2013)Cash & near cash year end 2008


Leading market positions and innovation rate

Strong product and market diversification

Good and sustainable market growth outlook due to increasing demand

Strong cash-flow generation and capital structure


Price cyclicality of agricultural products

Legislation risk

High shareholder focus


Next events



Website

www.syngenta.com




Rating rationale Our High A rating is based on UBS' above-average financial profile and strong business profile, which is supported by UBS� size and diversified business profile, both geographically and in terms of products. As the bank revealed a record net loss totaling CHF 19.7 billion, the new management is focusing on balance sheet risk reduction and cost savings to make UBS profitable again. UBS still maintains leading market positions in most of its core businesses, and is among the largest private banks in the world. At end-March 2009, UBS managed about CHF 2.2 trillion of invested assets, which, however, reflects a significant drop form previous years, as a result of the weak financial markets and a record new net money outflow totaling CHF 226.0 billion in FY 2008 and another CHF 14.9 billion in Q1 2009. The bank's Tier 1 ratio stood at 10.5% at end-March 2009, reflecting the risk reduction efforts, despite another loss recorded in Q1 2009. The Stable outlook reflects the successful reduction of balance sheet risks, which the bank intends to reduce further. The new CEO is well known as a rigorous turnaround manager with a focus on cost-efficiency measures. Additionally, UBS transferred some USD 39.1 billion of toxic assets to the Swiss National Bank, which further reduced the bank's exposure. We note, however, that the bank decided to keep some of the positions previously announced to be transferred to the SNB totaling USD 18.1 billion (student loans, auction rated securities), which contradicts the announced strategy in our view. Currently, every business unit is undergoing an extensive review and UBS is also not hesitating to sell profitable businesses, as seen with the recent sale of UBS Pactual to BTG Investments, which resulted in a further reduction of risk-weighted assets and positively impacted the bank's capitalization ratios. This said, new net money outflow, which has been negative over the last five quarters, needs to be monitored over the upcoming months, as this is a leading indicator of client confidence.

Corporate strategy Given the sizeable losses recorded in FY 2008 in particular, but also in Q1 2009, the new CEO is focusing on risk reduction and cost-efficiency measures, as well as winning back client confidence to address the net new money outflow trends seen over the last few quarters. In order to adapt the bank's size to the changed market conditions and lower levels of business, UBS plans to cut costs by roughly CHF 3.5�4.0 billion by the end of 2010. To reach its ambitious cost-saving targets, the bank expects to reduce the number of its employees to about 67,500 in 2010. Every single business is currently being reviewed and in the coming months the management will decide on the businesses in which UBS will remain active and

grow, and which businesses it will exit. To further reduce risk, UBS recently announced the sale of UBS Pactual, its Brazilian investment banking arm, which it bought just two years ago.

Business profile Across the globe, UBS had a total of CHF 2.2 billion AuM, revealing a 32% drop versus the prior year due to the deteriorating market and a record new net money outflow in FY 2008. In February 2009, UBS has been reorganized into five divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management, Investment Bank and Corporate Center. Hence, the former Global Wealth Management & Business Banking unit (FY 2008: CHF 5.4 billion net income, CHF 1.6 billion AuM) has been split into two new divisions. The Wealth Management and Swiss Bank division comprises UBS� global private banking businesses worldwide, excluding Americas, and its Swiss private and commercial banking operations. Wealth Management Americas comprises Wealth Management US, domestic Canada, domestic Brazil and the international business booked in the United States. Investment Bank (FY 2008 net loss of CHF 34.1 billion) comprises UBS� securities trading and investment banking operations. In M&A and equity underwriting, UBS is among the top five firms globally. GAM (FY 2008 pre-tax profit of CHF 1.3 billion; CHF 891 billion AuM) is a leading provider of investment funds and asset management services for institutional clients and financial intermediaries.

Financial profile In FY 2008, UBS posted an all-time record loss of CHF 20.9 billion, as a result of losses attributable to US subprime residential mortgages and other writedowns in the Fixed Income, Currencies & Commodities unit of the Investment Bank. The record loss at the Investment Bank was partially offset by the net gains at Wealth Management & Business Banking and Global Asset Management. Although the bank posted a solid result in its core business areas, the loss in client confidence was reflected in a record net new money outflow of CHF 226.0 billion, of which Global WM&BB contributed CHF 123.0 billion and GAM CHF 103.0 billion. Although the negative trend continued in Q1 2009, net outflows flattened out, staying at CHF 14.9 billion. Asset quality was holding up, as illustrated by an NPL ratio of 1.4%, despite the changed economic sentiment. Despite the record loss, capital ratios profited from the rights issues as well as risk reduction efforts (balance sheet reduction, sale of UBS Pactual, etc.), resulting in Tier 1 and total capital ratios of 10.5% and 14.7%, respectively, at end-March 2009.

Event risk/outlook UBS remained very cautious with regard to an outlook for FY 2009 and highlighted the ongoing difficult environment in the current financial crisis at the presentation of its first-quarter results. The main focus will remain on risk reduction and cost efficiencies, which will be reflected in another round of job cuts targeting 67,500 employees and cost savings of up to CHF 4.0 billion in 2010. UBS aims to maintain its core business, the international wealth management and the Swiss banking business, in combination with its expertise in investment banking and asset management. Although it is very difficult to predict any figures at this stage for the upcoming year, UBS reaffirmed its aim to return to profitability in FY 2009.

Daniel Rupli

UBS (CS: High A, Stable) Sector: Banking

Company description

With total assets of CHF 2.0 trillion at end-2008, UBS is among the world�s largest banks. UBS is a global universal bank with interests across the full spectrum of banking activities, and solid market positions in most of its core businesses. The bank is operating its businesses through four segments: Wealth Management & Swiss Bank, Wealth Management Americas, Investment Bank and Global Asset Management (GAM). With CHF 1.6 trillion in private-client assets under management (AuM) as well as a further CHF 0.6 trillion from wholesale intermediaries and institutional clients, UBS is among the top five banks in the world. In Switzerland, UBS is the leading bank for retail and commercial banking based on market share.





001874062 / 3.125% UBS 30/06/0214 (LT2) HOLD UBS AG A+, Stable Aa3, Stable CHF 400




Income statement summary

Net interest income (NII) 6,521 5,337 6,203 !

Net fee & commission income 25,456 30,634 22,929 "

Net trading income 14,652 -5,086 -25,405 !

Total revenues 46,899 31,167 3,998 !

Operating expenses 32,976 35,463 28,555 #

Operating profit 13,923 -4,296 -24,557 !

Loan loss provisions (LLP) -156 238 2,996 !

Pre-tax profit 15,535 -3,339 -27,154 !

Net income 12,257 -5,247 -20,887 !

Balance sheet summary

Total assets 2,346,362 2,274,891 2,015,098 #

Risk-weighted assets 341,892 374,421 302,273 #

Gross customer loans 299,068 336,867 343,213 #

Impaired loans 2,628 2,392 9,145 "

Non-performing loans 1,889 1,481 4,703 "

Loan loss reserves 1,226 1,003 2,905 !

Customer deposits 555,886 641,892 474,774 #

Senior debt 321,056 399,801 282,832 !

Subordinated debt 14,774 14,129 15,968 "

Hybrid Tier 1 capital 5,633 6,387 7,939 !

Equity 49,686 36,875 32,800 #

Goodwill 12,464 12,829 11,585 #


Key ratios

Profitability

Cost/income ratio 70.3% 113.8% 714.2% #

Return on average equity (ROAE) 26.2% -12.1% -60.0% !

Return on average assets (ROAA) 0.6% -0.2% -1.0% !

Net interest income/Operating revenues 13.9% 17.1% 155.2% !

Capital adequacy

Tier 1 ratio 11.9% 9.1% 11.0% !

Total capital ratio 14.7% 12.2% 15.1% !

Equity/Net loans 16.7% 11.0% 9.6% !

Equity/Total assets 2.1% 1.6% 1.6% !

Asset quality & liquidity

LLP/NII -2.4% 4.5% 48.3% !

Coverage ratio 65.0% 67.7% 61.8% "

Non-performing loan ratio 0.6% 0.4% 1.4% !

Deposits/Net loans 186.6% 191.1% 139.5% #


Profitability

-1.5%

-0.8%

0.0%

0.8%

1.5%

2005 2006 2007 2008

0%

200%

400%

600%

800%

Return on average assets (ROAA)

Cost/income ratio (r.h.s.)

Asset quality

-20.0%

0.0%

20.0%

40.0%

60.0%

2003 2004 2005 2006

0.0%

0.4%

0.8%

1.2%

1.6%

LLP/NII Non-performing loan ratio (r.h.s.)

Capital adequacy

0%

4%

8%

12%

16%

2005 2006 2007 2008

Tier 1 ratio Total capital ratio

Segment information

CHFm

-37,500

-25,000

-12,500

0

12,500

25,000

2005 2006 2007 2008

WMI & Switzerland WM US Business Banking GAM IB Other


New CEO could be able to turn around the business

Risk reduction efforts

Stable capitalization ratios, despite negative profitability

Strong global diversification


Record loss has hampered the bank's financial profile

Net new money outflows weaken profitable business units

Loss of client confidence

Difficult to return to profitability in a recession

Next events

4 August 2009: Q2 2009 results


Website

www.ubs.com




Rating rationale Unique�s average business profile reflects the public infrastructure-like nature of the airport and its important economic role as the largest Swiss airport, as well as the wealthy catchment area of about seven million inhabitants within a two hours' drive. The company operates Zurich airport under a concession from the Swiss Confederation that runs until 2051. Over recent years, Unique has successfully improved its business, which was also supported by the integration of Swiss International airlines (Swiss) into the Lufthansa and Star Alliance. Swiss accounted for 56.3% of total passenger volumes in FY 2008. The average financial profile has improved over recent years from the expansion of the aviation and non-aviation businesses, resulting in improved FCF. We also highlight the increasing share of non-aviation business in total turnover. However, we note the increasing pressure from a high CAPEX program and shrinking passenger volumes due to the current recession and the uncertain outcome with regard to aircraft noise compensation claims. We have changed the outlook for Unique back to Stable from Positive, despite the recent improved credit metrics, as we do not expect Unique to be able to further improve its financial ratios, given the deteriorating passenger volumes indicated in the latest airport statistics.

Corporate strategy Unique owns and operates Switzerland�s largest airport with the aim of further developing the Zurich airport, while maintaining the highest quality standards. Unique also operates a commercial center with a broad range of shops, services and entertainment facilities, which it aims to further expand (i.e. arrival duty-free). Unique offers consulting and management services to airports abroad and holds small equity stakes (in the low double-digit millions) in international airports. With regard to the airport noise compensation claims, Unique announced that, based on current rulings by the Swiss Federal Supreme Court on 18 pilot cases, the expected overall noise costs are estimated at CHF 760 million (base case scenario), below the previous estimate of costs in the range of CHF 0.8�1.2 billion. The Canton of Zurich pre-finances all "old" formal expropriation claims, while Unique covers all "new" noise-related liabilities. Hence, the Canton of Zurich has received 47% and Unique 53% of all noise revenues since H2 2008. The compensation settlements process is expected to be completed by 2015. As noted earlier, the potential noise liability is funded by a fee of CHF 5 per departing passenger. Another expansion area is the Butzenbuehl area, where Unique plans to invest up to CHF 1 billion until its completion in 2018. The project consists of hotel/stay and office facilities, including Health and Beauty, Education and Knowledge, Culture and Events, Brands and Dialogue, Special

Services, Hotels & Long Stay, and Office & Headquarters. A final decision will be made in 2011 and cash contributions by Unique are currently limited to a low double-digit million CHF number in the form of development costs.

Business profile The Aviation segment benefited from sound passenger volume growth of 6.6% to 22.1 million in 2008 (64.7% local passengers / 35.3% transfer and transit passengers). The successful integration of home carrier Swiss into the Star Alliance continued to have a positive impact on traffic volumes. The revenue split shifted further towards the non-aviation segment, which accounted for 38.5% of group revenue, benefiting from the newly opened shopping center as well as from the higher spending per departing passenger (CHF 43.5 in FY 2008). The Butzenbuehl project further underpins Unique's strategy to grow its non-aviation business to enhance its revenue streams.

Financial profile Unique's top-line growth in both segments benefited from sound passenger growth, resulting in 6.5% revenue growth to CHF 855 million. However, the sound passenger volume flattened out in Q4 2008 and has been negative in each month of 2009 so far. Adjusted EBITDA came in at CHF 446 million, reflecting a good 8.8% growth rate YoY, and the margin grew 110 basis points to 52.2%. The bottom line, however, was impacted by several one-offs or non-operating items (i.e. Sigma investments, Swissair liquidation, Bangalore). Balance sheet metrics remained solid for the current rating category, despite a hike in adjusted total net debt to CHF 1.3 billion. As equity also benefited from the sound profitability trend, adjusted net leverage stood at 47.4% (FY 2007: 43.6%). Adjusted FFO also increased 9.3% to CHF 352 million. However, given the increased adjusted net debt, the adjusted FFO/Net debt ratio decreased to 27.3%, which is nevertheless still at the upper end over the cycle. We view the company�s liquidity situation as robust, particularly due to its ability to generate sound cash flow from operating activities, but also due to the availability of unused credit lines of CHF 983 million at end-December 2008. In addition, the company was able to access the capital market by issuing CHF 225 million bonds in January 2009, and has also further increased and extended an existing credit line.

Event risk/outlook Unique guided for a 3%�5% decrease in passenger volume as a result of the current economic crisis. To keep profitability on a relatively stable level, Unique has addressed cost savings by reducing working hours, holidays and overtime, as well as by postponing less urgent maintenance works. The EBITDA margin is expected to come in 70�100 basis points lower. Unique also guided for a 10%�20% lower net income in FY 2009. In addition, the company expects to invest another CHF 250 million in CAPEX, which, however, reflects a CHF 70 million drop compared to the investment guidance communicated earlier, as the company adapts its spending to the current economic environment. Over the next 8�10 years, the company also plans to invest approximately CHF 1.0 billion in the expansion of the Butzenbuehl area under the "Circle" Project.

Daniel Rupli

Unique Flughafen Zurich (CS: Mid BBB, Stable) Sector: Airport Services

Company description

Unique (Flughafen Zürich AG) owns and operates Zurich airport, Switzerland�s largest airport, under a concession from the Swiss Confederation ending in 2051. With a passenger volume of 22.1 million in 2008, Unique is a second-tier hub on a European scale. Swiss International Airlines is the home carrier and, together with its owner Lufthansa and Star Alliance, constitute the airport�s growth engine (70.2% of passenger volume). Unique reported FY 2008 revenues of CHF 855 million, of which 61.5% were generated by the aviation segment, and 38.5% by non-aviation activities. The main shareholders are the Canton of Zurich (33.36% including the BVK pension fund) and the City of Zurich (5.03% including the pension fund of the City of Zurich).





002563677 / 3.125% FLIMSW 14/06/2010 HOLD Flughafen Zurich AG BBB+, Stable n.r. CHF 150

004988862 / 4.5% FLIMSW 18/02/2014 HOLD Flughafen Zurich AG BBB+, Stable n.r. CHF 225

n.r. = not rated


P&L

Sales 737 803 855 820


Margin 52.3% 51.1% 52.2% 51.6%


Margin 26.2% 28.1% 30.1% 28.1%


Net profit 87 131 121 96

Cash flow

Adjusted FFO 282 322 352 337

Adjusted CFO 275 343 356 331

CAPEX 97 109 250 256



Balance sheet








Key ratios




Adjusted FFO/Net interest coverage 3.7x 4.5x 5.6x 0.0x





Capital structure


Cash cycle -30.9d -56.7d -66.3d -66.3d






Margin development

20%

30%

40%

50%

60%

2006 2007 2008 2009E

80%

81%

82%

83%

84%

85%




0

400

800

1,200

1,600

2006 2007 2008 2009E

CHF m

40%

45%

50%

55%

60%



0%

10%

20%

30%

40%

2006 2007 2008 2009E

4.5x

5.3x

6.0x

6.8x

7.5x



0

300

600

900

1,200

Year end2008

2009 2010 2011 2012 2013

CHF m



Largest Swiss airport with wealthy catchment area

Improved profitability and cash flow metrics

Solid progress of home carrier Swiss and Star Alliance Sound development of Non-Aviation segment partially offsets dependence on passenger growth


Weak start into FY 2009 will hamper profitability

High CAPEX program could result in negative FCF

International treaty with Germany

Uncertainty about the size of noise compensation claims remains

Next events


Website

www.unique.ch




Rating rationale Valora's Low BBB rating is based on its average business profile, in particular noting its leading market positions in the kiosk and press distribution businesses, both in Switzerland and in Europe, as well as its average financial profile. After finalizing the sales of its various own-brand food production companies in 2008, Valora implemented its strategy of focusing on core strengths in the retailing sector. After a rather disappointing financial performance in recent years, FY 2008 has revealed slightly improved results, in our view. However, further enhancements are necessary, particularly in the context of a generally challenging environment for the retail sector and Valora's exposure to shrinking markets (i.e. tobacco, press and books). Key credit metrics remained within the range expected for its current rating, as illustrated by an adjusted FFO/Net debt ratio of 27.1%. However, we note that Valora is exposed to a low-margin business.

Corporate strategy In September 2008, Valora launched its "Valora 4 Success" strategy, consisting of four main objectives and based on four core initiatives; (1) expanding and strengthening its core businesses, (2) growth, (3) efficiency & effectiveness, and (4) people (i.e. a stronger corporate culture). Overall, Valora aims for sales growth of 3%�5% p.a., an EBIT margin of 3%�4% by 2012, and significant gains in efficiency and effectiveness, as well as stakeholder satisfaction. Valora targets annual cost savings of CHF 30 million by 2012. Within its core initiatives, Valora identified three focus areas in particular: (1) Valora Retail (i.e. k kiosk), (2) convenience retail (i.e. "avec") and (3) logistics. Key elements of Valora�s strategy to improve the unsatisfactory results of its k kiosks include the strengthening of the k kiosk brand, attaining operational excellence and achieving a sustainable increase in the turnover generated by each outlet, as well as improving margins. Valora also aims to further increase its activities in convenience retailing by expanding its current network of about 38 "avec" convenience stores to some 100 outlets by end-2009 through both the conversion of existing Valora outlets (large k kiosks, Caffè Spettacolos), cooperations and new openings. The focus will be on fresh, high-quality food products and branded non-food items. Overall, Valora expects these measures to result in an annual sales growth rate of above 5% and an improvement in its gross margin by about 1% at Valora Retail. In addition, cost savings will be achieved in logistics through the site location from Muttenz to Egerkingen (to be completed by end-2009), the replacement of old systems with the standard WAMAS system, and the re-engineered press picking and packing processes. The adoption of a centralized and uniform IT structure and the reorganization of its back offices will result in further savings through cost-efficiency measures.

Business profile Valora�s business activities are split across three divisions. Valora Retail (56% of group sales) comprises 1,428 sales outlets located in Switzerland, Germany, and Luxembourg, as well as convenience and gastronomy outlets (k kiosk bistros, "avec" shops, Caffè Spettacolo coffee bars), and more than 200 railway station and airport book-shops in Germany. It primarily sells books and print publications, tobacco products, everyday consumer goods and impulse purchase items. Altered shopping and reading habits have eroded the profit margin mix for the kiosk outlets, making earnings more volatile. Valora Media (19% of group sales) supplies books, newspapers and magazines to Valora�s own kiosks and to small third-party sales outlets. Valora Media aims to transform itself from a pure press wholesaler into an integrated solutions provider for media publishers, reflecting the changing market environment. Valora Trade (25% of group sales) is a leading distributor offering a comprehensive range of services and delivering more than 300 national and international brands to European consumers.

Financial profile Valora's FY 2008 net sales increased by 3.9% to CHF 2.9 billion. The positive growth development was mainly supported by Valora Retail (+5.0% sales growth YoY) and Valora Media (+4.1%), but offset by a weaker Valora Trade (�0.4%). Cost-saving initiatives and the good sales growth resulted in an increased adjusted EBITDA of CHF 215 million, and the adjusted EBITDA margin improved by 50 basis points to 7.3%. Valora's cash flow generation capacity remained solid, with an adjusted FFO of CHF 198 million, still including a small cash flow portion of CHF 5 million from discontinued business (2007: CHF 15 million). The cash inflow of CHF 118 million following the aforementioned business disposal was used to pay down financial debt and to finance the company's share buyback program (CHF 100 million finalized in 02/09). The capital structure softened further, driven by the decrease in adjusted equity to CHF 486 million due to the share buyback program. Nevertheless, adjusted net debt remained fairly unchanged at CHF 730 million. We appreciate the improvement in adjusted FFO/Net debt to 27.1% (+110 basis points YoY) stemming from the solid cash flow generation capacity. Hence, the company still lies within our expected adjusted FFO/Net debt of around 25% over the credit cycle for the current rating. Valora's liquidity position remains sufficient, in our view, with an unadjusted cash position of CHF 158 million, and having almost no exposure to short-term debt. Additionally, no refinancing needs are due until 2012.

Event risk/outlook Valora's outlook for FY 2009 remained cautious given the significantly more challenging market environment due to the weak economic climate. The company expects to see the first positive signs from the new strategy program in the second half of 2009; however, full positive effects are expected for FY 2010. Additionally, Valora outlined that significant growth potential has been identified, particularly in the convenience store business, where it intends to invest in up to 100 outlets by the end of 2009. Moreover, the management maintained its objective of achieving a sustained improvement in the EBIT margin by 2012 (target rate: 3%�4%).

Daniel Rupli

Valora (CS: Low BBB, Stable) Sector: Retailing

Company description

Valora is a specialized retailer and media wholesaler of fast-moving consumer goods. It operates through its three divisions: Retail, with 1,428 sales outlets at highly frequented locations in Switzerland; Media, which focuses on distribution to small shops, chain stores and other retail customers operating in Switzerland, Austria and Luxembourg; and Trade, which finalizes distribution of food and non-food branded goods to large shops and chain stores. After divesting its activities in production of own-brand food products in 2007, Valora is focusing on its core strengths as a retailing company.





002189351 / 2.875% VALNSW 12/07/2012 SELL Valora Holding AG n.r. n.r. CHF 140

n.r. = not rated


P&L

Sales 2749 2822 2932 2964

Gross margin 31.1% 30.5% 30.5% 30.3%


Margin 7.1% 6.8% 7.3% 7.5%


Margin 2.4% 2.0% 2.5% 2.7%



Cash flow

Adjusted FFO 207 192 198 194

Adjusted CFO 202 200 189 184

CAPEX 50 48 44 55

Adjusted FCF 152 152 145 129


Balance sheet







Market capitalization 1,068.9 906.7 508.2 n.a

Key ratios








Capital structure


Cash cycle 0.9d -0.6d 2.3d 3.2d






Margin development

0%

3%

5%

8%

10%

2006 2007 2008 2009E

25%

28%

30%

33%

35%




0

200

400

600

800

2006 2007 2008 2009E

CHF m

50%

53%

55%

58%

60%



10%

15%

20%

25%

30%

2006 2007 2008 2009E

4.0x

4.8x

5.5x

6.3x

7.0x



0

40

80

120

160

Year end2008

2009 2010 2011 2012 2013

CHF m



Leading position in the Swiss kiosk market

First signs of profitability improvements

Comfortable liquidity position

Clear strategy with a focus on core retailing strengths

Weaknesses / Threats Exposure to shrinking markets (tobacco, press, books) Increased leverage after completion of share buybacks

Low margin business going into recession

Further need for operational improvements

Next events

27 August 2009: H1 2009 results / Investor's day

Website

www.valora.com




Rating rationale The High A rating for Zurich Insurance, the group's core operating entity, is based on the company's above-average business and financial profile. The business profile not only benefits from a good geographical diversification, but also from a broad product range across business lines and solid franchises in its core markets. The financial profile, which is based on Zurich's consolidated figures, suffered somewhat in FY 2008, but the company weathered the financial market crisis rather well and was even able to post a positive overall investment result, albeit markedly below the previous year�s figure. In our view, Zurich's FY 2008 results reflected the successful execution of its strategy of strengthening and expanding its market position both organically and through acquisitions, combined with a prudent cost management reflected in the cost savings through its efficiency program "The Zurich Way."

Corporate strategy Zurich aims to become the leading insurer in its chosen markets by strengthening its market positions in mature and emerging markets, and expanding its capital-light and fee income business. Zurich targets a medium-term business operating profit (BOP) after-tax ROE of 16%. It aims to achieve this target through proactively balancing profitable growth, margin improvements, and capital management. Since 2004, "The Zurich Way" initiative achieved approximately USD 2.5 billion of savings through cost efficiency measures and the company aims to achieve further annual savings of USD 900 million by 2011. Additionally, Zurich aims to realize further cost contingencies of USD 400 million through 2009 given the evolving market. In terms of business expansion, Zurich reiterated that it sees further opportunities for profitable growth, both organic and inorganic. Focus remains on growth in emerging markets, in particular Asia, Russia, Latin America, the Middle East and South Africa, as well as in parts of Europe and in personal lines in the USA. In April 2009, Zurich announced the purchase of AIG�s US Personal Auto Group through Farmers, which immediately sold the portion of regulated insurance businesses to the Farmers Exchanges, which Zurich manages but does not own. The net transaction costs for Zurich were roughly USD 500 million. Zurich will also increase the existing quota share reinsurance from the Farmers Exchanges from 25% to 40% (USD 2.8 billion). To keep capitalization at a stable level, Zurich issued USD 400 million of subordinated debt and USD 1.1 billion of equity.

Business profile The General Insurance segment, which offers property and casualty products and services for individual and commercial customers, is the

company's largest segment, accounting for 72% of FY 2008 gross written premiums (GWP). Business operating profit (BOP) stood at USD 3.5 billion. Among the business units, Global Corporate accounted for 1% of BOP, North America Commercial for 35%, Europe General Insurance for 52%, International Businesses for 7%, and Group Reinsurance for 5%. The total combined ratio increased to 98.1%, mainly driven by Global Corporate, which posted a weak 112.4% due to increased losses in North America. Global Life generated 21% of GWP and contributed USD 1.5 billion to the group's BOP. On an annual premium equivalent (APE) basis, gross new business grew a solid 11% to USD 3.3 billion, thereby achieving the targeted double-digit growth rate for the third consecutive time. Assets under management decreased 18% YoY to USD 180 billion, driven by a combination of a currency effects and a marked decline in equity markets. As mentioned, Zurich targets double-digit APE growth rates, which would raise the new business value to USD 850 million by 2010 (FY 2008: USD 753 million). The Farmers Management Services segment provides a steady income stream, generating fee income of USD 2.5 billion in FY 2008 and contributing 23% to BOP. It consists of the management services provided to the Farmers Exchanges, which the group manages but does not own. The members of the Farmers Exchanges operate predominantly in US personal lines insurance. At Farmers Exchanges, Zurich targets GWP of USD 21 billion by 2010 (FY 2008: USD 16.5 billion) and a combined ratio of below 98.1%.

Financial profile Net income decreased 47% YoY to USD 3.0 billion, mainly driven by lower investment returns. BOP fell 23% YoY to USD 5.2 billion due to General Insurance and Other Business, both of which were unable to match last year�s results. Zurich maintained USD 53.0 billion in net reserves for losses and loss adjustment expenses. Shareholders� equity deteriorated 24% to USD 22.1 billion due to net unrealized capital losses, FX, and net actuarial losses on pension plans. The solvency ratio dropped to 153% thereby reflecting the deterioration of Zurich's equity. Zurich again highlighted its conservative investment strategy for its investment portfolio compared to peers. Group investment decreased 7% YoY to USD 180 billion (6% attributable to FX). Only 0.1% of total investments are invested in US sub-prime mortgage-backed securities and approximately USD 1.2 billion was invested in CDO and CLO of which roughly 95% were AAA rated. However, with regards to last year�s equity markets, investments were down by USD 2.8 billion.

Event risk/outlook Zurich�s business operating profit declined by 40% to USD 1.1 billion in Q1 2009, largely driven by FX effects and somewhat weaker net underwriting results. Despite a difficult year ahead of the company due to the recession, Zurich is confident that it can grow its business further. Zurich reiterated its aim to save USD 900 million in costs every year until 2011. General Insurance experienced an improvement in the rate environment, which is expected to hold throughout the upcoming year. Global Life profited from an increased demand for protection products, which is also expected to continue in 2009. Farmers exchange, however, will be exposed to a highly challenging environment for the US insurance industry. Zurich is confident that it is well positioned for the upcoming year and reaffirmed its medium-term BOP after-tax ROE group target of 16%.

Daniel Rupli

Zurich Insurance (CS: High A, Stable) Sector: Insurance

Company description

Zurich Financial Services Group (Zurich) is a global insurance-based financial services provider, with solid market positions (particularly in non-life insurance) in its key markets in the USA, the UK, and continental Europe, with strengthening positions in Asia and key emerging markets. The company operates with three business segments: General insurance (57% of operating group profit), Global Life (24%), and Farmers Management Services (19%). Zurich has gradually expanded its life insurance activities, but the business remains weighted towards non-life insurance (about 75% of FY 2007 gross premiums written). Its customer base includes private individuals, small and medium-sized enterprises, as well as large corporations and multinationals.





001261678 / 3.875% ZURNVX 27/07/2011 HOLD Zurich Insurance n.r. n.r. CHF 1,000

004535004 / 3.5% ZURNVX 23/11/2011 HOLD Zurich Insurance A+, Stable A2, Stable CHF 300

004535098 / 3.75% ZURNVX 23/09/2013 HOLD Zurich Insurance A+, Stable A2, Stable CHF 500

n.r. = not rated


P&L



Net investment income 10,283 11,591 11,910 "

Net capital gains on investments 10,739 5,645 -27,809 !

Net attributable profit 4,620 5,714 3,039 !

Comprehensive income 5,235 5,652 2,977 !

Balance sheet



Acquired present value of future profits 775 780 1,252 "

Goodwill & other intangibles 2,310 3,856 7,058 "

Total assets 354,673 362,372 309,349 "

Technical liabilities: Life (other than linked) 86,436 82,205 83,530 !

Technical liabilities: Life (linked business) 101,081 108,822 71,048 !

Technical liabilities: Non-life business 61,102 66,759 64,693 !

Technical liabilities: Other 22,877 22,306 20,203 !

Less: Reinsurer share of technical provisions -20,108 -26,970 -18,595 !

Financial debt 7,713 8,300 8,456 "

Equity 25,587 28,945 22,103 !




Business operating profit 1,200 1,443 1,480 "

Embedded value 14,092 15,935 12,818 "




Business operating profit 3,804 4,024 3,535 "

Loss ratio 70.1% 70.5% 72.6% "

Expense ratio 23.8% 25.1% 25.5% "

Combined ratio 93.9% 95.6% 98.1% "

Other key ratios

Return on average equity 19.2% 21.0% 27.5% #

Comprehensive return on average equity 21.8% 20.7% 26.9% #

Gearing (financial debt/equity) 29.5% 28.3% 35.6% #

Leverage (financial debt/[debt + equity]) 22.8% 22.1% 26.2% #



BOP and combined ratio

-2.5

0.0

2.5

5.0

7.5

2004 2005 2006 2007

USD bn

70%

80%

90%

100%

110%

Life Non-LifeFarmers Other Corporate Functions P&C combined ratio (r.h.s.)

Embedded value - Life

0

4

8

12

16

2005 2006 2007 2008

USD bn

0%

7%

14%

21%

28%

Embedded value New business margin (r.h.s.)

Equity and leverage

0

8

15

23

30

2005 2006 2007 2008

USD bn

20%

23%

25%

28%

30%



Fixed income

Real EstateEquitiesCash short term debt

Hedge funds / private equity


Further efficiency gains through "The Zurich way"

Solid capitalization metrics despite acquisition

Comparably defensive investment strategy

Solid market position and broad diversification


M&A headline risk

Volatile financial markets combined with recession

Decreasing embedded value

High exposure to volatile US P&C market

Next events



Website

www.zurich.com




Adjusted CFO Cash flow from operations, after changes in net working capital and adjusted for the depreciation part from leasing & rentals depreciation expenses and pension-related charges and contributions.

Adjusted debt Short- and long-term interest-bearing liabilities adjusted for off-balance- sheet debt from debt related to pensions, leasing & rents, contingencies and guarantees.

Adjusted EBIT Earnings before interest and taxes adjusted for the interest part from leasing & rental obligations and pension-related charges.

Adjusted EBITDA Earnings before interest, taxes, depreciation and amortization adjusted for leasing & rental charges and pension-related charges.

Adjusted equity Equity including minorities adjusted for the leverage structure applied to cover the unfunded pension deficit.

Adjusted FCF Cash flow from operations less gross capital expenditures, excluding acquisition-related investments related to acquisitions and dividends, adjusted for leasing & rental depreciation charges and pension-related expenses.

Adjusted FFO Funds from operations adjusted for the depreciation part from leasing & rental and pension-related expenses and contributions.

Adjusted leverage and adjusted net leverage Adjusted debt on a gross or net basis in relation to total equity plus adjusted debt on a gross or net basis.

Adjusted net cash and cash equivalents Cash and cash equivalents, including investments that can be liquidated in the immediate future adjusted for cash needed required for operating activities.

Adjusted net debt Adjusted debt less adjusted net cash (a negative figure indicates net adjusted cash).

Adjusted net interest expense Interest expenses less interest income adjusted for the interest part from leasing & rental obligations and the net interest expense from pensions.

Capital expenditures (CAPEX) Gross capital expenditures excluding acquisitions.

Cash cycle The time it takes to turn inventory, receivables and payables into cash.

Commercial paper (CP) Debt instruments (maturities up to nine months) that are issued by established corporations in large sums and traded at a discount. They represent a key financing tool and an alternative to bank credits.

Comprehensive income Net attributable profit plus other comprehensive income, i.e., unrealized gains/losses that bypassed the P&L statement such as foreign currency translation gain or loss or unrealized loss or gain on available-for-sale securities.

Core working capital The sum of receivables and inventory adjusted for payables.

Covenants Debt covenants are credit agreements containing stipulating ratios and conditions applicable to financial obligations.

Foundation for accounting and reporting regulations (FER) An independent Swiss institution dealing with the further development of accounting standards in Switzerland to improve the quality and comparability of company accounts and to align them with the requirements of international accounting standards.

Gearing Adjusted debt on a gross or net basis in relation to total adjusted equity.

Goodwill An asset created when the price to acquire a company exceeds the value of its net assets and identifiable intangible assets.

IFRS accounting standards The IFRS (International Financial Reporting Standards) are a key instrument in the global harmonization of corporate accounting. They are issued by the International Accounting Standards Committee (IASC), an international association established in London in 1973.

Impairment A permanent loss in value on investment goods and goodwill.

Intangible assets Non-physical assets other than goodwill, such as patents, licenses, brands, trade names, business secrets (procedures), formulas, supply contracts and customer relationships.

Interest coverage The ratio of adjusted EBITDA or EBIT to either gross or net adjusted interest charges.

Rating A rating is an independent opinion with regard to the ability and willingness of an issuer to repay debt and interest in full without delay.

Solvency Solvency refers to the ability of an insurer to service debt. Among other factors, this depends on an adequate level of underwriting reserves, internal funds and the extent of reinsurance activities.

Solvency margin Depending on the volume of business, the minimum amount of unused shareholders� equity required by federal regulations. This serves to cover general business risks that the underwriting reserves do not cover or cover only partially.

US GAAP United States Generally Accepted Accounting Principles; these comprise Statements of Financial Accounting Standards (SFAS) issued by the Financial Accounting Standards Board (FASB).

Glossary of financial terms



Disclaimer/Disclosures

Analyst certification The analysts identified in this report hereby certify that views about the companies and their securities discussed in this report accurately reflect their personal views about all of the subject companies and securities. The analysts also certify that no part of their compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

Important disclosures Credit Suisse policy is to publish research reports, as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. The Credit Suisse Code of Conduct to which all employees are obliged to adhere, is accessible via the website at: https://www.credit-suisse.com/governance/en/code_of_conduct.html For more detail, please refer to the information on independence of financial research, which can be found at: https://www.credit-suisse.com/legal/pb_research/independence_en.pdf The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse Investment Banking business. As at the end of the preceding month, Credit Suisse beneficially owned 1% or moreof a class of common equity securities of (ROCHE (GENUSSSCHEINE), SWISSLIFE HOLDING, SWISS RE, UBS, ADECCO, BALOISE-HOLDING, ZURICHFINANCIAL SERVICES, NESTLE, CLARIANT). For the following disclosures, references to Credit Suisse include all of thesubsidiaries and affiliates of Credit Suisse AG, the Swiss bank, operating under itsInvestment Banking division. The subject issuer (SCHINDLER PC, ROCHE (GENUSSSCHEINE), SWISS LIFEHOLDING, SWISS RE, UBS, ABB, ADECCO, AFG ARBONIA-FORSTER, BALOISE-HOLDING, HOLCIM LIMITED, LONZA GROUP, RIETER, GIVAUDAN,SWISSCOM, UNIQUE ZURICH AIRPORT, ZURICH FINANCIAL SERVICES,FORBO HOLDING AG, LINDT & SPRUENGLI PC, NESTLE, CLARIANT, GEORGFISCHER, SYNGENTA, GEBERIT AG, NOVARTIS) currently is, or was during the12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (ROCHE(GENUSSSCHEINE), SWISS LIFE HOLDING, SWISS RE, UBS, ABB, ADECCO,AFG ARBONIA-FORSTER, BALOISE-HOLDING, HOLCIM LIMITED, LONZAGROUP, GIVAUDAN, SWISSCOM, UNIQUE ZURICH AIRPORT, ZURICHFINANCIAL SERVICES, FORBO HOLDING AG, LINDT & SPRUENGLI PC,NESTLE, CLARIANT, GEORG FISCHER, SYNGENTA, NOVARTIS) within the past12 months. Credit Suisse provided non-investment banking services, which may include Salesand Trading services, to the subject issuer (SCHINDLER PC, ROCHE(GENUSSSCHEINE), SWISS LIFE HOLDING, SWISS RE, UBS, ABB, ADECCO,BALOISE-HOLDING, LONZA GROUP, RIETER, GIVAUDAN, NESTLE, CLARIANT,GEORG FISCHER, SYNGENTA, GEBERIT AG, NOVARTIS) within the past 12months. Credit Suisse has managed or co-managed a public offering of securities for thesubject issuer (PSP SWISS PROPERTY, ROCHE (GENUSSSCHEINE), SWISS RE,UBS, ABB, ADECCO, AFG ARBONIA-FORSTER, BALOISE-HOLDING, HOLCIMLIMITED, GIVAUDAN, SWISSCOM, UNIQUE ZURICH AIRPORT, ZURICHFINANCIAL SERVICES, NESTLE, NOVARTIS) within the past three years. Credit Suisse has managed or co-managed a public offering of securities for thesubject issuer (ROCHE (GENUSSSCHEINE), SWISS RE, UBS, ADECCO, AFG ARBONIA-FORSTER, BALOISE-HOLDING, GIVAUDAN, SWISSCOM, UNIQUEZURICH AIRPORT, ZURICH FINANCIAL SERVICES, NESTLE, NOVARTIS) withinthe past 12 months. Credit Suisse has received investment banking related compensation from thesubject issuer (ROCHE (GENUSSSCHEINE), SWISS LIFE HOLDING, SWISS RE,UBS, ABB, ADECCO, AFG ARBONIA-FORSTER, BALOISE-HOLDING, LONZAGROUP, GIVAUDAN, SWISSCOM, UNIQUE ZURICH AIRPORT, ZURICHFINANCIAL SERVICES, LINDT & SPRUENGLI PC, NESTLE, CLARIANT, GEORGFISCHER, SYNGENTA, NOVARTIS) within the past 12 months. Credit Suisse has received compensation for products and services other thaninvestment banking services from the subject issuer (SCHINDLER PC, ROCHE(GENUSSSCHEINE), SWISS LIFE HOLDING, SWISS RE, UBS, ABB, ADECCO,BALOISE-HOLDING, LONZA GROUP, GIVAUDAN, NESTLE, CLARIANT, GEORGFISCHER, SYNGENTA, GEBERIT AG, NOVARTIS) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking relatedcompensation from the subject issuer (ROCHE (GENUSSSCHEINE), SWISS LIFEHOLDING, SWISS RE, UBS, ABB, ADECCO, AFG ARBONIA-FORSTER, BALOISE-HOLDING, HOLCIM LIMITED, LONZA GROUP, GIVAUDAN,SWISSCOM, UNIQUE ZURICH AIRPORT, ZURICH FINANCIAL SERVICES,

FORBO HOLDING AG, LINDT & SPRUENGLI PC, NESTLE, CLARIANT, GEORG FISCHER, SYNGENTA, NOVARTIS) within the next three months. Credit Suisse holds a trading position in the subject issuer (SCHINDLER PC, PSP SWISS PROPERTY, ROCHE (GENUSSSCHEINE), SWISS LIFE HOLDING, SWISS RE, UBS, ABB, ADECCO, AFG ARBONIA-FORSTER, BALOISE-HOLDING, HOLCIM LIMITED, LONZA GROUP, RIETER, GIVAUDAN, SWISSCOM, UNIQUE ZURICH AIRPORT, VALORA, ZURICH FINANCIAL SERVICES, FORBO HOLDING AG, JELMOLI HOLDING AG, LINDT & SPRUENGLI PC, NESTLE, CLARIANT, GEORG FISCHER, SYNGENTA, GEBERIT AG, NOVARTIS).

Additional disclosures for the following jurisdictions Hong Kong: Other than any interests held by the analyst and/or associates as disclosed in this report, Credit Suisse Hong Kong Branch does not hold any disclosable interests. United Kingdom: For fixed income disclosure information for clients of Credit Suisse (UK) Limited and Credit Suisse Securities (Europe) Limited, please call +41 44 333 33 99. For further information, including disclosures with respect to any other issuers, please refer to the Credit Suisse Global Research Disclosure site at: http://www.credit-suisse.com/research/disclaimer

Guide to analysis

Corporate bond recommendations The recommendations are based fundamentally on forecasts for total returns versus the respective benchmark on a 3�6 month horizon and are defined as follows: BUY: Expectation that the bond issue will be a top performer relative to

its sector and rating class HOLD: Expectation that the bond issue will be a average performer

relative to its sector and rating class SELL: Expectation that the bond issue will be a poor performer relative

to its sector and rating class RESTRICTED: In certain circumstances, internal and external regulations

exclude certain types of communications, including e.g. an investment recommendation during the course of Credit Suisse engagement in an investment banking transaction.

Credit ratings definition The Swiss Institutional Credit Research of Private Banking division at Credit Suisse assigns ratings to investment-grade and sub-investment-grade issuers. Ratings are based on our assessment of a company�s creditworthiness and are not recommendations to buy or sell a bond. The ratings scale (AAA, AA, A, BBB, BB and below) is dependent on our assessment of an issuer�s ability and willingness to meet its financial commitments on a timely manner and in full. AAA: Best credit quality and lowest expectation of credit risks,

including an exceptionally high capacity level with respect to debt servicing. This capacity is unlikely to be adversely affected by foreseeable events.

AA: Obligor�s capacity to meet its financial commitments is very strong

A: Obligor�s capacity to meet its financial commitments is strong BBB: Obligor�s capacity to meet its financial commitments is adequate,

but adverse economic / operating / financial circumstances are more likely to impact the capacity to meet its obligations

BB and below: Interest and debt obligations have speculative characteristics and are subject to substantial credit risk due to adverse economic / operating / financial circumstances resulting in inadequate capacity to service its obligations

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