ltro, money for nothing?

Convertible Monthly

This report has been published in accordance with BNP Paribas conflict management policy.

CONVERTIBLE BOND STRATEGY

London StrategistBenoit Le Pape +44 20 7595 [email protected]

May 03rd , 2012

2010 2011

April 12 Monthly:

« LTRO, Money for nothing ? »

3 May, 2012 2

Summary page

� Executive Summary p 3

� Focus: Sell in May and go away? p 4

� European Convertible bonds p 5

� Asia ex-Japan Convertible bonds p 26

� US CBs in a Nutshell p 34

US

55%EMEA

26%

APAC

19%

Breakdown of CBs by Geography (% market capitalisation on 30th April).

Source: BNP Paribas

* EMEA: Europe Middle East Africa

** APAC: Asia Pacific

Source: Bloomberg, Markit, BNP Paribas:

* YTD: Data of the graph from 01st January to 30th April

* MTD: Data of the graph from 31st March to 30th April.

Performance in EUR YTD MTD

Sovereign Bonds

Eurozone Sovereigns 3.6% -0.2%

Germany 1.3% 1.1%

Italy 9.4% -1.5%

Straight bonds

European Corporate Bonds (Investment grade) 5.8% 0.2%

of which financials 7.5% -0.1%

of which non-financials (Corporate IG) 8.9% 0.3%

US HY Bonds 5.6% 1.0%

EUR HY Bonds 8.6% -0.8%

Convertible bonds

European CB Index 7.4% -0.4%

US CB Index 9.4% -0.8%

Asia Pacific CBs 4.0% -0.1%

Equity

Europe CB Underlying Index 8.9% -2.1%

Stoxx 600 6.8% -1.6%

Dax 14.6% -2.7%

S&P 500 9.8% -0.6%

3 May, 2012 3

� Quoting the famous song, one can ask if LTRO was not money for nothing. Dire Straits’ fan would then answer: “That ain't workin‘!” Our credit strategists have noticed that Eurozone unemployment rate is now at 10.9%, matching the 20-year high set in Feb 1997. With BBVA 2yr CDS trading wider than Dec LTRO level, and failure to boost money velocity, the impact of the LTRO is obviously more than mitigated… CBs issued by GIIPS banks have posted a decent resilience (most of them are maturing before the end of the second LTRO), while CBs issued by GIIPS corporates are now back to pre-LTRO YTM level.

� However, it is worth mentioning that no hubris has been observed on CB price action and the spread widening trend has been moderated (+55bp MTD). The European Convertible bond posted an interesting resilience in April (-0.4% for CBs while underlyings are declining by 2.1% MTD). Even if CBs funds are not recording inflows achieved by HY funds, we understand that funds involved on GIIPS CBs have now the mandate to do so and won’t sell at the first negative news (ex: the news that 90% of the cash of Parpublica will be upstreamed has not triggered a sell-off of the 14s). 70% of Portuguese bonds are maturing before end 2014 and we believe that outright funds will be happy to buy yield once we have more visibility on Spanish banks recapitalisation and potential Portuguese PSI. BNP Paribas Economists believe that a PSI on Portugal is unlikely and that a new programme will be preferred. The fourth review of the Troika in mid-July will be an important event. Some banks on our space are still below EBA requirements (Banco Popolare, BMPS, BCP…) and we expect some corporate activity on these names. Commitment of the Spanish Government to reimburse utility players may also positively impact FCC & Sacyr.

� European CBs posted a decent performance this month, outperforming US CBs. European OR funds are recording in average a performance of 5.5%YTD and are not chasing risk or increasing the delta on their portfolio. Even if cash has been more resilient than CDS in April, one has to notice that CBs are cheaper than straight bonds. The level reached on negative basis are becoming attractive (or should we say, is being repriced with arbitragers funding level…).

� We have back-tested the well-known adage “sell in May and go away” **, and it appears that the end of May is historically a nice entry point for bear strategies as June is traditionally a weak month on our CB-world. We remain constructive on credit spreads but we expect volatility. The impact of French and Greek Elections may drive the first part of the month (one fourth of our European universe is being made by French CBs). The “we’re all in this together” mantra of the last two years is clearly at risk. However, the move toward growths policies should be supportive for risk assets, including CBs. As in April with HGSI/CETV/CEDC/IPR, we expect that M&A and special situations will impact the asset class (main issue in Europe being Cable & Wireless and Silic). Primary market has been very quiet in Europe as well as in Asia, but more active in the US. We believe that May will be more active.

� Asian CBs are posting interesting outperformance. Prospect of upcoming easing and private banks chasing yield are helping to maintain valuations. China consumption plays were active with more speculation of an RRR cut by the government to stimulate the economy. There remain significant fears however of a current slowdown which continues to depress the retail space plays. Taiwanese CBs have underperformed the index. Fear of capital gains tax and erosion of confidence on the Apple’s suppliers saga have impacted negatively this market.

� In the US, we have observed many accounts reallocating out of the technology sector and into healthcare. Money flows appear supportive. There were many deeply distressed and high yield CBs that had very weak price action during the month of April.

LTRO, Money for nothing ?

** For the whole study, please read BNPP GMM “Summer Superstition”.

3 May, 2012 4

Focus: Sell in May and stay away until St. Leger Day ?

Chart 3: Dax Seasonality.Chart 2: European CBs Underlying Seasonality.

� We agree that May and September are universally weak while December and April are universally strong.

� However, end of May is historically a better entry price for bear strategies. Indeed, CBs as well as their underlyings are recording weaker performances during June (cf. chart 1 & 2).

� In May 2012, we believe that the move toward “growth policies”will be supportive for risk assets, including CBs.

Source: BNP ParibasSource: BNP Paribas

Chart 1: European CBs Seasonality.

3 May, 2012 5

European Convertible Bonds

3 May, 2012 6

Chart 4: GIIPS Banks CBs YTM

Components of the index (equally weighted average): Banco Popolare 14, EFG 14, ESF 3.55% 2025, Controlinveste/PTC 2015, BES/Bradesco 2013, BES/EDP 2015

Components of the index (equally weighted average): Abengoa 4.5% Feb2017, Abengoa 6.875% Jul2014, FCC 6.5% Oct2014, Beni Stabili 3.875% Apr2015, Pescanova 5.125% Apr2017, Portugal Telecom 4.125% Aug2014, Sacyr 6.5% May2016, Sol Melia 5% Dec2014

Chart 5: GIIPS Corporate CB YTM

2

3

4

5

6

7

8

9

10

11

12

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

LTRO for

nothing

?

LTRO: money for nothing ?

� FMI director Christine Lagarde said on April 19th that Europe remains the epicentre of potential risks. The debate concerning the impact of the LTRO is still open.

� The LTRO has solved the liquidity issue for many GIIPS banks and CBs issued by these issuers have not suffered excessively during the month of April. Most CBs issued by GIIPS banks are maturing before the end of the second LTRO. It is worth-noting that these CBs are cheaper than straight bonds as they are not the best candidates for liability management (a lot of exchangeable bonds).

� However the LTRO has failed to boost lending to corporates and households. Money velocity has not increased in these countries. GIIPS Corporate CBs have then significantly underperformed the Index in April. Note that GIIPS Banks CBs are more on the short term part of the curve than GIIPS Corporate CBs, and are then technically more resilient.

0

2

4

6

8

10

12

14

16

18

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12

3 May, 2012 7

CB performance vs. other asset classes.

80

85

90

95

100

105

110

115

120

125


EECIEECI Index EECIUNDL Index DJ Europe 600 Base 100 on 4 Jan 2010(%)

Chart 6: CBs index vs UL CBs index vs DJ Europe 600

Source: Bloomberg, BNP Paribas.

Source: Bloomberg, Markit, BNP Paribas:



� The European Convertible bond have posted an interesting resilience in April (-0.4%

for CBs while Underlyings are declining by 2.1% MTD).

� This highlights the downside protection-effect of the asset class. Elementary my

dear !

Performance in EUR YTD MTD

Sovereign Bonds

Eurozone Sovereigns 3.6% -0.2%

Germany 1.3% 1.1%

Italy 9.4% -1.5%

Straight bonds

European Corporate Bonds (Investment grade) 5.8% 0.2%

of which financials 7.5% -0.1%

of which non-financials (Corporate IG) 8.9% 0.3%

US HY Bonds 5.6% 1.0%

EUR HY Bonds 8.6% -0.8%

Convertible bonds

European CB Index 7.4% -0.4%

US CB Index 9.4% -0.8%


Equity

Europe CB Underlying Index 8.9% -2.1%

Stoxx 600 6.8% -1.6%

Dax 14.6% -2.7%

S&P 500 9.8% -0.6%

3 May, 2012 8

CB performance vs. other asset classes.

Main highlights of April 2012:Source: BNPP EDS Convertible

� Equities went down 1.6% in April 2012 (SXXP) vs. -2.1% for the European Underlying Convertible index.

� CDS indices experienced a moderated widening trend in April. Itraxx Cross-over widened by 37bp MTD. The IG yield (Main) widened by 15bps MTD, while the market weighted average credit spreads in our CB universe widened by 55bp.

83

88

93

98

103

108

113


CB Europe DJ Europe 600 iBoxx Europe Base 100 on 4 Jan 2010

Source: Bloomberg and BNPP EDS convertibles• Implied Credit Spread: CB with delta < 90% &

Capitalization (in €) weighted,• Implied Volatilities: CB with 0.10<Delta<0.90 &

Capitalization (in €) weighted,• Delta calculation: Capitalization (in €) weighted

Table 1: Convertible Market Valuation (CS & Vol)

Chart 7: Performance CB vs. Equities vs. Credit

MTD Perf

-0.4%

-1.6%

+ 0.15%

Source: Bloomberg, BNP Paribas.

Past performance is not indicative of future results, which may be better or worse than prior results.

Market Cap Delta Premium YTM Spread / iVol (%) CS (bp) Maturity (Y)

EUR64.3 38.5 132% 1.9% 405bp 33.4% 442bp 4.6Y

Changes over the Month

-0.04 -1.50 11.66 0.50 50.30 0.44 55.00

European Convertible market at Glance

Index Performances Levels WTD MTD YTD Volatility Levels WTD MTD YTD

Convertible Europe (€) 27-A 5,670.65 0.4% -0.6% 6.9% CB Vol Index 30-A 33.49 -0.34 0.16 -2.86

HFRX ($) 30-A 680.53 -0.1% 0.2% 4.1% UL ATM 12m IV 30-A 34.09 -1.25 -0.14 -7.58

Outrights Europe (€) 26-A 118.38 -0.2% -1.6% 5.5% UL CB Hist 90d Vol 30-A 31.04 -0.44 -1.63 -14.23

DJ Stoxx 600 01-M 258.37 1.6% -3.3% 4.5%

iBoxx Corporate TR € 30-A 179.10 0.4% 0.1% 5.9% Credit indicators in bp

CB Credit Spread 30-A 443 18 55 -148

CB Market Profile in % iTraxx IG 01-M 137 -7 13 -36

Delta 30-A 38.5 0.0 -1.5 3.0 iTraxx X-Over 01-M 630 -49 20 -125

CB Market Moves

3 May, 2012 9

0%

10%

20%

30%

40%

50%

x < 4% 6% > x > 4% 8% > x > 6% 10% > x > 8% x > 10%

Average Performance: 5.5%

Source: Bloomberg, BNP Paribas.We have assumed the performance of 94 OR funds totalling EUR 28bn of AUM.

Decent outright European CB fund performance YTD 2012: + 5.5%

� Outright funds are still recording decent performances.

� Year to date, the average performance of these funds is 5.5% vs. European CB index of 7.4%.

Chart 8: European OR CB Fund performance YTD

3 May, 2012 10

20

25

30

35

40

45

50


Delta evolution: slight decrease in April.

Chart 9: Delta Evolution (CB Market Cap weighted).

Source BNPP EDS Convertible

� In April, the weighted average delta went down by 1.5pts from 40% to 38.5%.

� In some cases, this equity market pull-back helped CB investors to get coupons on callable CBs !

3 May, 2012 11

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

04 05 06 07 08 09 10 11

EURxUK -2 sd +1 sd

+2 sd -1 sd mean

Chart 10: European CB Underlying vs. Stoxx 600 Investment Styles.

Source: Bloomberg, BNP Paribas

Valuation discount of cyclicals to defensives: what is the impact for CBs ?

� Risk assets have underperformed in April.

� This risk-off mood increased the discount of European cyclicals vs. defensives (excluding UK).

� Being made of 59% of cyclicals underlyings, the European CB underlying index has lost 2.1% over the month.

Chart 11: Eur (excl. UK) cyclicals close to 1st dev “cheap” to defensives (price to book)


70

80

90

100

110

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12

Defensives (Stoxx 600)

Cyclicals (Stoxx 600)

European CB Underlyings

3 May, 2012 12

Equity Implied volatility : no big change in April. France being the main focus.

20

25

30

35

40


ImpV SX5E ImplVol 2YSource: Bloomberg - BNPP EDS Convertible

Chart 12 : CB IV vs. Eurostoxx 50 IV 2Y ATM

� While volatility was better bid over the past week, skew failed to realize in periods of market sell-off.

� CAC40 May implied volatilities have been trading above SX5E for the first time over the past 2-3 years. Note that French CBs have also underperformed their index.

� CB implied volatilities went up in April 2012 by 0.5pt MTD to 33.5% (based on our BNPP Trading Universe).

� The underlying equity market cap weighted listed options volatility went down by -1pts to 34%.

� IV 2Y ATM of the SX5E increased by 0.4pts to 25%.

(*) Implied Volatility indicator: CBs with delta ranging [10% -90%].Indicator is a sum of the Implied volatility of CBs weighted by their outstanding nominal Market cap (in euros) and a delta coefficient.

Delta coefficient: Delta [10% ; 35%[ => Coef [0 ; 1[Delta [35% ; 65%] => Coef = 1Delta ]65% ; 90%] => Coef ]1 ; 0]

Chart 13: CB Implied vs. Realized 90-d & ATM 12-m Implied volatilities

(Data of the graph ends on April 30th 2012.).

24

29

34

39

44

49


CB ImplV Vol 90d ATM 12m Listed Option Vol

Source: BNPP EDS Convertible

Vol in %(UL Option Vol)

3 May, 2012 13

Chart 14: Daily volatility rising (Itraxx Cross-Over)

Source: Paola Lamedica, BNPP Credit Strategy.

� BNPP Credit Strategy team remains constructive on credit in the long-term but notices that volatility will persist in the short-term (cf. uncertainty on French Election, Spanish banks recapitalisation…).

� Tail risk hedges are warranted.

Credit Implied volatility : tail risk hedges are warranted.

3 May, 2012 14

Chart 16: MTD CDS Index Performance vs. CB credit Spread

� Spread widening on our space has not been massive (+55bp) and is in line with Itraxx Cross-over.

� We understand that market players have now defined mandate to take risk on GIIPS papers

and are not selling on every single tension on sovereign bonds.

� Lack of significant issuance also provides a positive technical support for existing paper.

“iBoxx” & “iTraxx” are re-weighted to match with current overall CB profile:(i) Implied CS = Credit spread resulting from the bond value of the CB (Bond value = CB price - option value)(ii) iBoxx = 50% HY + 50% IG(iii) iTraxx 5Y: 50% Crossover + 50% Master

Implied credit spread: No hubris on the widening trend.

Chart 15: CB Implied Credit Spread vs. Itraxx Crossover 5Y Senior

Source: BNP Paribas, iBoxx

0%

5%

10%

15%

20%

25%

Main

HiV

ol

Cro

ss-O

ver

Sen

Fin

s

Su

b F

ins

So

vX

Eu

rop

ean

CB

Proportional spread change (MTD)

+15bp

+37bp

+37bp

+20bp+42bp

+7bp

+55bp

200

300

400

500

600

700

800

900

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12

CB Implied Credit Spread Index Itraxx Cross-Over 5Y

Source: Bloomberg - BNPP EDS Convertible

Spread (Bp)

3 May, 2012 15

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

Jan-10 Apr-10 Aug-10 Nov-10 Mar-11 Jun-11 Sep-11 Jan-12 Apr-12

USA-High Yield Bond Weekly Inflows/Outflows ($ mill)

4 Week Moving Average

$ Mil

-400

-300

-200

-100

0

100

200

300

Jan-10 Apr-10 Aug-10 Nov-10 Mar-11 Jun-11 Sep-11 Jan-12 Apr-12

Western Europe-High Yield Bond Weekly Inflows/Outflows ($ mill)

4 Week Moving Average

$ Mil

Chart 17: Inflows in European HY Funds Chart 18: Inflows in US HY Funds

Source: EPFR, BNP Paribas. Source: EPFR, BNP Paribas.

HY & CBs funds inflows: flows weakening

� US HY Funds inflows have weakened in April while European HY funds inflows have slightly recovered. Bonds have been marked down, but not much else. Funds looking for yield and willing to put cash at work are still driving the market.

� Convertible Outright funds have not recorded massive inflows or outflows. We have the feeling that some OR funds have to sell expensive balanced papers to subscribe to new issues.

� We understand that this discrepancy explains partly why the negative basis is still common on our universe, especially on GIIPS CBs, while it is no more the case on the HY market.

� On many cases, the CB is much cheaper than the straight.

3 May, 2012 16

1.0 2.2 2.9 0.3 3.3 2.9 2.923.71.8 2.32.419.4 4.93.60.2 1.219.52.4 2.8

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Bra

zil

South

Afric

a

UK

Sw

eden

Hungary

Gre

ece

Russia

Fin

land

Germ

any

Austria

Sw

itzerla

nd

Italy

Norw

ay

US

Portu

gal

Fra

nce

Belg

ium

Spain

Neth

erla

nds

CB Perf UL Perf

Country weight in %


Sector & Country Performance: Domestic bias in April.

� French and Spanish CBs posted weak

performances in April.

� ALU 15, Faurecia 15, AF 15, Sacyr 16, Nexans 16,

ABG 17, Arcelor 7.25% 14 and Soitec 14 posted the

worst performance in April.

� Spanish CBs were sold in line with sovereign bonds.

Uncertainty concerning fiscal regime and refinancing

conditions increased the risk premium.

� French CBs underperformed in April. The Election risk

raised the risk-premium on these CBs.

� Note that the IBEX now trades at a forward PE

discount to the CAC of over 15%, while only 27% of

IBEX revenues come from Spain. This trend is also

important on the CB universe where firms are being

punished while they are doing less than 30% of their

sales in Spain (ex: Abengoa, Sol Melia…).

4.6 2.8 5.6 2.0 3.6 0.45.43.48.5 4.21.56.0 9.913.23.5 13.0 10.43.0 2.5

-16%-14%-12%-10%-8%-6%-4%-2%0%2%4%

Fin

ancia

ls

Utilitie

s

Pers

. Goods

Reta

il

Health

Care

Basic

Resourc

es

Tele

com

munic

atio

ns

Food &

Bevera

ge

Real E

sta

te

Oil &

Gas

Insura

nce

Const. &

Mat

Auto

Tra

vel &

Leis

ure

Banks

Industria

ls

Technolo

gy

Media

Chem

icals

CB Perf UL Perf

Sector weight in %

Chart 19: Sector Performance (MTD)

Chart 20: Country Performance (MTD)

Sector Performance Chart: the sector linked with a CB depends on the delta. We pick the issuer’s sector for CBs with delta below 30% otherwise, we pick the UL’s sector.Country performance Chart: the country results from the main listing place of the UL stock.The performance of each basket –sector or country-: is the arithmetic average of the convertible bonds performance. In the green diamonds, we indicate the number of CBs in the basket and below, we indicate the weighting (in %) of the basket.

3 May, 2012 17

Performance by Profile & Rating.

Bond

High-Yield

Balanced

Equity

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

-14% -12% -10% -8% -6% -4% -2% 0% 2% 4%

UL Perf

MTD

CB Perf MTD

Chart 21: Rating Based Performance (MTD Perf.) Chart 22: Profile based Performance (MTD Perf.)

Graph description: size of the bubble represents the CB market capitalisation

� Chart 13: Rating explained well the CBs performance in April. High-yield rated posted the worst performance as credit spreads have widened in average by 55bp. However, all profile posted decent resilience and offered a good hedge versus underlyings decline.

� Chart 14: Equity profile posted the best performance in April. Even if their underlyings were flat, the outperformance of these CBs is partly linked to Hedge funds being happy to buy Synthetic puts and callable CBs trading around their soft-call strike.

Data of the graph from 30th March. to 30th April

Source BNPP EDS Convertible Source BNPP EDS Convertible

Investment Grade

Sub-IG (HY)

Not Rated

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

-12% -10% -8% -6% -4% -2% 0%

UL Perf

CB Perf

Data of the graph from 30th March. to 30th April

3 May, 2012 18

42 44

5563

6877

98

114

125

150 151 154

130

118

101 9892

47

60 5665

0

20

40

60

80

100

120

140

160

180

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12Source: BNPP EDS Convertible

EUR bn

59 59

65

67

6463 64 64

66 6667 67 67

69 69 6970

6867

62

60

63

58

56

58

62

64 65

52

54

56

58

60

62

64

66

68

70

72

Jan

-10

Fe

b-1

0

Ma

r-10

Ap

r-10

Ma

y-1

0

Jun

-10

Jul-1

0

Au

g-1

0

Se

p-1

0

Oct-1

0

No

v-10

De

c-10

Jan

-11

Fe

b-1

1

Ma

r-11

Ap

r-11

Ma

y-1

1

Jun

-11

Jul-1

1

Au

g-1

1

Se

p-1

1

Oct-1

1

No

v-11

De

c-11

Jan

-12

Fe

b-1

2

Ma

r-12

Ap

r-12

Market cap evolution: on the way up.

Global CB Market Capitalization (data from 30th April.):

� Europe: EUR 65 bn

� US: EUR 160 bn

� Asia Pacific: EUR 54 bn

Chart 23: European CB universe average market cap

Chart 24: European CB universe monthly average market cap (Focus on 2010 – 2012)

Source BNPP EDS ConvertibleEUR Bn

3 May, 2012 19

Quiet primary market in April on Convertible bonds…

2.2

1.2 1.2

0.0

0.10.1

0.0

1.9

0.8

1.0

1.7

0.1

0.4

2.2

0.2

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2.32.1

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2.3

0.5

0

1

1

2

2

3

3

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

2010 issue (EUR m)2011 issue (EUR m)2012 issue (EUR m)

Chart 27: Yearly New Issue (amounts and numbers)

� April is traditionally a quiet month on the CB primary market. The stress on GIIPS sovereign bonds contributed to freeze the market.

� Only two transactions (always from Northern Europe) have been recorded: SGL 2018 and Elekta 2017.

� We believe that May will be more active.

Chart 28: Monthly issuance (EUR 450 M)


April has traditionally been an quiet month

Issue Amount (EUR bn)

913

23

3033

53

26

44

1612

16

26

10

23

138 5

43

64

78

62

54 53

84

57

48

53

64

16

64

40

14

78

23

0

10

20

30

40

50

60

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

-5

5

15

25

35

45

55

65

75

85Issue Amount

(EUR bn)Nb of EQL

3 May, 2012 20

Source: Dealogic, BNP Paribas, European Credit Strategy

� In April, EUR 3 bn has been issued in European High Yield market vs. EUR 450 M for the CB Market.

� BNP Paribas Credit Research expects more issuance in High Yield due to disintermediation process even if LTRO has reduced liquidity-constraints.

� Our Credit Strategists forecast EUR 50-70 bn vs. EUR 25 bn issued YTD.

�The CB asset class should be able to leverage this trend.

… while high yield straight bonds are posting decent activity.

Chart 25: European HY monthly issuance.

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2

4

6

8

10

12

14


EU

R (

Billio

ns

)

2009

2010

2011

2012

2007

2008

2009

2010

2011

2012

0

10

20

30

40

50


EU

R (

Billio

ns

)

Source: Dealogic, BNP Paribas, European Credit Strategy

Chart 26: Cumulative European HY issuance.

3 May, 2012 21

5 2 1 2 2 5 1 3 0 2 0 6 3 1 3 2 1 3 1 2 1 4 1 41-250

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

Jul-1

0

Aug

-10

Sep

-10

Oct-1

0

Nov-1

0

Dec-1

0

Jan-1

1

Feb

-11

Mar-1

1

Apr-1

1

May-1

1

Jun-1

1

Jul-1

1

Aug

-11

Sep

-11

Oct-1

1

Nov-1

1

Dec-1

1

Jan-1

2

Feb

-12

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-1

2

Mat Amount (EUR M) Put Amount (EUR M) Call Amount (EUR M) Misc (Eur M)

Expected

Upcoming events: all eyes on M&A and Call Options.

Chart 29: Redemption calendar:(Source: BNPP EDS Convertible Pricing Table)

Historic:

-Nov: Nobel Biocare, Aldar 11, Actelion

-Dec: Iliad 12 (converted)

-Jan: Cap Gemini 12, Immofinanz 14, MTU 12

Call amount: If the prorata temporis adjusted call trigger < parity value => we indicate the

market capitalisation

Put amount: If current CB market capitalisation < put redemption amount => we indicate the

Put redemption amount

Mat amount: Max (current CB market capitalisation; Final redemption amount)

Misc.: Includes CB buy back

Source: BNPP EDS Convertible Research, Bloomberg

Next Maturity: April / May (conversion / redemption)

No put or redemption before end of June.

More visibility expected on the annual coupon for Eurazeo-Danone

Qiagen 2024 / Infineon 2014 / Clariant 2014: possible call option.

Anglo American 14 (USD 1.7 bn): CB will be called in 22 May 2012 – last day

to convert being 15 May 2012.

Takeover / offer

Cable & Wireless 14: Vodafone made an offer on Cable at 38p. Orbis (Cable’s shareholder at 19.13%) could derail the deal as Vodafone can not raise the offer without a third party making a counter-bid. Threshold fixed by Vodafone at 75% could be reduced to 50% to transfer the scheme into an offer.

International Power 13 & 15: GDF has made an unconditional offer on IPR at 390p. Contrary to our expectations, the ratchet will be effectively activated. We believe that IPR 13 should be converted with the enhanced parity around 144%. A scenario on the IPR 15 could be an offer from GDF to clean it.

No put or redemption before end of June.

Anglo 14 will be converted on 15 May 12.


EUR Bn

3 May, 2012 22

A 9%

AAA 7%AA, 1%

BBB 20%

BB 8%

B 6%

N.R. 49%

Breakdown by Currency & Rating

GBP, 7%

USD, 19%

EUR, 70%

SEK, 1%CHF, 2%

Chart 31: Currency Breakdown (CB Market Cap weighted) (30th April.)

Chart 32: Rating Breakdown(CB Market Cap weighted) (30th April.)



3 May, 2012 23

Breakdown by Sector

Chart 30: Sector Breakdown (CB Market Cap weighted) (30th April.)


� Defensives represent 41% of EMEA CB universe.

13

1010

9

66 5

5 54

4 3 33 3 3

21

0

0

2

4

6

8

10

12

14

Basic

Res

ourc

esTec

hnol

ogyO

il & G

as

Telec

omm

unic

atio

nsReal

Est

ate

Trave

l & L

eisure

Banks

Health

Car

eUtil

ities

Auto

Med

ia

Retail

Food &

Beve

rage

Finan

cials

Pers.

Goo

dsIn

sura

nce

Indu

stria

lsCons

t. & M

atChem

icals

3 May, 2012 24

Breakdown by Profile & Underlying Market Cap.

> €6.9 bn

50%

[€2.5 bn - €6.9 bn]

26%

< €2.5 bn

25%

Big

Cap

Mid

Cap

Small

Cap

38 CBs

75 CBs

40 CBs

Chart 33: Delta Breakdown(CB Market Cap weighted) (30th April.)

Chart 34: UL Equity Market Cap Breakdown(CB Market Cap weighted) (30th April.)


[30 - 70]

51%

[0 - 30]

34%

[70 - 100]

15%

Equity

Profile

Balanced

Profile

Bond

Profile

3 May, 2012 25

3%

13%

36%33%

15%

0%

10%

20%

30%

40%

<1 Y 2 Y 3 Y 5Y > 5Y

European Market Configuration

10

25

40

55

70

85

100

115

130

145

160

175

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

Distressed H-Yield Bond Balanced Equity

Source:BNPP EDS Convertible

10

25

40

55

70

85

100

115

130

145

160

175

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

Distressed H-Yield Bond Balanced Equity


Chart 35: Closest Maturity Breakdown (CB Market Cap weighted)

Chart 37: European Market Configuration (April. 2011)Chart 36: European Market Configuration (Feb. 2011)

De-strickingtrend


3 May, 2012 26

Asia Ex-Japan Convertible Bonds

3 May, 2012 27

Asia Equity Returns (in USD) YTD MTD

Asia CB Underlying 11% -2%

Asia CBs Index 4% -0.1%

MSCI China 13% 4%

MSCI Hong Kong 14% 1%

MSCI Korea 15% 0%

MSCI Taiwan 10% -4%

MSCI Singapore 18% 0%

MSCI Malaysia 9% -1%

MSCI Thailand 22% 3%

MSCI Indonesia 5% 0%

MSCI India 14% -1%

MSCI Australia 10% 1%

Asia Ex-Japan Convertible Bonds: Some stability in April.

� Whilst the month of March saw general slippage after the strong start to the year in January and February, April saw some return to stability although indices on the whole meandered their way through the month adding to pressure on vols. The best performance was reserved for the Shanghai index but that was only gaining back the loss in March so a month of treading water for most

� Taiwan started the month well bid on the back of hopes for a recovering global economy and we saw traders look to exit yield names and enter delta sensitive names. However the market quickly turned on news of government discussions about the introduction of a capital gains tax for equities and futures. This dampened enthusiasm and caused the need for the National Stabilisation Fund to be more active in the market as foreigners and domestic funds sold down. In addition to this there was an erosion of confidence in the Apple (AAPL US) supply chain despite Apple itself posting strong numbers and new all time highs. A Hon Hai (2317 TT) subsidiary FoxConn (2038 HK) issued a profit warning to be quickly followed by Hon Hai itself posting 1Q numbers -30% from estimates. This pushed the CBs back below 100 for the first time since the start of February and caused a driting apathy in a number of the other Taiwanese tech CBs. There was also M&A news in reports of a tie up between two fallen angels - Sony (6758 JP) and AU Optronics (2409 TT) - although both companies have declined to comment. Stories were for a JV to develop Organic LED TV technology which should provide a boost to both companies, but this failed to generate a lot of enthusiasm in the AUO bonds which are still trading with a 10% yield through 2015 maturity

� HK activity was very focussed on the IG yield names as private banks and other traders were attracted to the safe if somewhat low 3-5% yields given turmoil in other markets. Implied volatility plays were struggling in general as realisable vols continued to slip. There were some bright spots in China Unicom (762 HK) which reported a small miss in earnings leading to a +4% pop in the stock. This spurred some interest in the name given the near constant cheapening we have seen over the last months. Soho China (410 HK) was also active with the stock suffering from a "flash crash" towards the end of the month where the stock collapsed -7% late on a Friday afternoon for no apparent reason. It recovered its poise the following week but highlighted the fact that there is some volatility in stocks although this is not necessarily easily deduced from the close to close prices. This CB remains the only Chinese developer with a significant tradeable delta (60-70%) and given the distinct lack of transparency on when the government removes the property curbs, there could be some good gamma and vol capture left in this name

Source: Bloomberg, BNPP EDS Convertible

25

27

29

31

33

35

Jan-12 Feb-12 Mar-12 Apr-12 May-12

Chart 38: Delta Evolution (CB Market Cap weighted).


3 May, 2012 28

100

120

140

160

180

200

220

Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12

350

380

410

440

470

500

530

Itraxx Asia Ex-Japan IG 5Y (LHS) Implied Credit Spread Index (RHS)

Spread (Bp)

Implied credit spread: no widening.

Chart 39: CB Implied Credit Spread vs. iTraxx Asia ex-Japan IG index

Source: Bloomberg, BNPP EDS Convertible

Source: JACI, Markit, BNP Paribas:



Asia Credit Returns YTD MTD


Aisa Sovereigns 3.2% 0.5%

Asia Corporates 6.2% 1.1%

IG Bonds 3.5% 0.8%

Non-IG Bonds 7.3% 1.2%

By sector

Retail 4.9% 1.5%

Financials 5.1% 0.6%

Industriales 8.3% 1.4%

Oil & Gas 3.8% 1.3%

Media & Telecom 3.9% 1.4%

Utilities 4.3% 1.5%

By country

China 10.1% 1.8%

Hong Kong 4.5% 1.4%

Taiwan 6.4% 0.1%

Indonesia 3.0% -0.5%

India 8.3% 0.6%

Korea 3.6% 0.9%

Thailand 3.3% 0.9%

3 May, 2012 29

1.0 2.1 8.9 8.419.642.2 2.5 1.21.512.8

-15%

-10%

-5%

0%

5%

10%

Thaila

nd

Unite

d

Sta

tes

Hong-K

ong

Austra

lia

Sin

gapore

Philip

pin

es

Taiw

an

South

Kore

a

Indonesia

Mala

ysia

CB Perf UL Perf

Country weight in %


Sector & Country Performance

6.1 0.446.2 13.04.1 4.9 14.27.97.4 2.0

-13%

-11%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

Fin

ancia

l

Technolo

gy

Utilitie

s

Basic

Mate

rials

Consum

er, N

on-

cyclic

al

Div

ers

ified

Energ

y

Com

munic

atio

ns

Consum

er,

Cyclic

al

Industria

l

CB Perf UL PerfSource: BNPP EDS Convertible

Sector weight in %

Chart 40: Sector Performance (MTD)

Chart 41: Country Performance (MTD)

Sector Performance Chart: the sector linked with a CB depends on the delta. We pick the issuer’s sector for CBs with delta below 30% otherwise, we pick the UL’s sector.Country performance Chart: the country results from the main listing place of the UL stock.The performance of each basket –sector or country-: is the arithmetic average of the convertible bonds performance. In the green diamonds, we indicate the number of CBs in the basket and below, we indicate the weighting (in %) of the basket.

� On the real estate sector there were some positive comments from Chinese officials that the government have no interest in causing a housing crisis , although they remain steadfast in the desire to curtail the speculation bubble. This has provided some relief in the developer space with the likes of China Overseas Grand Ocean (81 HK) stock surging +10% towards the end of the month. We do see buyers of the sector but tentative at best given theinherent risk.

� China consumption plays were active with more speculation of an RRR cut by the government to stimulate the economy. There remain significant fears however of a current slowdown which continues to depress the retail space plays of Intime (1833 HK), Hengdeli (3389 HK) and Parkson (3368 HK). News in this sector was provided by Gome (493 HK) which issued a profit warning for 1Q results, similar to the indications given when they reported a weak set of 2011 numbers. Whilst the company retains a significant cashpile to pay the put in Sep '12 and has considerable access to banks, traders are starting to become a little nervous about the near constant wall of bad news.

Including real estate CBs

3 May, 2012 30

Convertible Bonds: Primary Market

� The only new issue in the month was from repeat issuer Paladin (PDN AU) who refinanced the 2013 5% CBs which had been trading with approximately 8% yield. The $274mln new issue was partly to fund a $200mln tender for the 2013 paper and partly for other corporate purposes, although the company retained the option to buy more of the 2013 CBs.

� These CBs jumped immediately as shorts were covered despite the 1/3 chance they would not be repurchased ('13 CB size is $325mln). The new CBs were brought on a very weak day for equities and given the volatile nature of the company (uranium miner), there was concern the deal would not complete. The CBs traded as high as 100.5 in the grey market before selling down to 99.25 late in the day as Europe sold off. However the trade was rescued by the lead pricing at the cheap end of the terms (6% coupon, 25% premium) and some strong interest from specialist investors in the Americas. We heard the final allocations were patchy and there were a number of investors looking to top up hence the bonds traded as much as +3pts higher on a delta neutral basis.

� It is good to see another successful issue in Asia given how difficult the markets have been for the other new issues but it must be noted this name priced at least 10-15% cheap in terms of implied volatility which has been something issuers have been very reluctant to entertain.

3 May, 2012 31

10

25

40

55

70

85

100

115

130

145

160

175

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

Distressed H-Y Bond Balanced Equity


10

25

40

55

70

85

100

115

130

145

160

175

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

Distressed H-Y Bond Balanced Equity


Chart 43: Asia Ex-Japan Market Configuration (April 30th)

Asia Ex-Japan Convertible Bonds: Performance by Profile & Rating.

Chart 42: Asia Ex-Japan Market Configuration (Feb 28th)

Small de-striking trend

Bond

High-Yield

Balanced

Equity

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

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

UL Perf

MTD

CB Perf MTD Investment Grade

Sub-IG (HY)

Not Rated

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

-4% -3% -3% -2% -2% -1% -1% 0% 1% 1% 2%

UL Perf

MTD

CB Perf MTD

Chart 45: Rating Based Performance (MTD Perf.)Chart 44: Profile based Performance (MTD Perf.)

Graph description: size of the bubble represents the CB market capitalisation



3 May, 2012 32

N.R., 77%

BBB, 4%

BB, 5%

B, 1%

A, 13%

Asia Ex-Japan Convertible Bonds: Breakdown by Currency & Rating.

USD, 51%

HKD, 19%

SGD, 17%

CNY, 6%AUD, 4%

JPY, 2%THB, 1%

Chart 46: CB Currency Breakdown(CB Market Cap weighted – Asia Ex Japan) (30th April).

Chart 47: Rating Breakdown(CB Market Cap weighted - Asia Ex Japan) (30th April).

Source: BNP Paribas.Source: BNP Paribas.

3 May, 2012 33

H-Y

3%

Bond

75%

Balanced

20%

Equity

2%

Asia Ex-Japan Convertible Bonds: Breakdown by Profile & Underlying market cap.

< €2.5bn

1%

[€2.5bn - €6.9bn]

63%

> €6.9bn

36%

Small

Cap

Mid

Cap

Big

Cap

Chart 48: Profile Breakdown(CB Market Cap weighted - Asia Ex Japan)

Chart 49: UL Equity Market Cap Breakdown(CB Market Cap weighted - Asia Ex Japan)

Methodology:

Distressed: CB between 0% and 50% of par

High Yield: CB between 50% and 80% of par

Bond: CB between 80% and 110% of par

Balanced: CB between 100% and 135% of par

Equity: CB above 135% of par

Source: BNP Paribas.


3 May, 2012 34

US CBs in a Nutshell

3 May, 2012 35

US Convertible Bonds: April review

As we suggested in our Global Outlook, April was a month of alpha generation with great divergence among US Convertibles. If one was on the right side of certain M&A events, corporate actions, and earnings stories one would have had very strong returns in April. If on the other hand, an investor was in generic volatility sensitive names he or she would have likeley been down for the month.

In a basic sense there was meaningful bifurcation between volatility and credit sensitive names, with the former ones generally weaker on the month and the latter stronger.

Corporate actions and M&A were very important. Thus for example many O/R accounts generated significant P&L due to HGSI hostile take-over proposal and many credit and special situations oriented investors generated outsized returns from CETV and CEDC announcements.

At the same time there were many deeply distressed and high yield CBs that had very weak price action during the month of April, primarily for technical reasons. These include CLWR 8%, JRCC, SPWR 4.5%, and DNDN 2.875%. Given the liquidity in the market these type of names tend to drop precipitously if the market has the impression that there are large O/R sellers around.

Overall, money flows appear supportive, the new issuance calendar, while having picked up, is still unable to keep up with all the paper that is coming out of the market. M&A is not helping matters in this regard as it is often the reason for additional CBs disappearing. Thus the scarcity factor is still very much supportive of CB valuations, and given attractive yields among many credit-sensitive CBs relative to their duration we do not expect this to change.

Finally, from the O/R side, we have observed many accounts reallocating out of the technology sector and into healthcare.

3 May, 2012 36

Convertible Bonds: Primary Market


3 May, 2012 37

90

95

100

105

110

115


US CBs European CBs

Perf (%)

US Convertible Bonds: CB performance vs. other asset classes.

90

95

100

105

110

115


US CBs iBoxx $ Liquid High Yield Index

Perf (%)


Chart 51: US CB vs. European CBs since Jan. 2010Chart 50: US CBs vs. US HY Straight Bonds.

Source: Bloomberg, Markit, BNP Paribas

� US CBs have not performed as well as European CBs MTD (-0.8% vs. -0.4%).

� There were many deeply distressed and high yield CBs that had very weak price action during the month of April.

3 May, 2012 38

CONVERTIBLE BOND SALES TEAM

Paris Sales team +33 1 40 14 96 73

London Sales team +44 20 7595 8763

Hong Kong Sales Team +852 2108 5641

New York Sales Team +1 212 471 8255

CONVERTIBLE BOND STRATEGY

New York Strategist

Alex Fridlyand: +1 212 841 3491

[email protected]

London Strategist

Benoit Le Pape +44 20 7595 1216

[email protected]

EDS STRATEGY TEAM

Global Head

Gerry Fowler +44 20 7595 8619 [email protected]

EuropeKokou Agbo-Bloua +44 207 595 8919 [email protected] Deix +33 1 40 14 06 22 [email protected] Gheedia +33 1 5577 7186 [email protected] Guinane +44 207 595 8907 [email protected] Le Pape +44 20 7595 1216 [email protected] Semenova +44 20 7595 1278 [email protected] Sharp-Pierson +44 20 7595 1128 [email protected]

United StatesAnand Omprakash +1 212 841 2886 [email protected] Arouna +1 212 841 2675 [email protected]

AsiaWinner Lee +852 21085658 [email protected] Wong +852 21085638 [email protected] Cheng +852 21085671 [email protected]

Contacts

3 May, 2012 39

Disclaimer

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Important Option Disclosures: Options are complex instruments that are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data will be supplied upon request. Any trade information is preliminary and not intended as an official transaction confirmation. If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your BNP Paribas sales representative or visit the OCC's website at http://www.theocc.com/about/publications/character-risks.jsp Important ETF Disclosures: For any ETFs discussed in this document, you should consider the investment objectives, risks, and charges and expenses of the investment company carefully before investing. The prospectus, and if available, the summary prospectus, contains this and other important information about the ETF. You may obtain a prospectus and, if available, a summary prospectus by calling +1 212 841-3099. The prospectus and, if available, summary prospectus should be read carefully before investing. As with any investment, ETFs have risks. These include the general risks associated with investing in the underlying assets, potential tracking error, and the possibility that particular indices may lag other market segments or active managers. In addition, ETFsinvesting in international markets may include currency and geopolitical risks, while fixed income ETF risks also include credit and interest rate risk. BNP Paribas and its affiliates may hold a position or act as a market maker in the financial instruments discussed, or act as an advisor, manager, underwriter, or lender to such issuer. As a result, BNP Paribas may have potential conflicts of interest relating to the ETFs that are discussed in this material. In particular, BNP Paribas may act as an Authorized Participant in the purchase or sale of shares from an ETF and participate in the creation and redemption of the securities covered in this material. In connection with these activities, BNP Paribas may receive a fee, may be deemed to be an underwriter of the ETF shares, and may receive information about pending creations or redemptions of large blocks of ETF shares. Under no circumstances shall BNP Paribas or its affiliates be obliged to disclose any information that it has received on a confidential basis or to disclose the existence of such information. BNP Paribas also may act as a market maker or block positioner in the ETF shares discussed in this material, or financial instruments that are held by the ETF and/or are part of the index whose performance the ETF seeks to track. As a result, BNP Paribas may be buying or selling ETF shares (or the instruments underlying the ETF shares) for other customers or for its own account while you are selling or buying ETF shares. BNP Paribas may have multiple advisory, transactional, financial and other interests in the companies whose securities or other instruments may be purchased or sold by an ETF discussed in this material. BNP Paribas may from time to time engage in business with these companies, including extending loans to, making equity investments in or providing advisory services to the companies, including merger and acquisition advisory services. In the course of those activities, certain BNP Paribas personnel may acquire nonpublic information about the companies. Such information could potentially affect the prices at which the ETF shares trade. BNP Paribas will maintain the confidentiality of such information and not disclose it to the ETF, ETF holders, or other unauthorized personnel. This document will have been approved for publication and distribution in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas SA whose head office is in Paris, France. BNP Paribas London Branch is registered in England and Wales under No. FC13447. Registered Office: 10 Harewood Avenue, London, NW1 6AA. BNP Paribas SA is incorporated in France with limited liability with its registered office at 16 boulevard des Italiens, 75009 Paris. BNP Paribas London Branch is authorised and supervised by the Autorité de ContrôlePrudentiel and is authorised and subject to limited regulation by the Financial Services Authority ("FSA") for the conduct of its designated investment business in the United Kingdom. Details of the extent of its authorisation and regulation by the Financial Services Authority are available upon request. BNP Paribas SA is incorporated in France with limited liability and is authorised by the Autorité de Contrôle Prudentiel and regulated by Autorité des Marchés Financiers (AMF).“ In the United States, this document is distributed by BNP Paribas Securities Corp., an affiliate of BNP Paribas. BNP Paribas Securities Corp. is a U.S. registered broker-dealer and a member of FINRA, the NYSE and other principal exchanges. Any offer or sale of securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein, or the merits of any securities described herein, and any representation to the contrary is an offence. In Singapore, clients should contact BNP Paribas Securities Singapore Pte Ltd in respect of any matters arising from, or in connection with, the contents of this document. Clients should contact and execute transactions through a BNP Paribas entity in their home jurisdiction unless governing law permits otherwise. By accepting this document you agree to be bound by the foregoing limitations. © BNP Paribas (2012). All rights reserved.

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