Deutsche Bank Markets Research

Europe Credit HY Multi Sector HY Strategy Date 3 October 2013

Stephen Stakhiv

HY Strategy Monthly
Q4 Outlook / Q3 Review
We maintain a positive outlook for Q4 as the underlying environment for HY remains favorable. A closer look at the underlying fundamentals of the HY market are summarized below. Key Q4 Outlook Observations Loan standards in 2013 for Europe have seen less and less tightening along with a decreasing default rate environment in Q3

Strategist (+44) 20 754-52063 stephen.stakhiv@db.com Nick Burns, CFA Jim Reid

Strategist Strategist (+44) 20 754-71970 (+44) 20 754-72943 nick.burns@db.com jim.reid@db.com

Figure 1: European Lending Standards vs HY Default Rates

Lending to Enterprises (% net tightening, LHS) 18% 80 HY Default Rate (RHS) 70 16% 60 14% 50 12% 40 10% 30 8% 20 6% 10 4% 0 2% -10 0% -20 1999 2001 2003 2005 2007 2009 2011 2013
Source: Deutsche Bank, Moodys, Bloomberg Finance LP Note: The light blue reflects Moodys estimates 12 month forward

Going out 12 months we see default rates for European HY decreasing from the current level of 3.4% to circa 2.5% Although downgrades are still outnumbering upgrades we have seen improvement in both rating drift and the upgrade/downgrade ratio European Currency Issuance YTD has now surpassed any full year of issuance in history at 53bn Despite record issuance we have only seen a mild uptick in Debt/EBITDA multiples which are now in line with the 15 year median of 4.5x Strong underlying economic momentum in Europe will help business conditions; recent strength in EZ Manufacturing PMI highlights this point

Figure 2: EZ Manufacturing PMI

65 Eurozone PMI

Key Points Performance: September iBoxx EUR HY +1.1%, Q3 +3.5% and YTD +5.3%

60 55 50 45 40 35 30 1998

Issuance (Fixed Rate/Non-Fin): September Issuance of c.10bn, YTD 53bn Key Analyst Changes: Stena, Virgin Media, Telenet Group, Wind Telecom, New World Resources New Analyst Top Picks: Buy Com Hem EUR 287 million 10.75% Senior Notes due 2019 (8.6% YTW)

2001

2004

2007

2010

2013

Buy Gestamp EUR 500 million 5.875% Senior Secured Notes due 2020 (5.9% YTW) Sell Lecta EUR 200 million 8.875% Senior Secured Notes due 2019 (9.9% YTW) Sell Stena (Buy 5yr CDS protection) 395/410 Buy Sunrise EUR 275 million 8.75% PIK Notes due 2019 (8.8% YTW) Buy Takko EUR 380 million 9.875% Senior Secured Notes due 2019 (10.6% YTW)

Source: Deutsche Bank, Bloomberg Finance LP, Moodys

________________________________________________________________________________________________________________ Deutsche Bank AG/London DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

Deutsche Bank AG/London

HY Q4 Outlook
Amidst a week of turbulent headlines we look to European High Yield and what one can expect in the coming quarter. Overall our thoughts are positive for Q4, with default rates at multi-year lows and an increasingly positive economic outlook in Europe and the US. We believe the fundamentals for HY are strong and should continue to see positive performance through year end. In Figure 3 we look at Loan Standards vs. HY Default Rates in the US and Europe. Loan Standards have tended to be a good leading indicator for potential future default rates typically looked at on a 12-month lag basis. As we can see, lending standards in the US have been loosening throughout 2013 while in Europe we have seen less and less tightening. In the US, current HY default rates are circa 2.8% and in Europe 3.4%. The light blue line extending past 2013 is Moodys forecast for default rates going out to the end of August 2014. In the US estimates are seen to trend downward to 2.6% and in Europe to 2.7%. We generally agree with this view and would even look at these estimates as conservative given the current upward economic trend. Of course going forward, further political and geo-political events could alter the course of markets and hence change the dynamics of the High Yield market. Figure 3: Lending Standard vs. HY Default Rates for the US (left) and Europe (right)
100 80 60 40 20 0 -20 -40 1999 2001 2003 2005 2007 2009 2011 2013
Source: Deutsche Bank, Moodys, Bloomberg Finance LP Note: The light blue reflects Moodys estimates 12 month forward

C&I Loan Standards (% net tightening, LHS) HY Default Rate (RHS)

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

Lending to Enterprises (% net tightening, LHS) 80 HY Default Rate (RHS) 70 60 50 40 30 20 10 0 -10 -20 1999 2001 2003 2005 2007 2009 2011 2013

18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Having looked at defaults, the next question to address is how ratings within the High Yield space have been trending. In Figure 4 we look at the overall (IG & HY) ratings drift across the US and Europe. A quick note to an obvious anomaly; during June 2012 Moodys had downgraded close to 100 European financials causing a collapse in drift. As these actions dropped out of the statistics we have seen a sharp correction. That said, although we are still seeing more downgrades than upgrades the drift is on an improving trajectory. Whether we converge toward the US level, closer to 0, probably depends on the strength and sustainability of economic growth. On the right side of Figure 4 we take a look at a simple Upgrade/Downgrade ratio. This tends to paint a similar picture to the Ratings Drift analysis as Europe may still be encountering more downgrades than upgrades but the ratio is improving.

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3 October 2013 HY Strategy Monthly: Q4 Outlook / Q3 Review

Figure 4: 12-Month Trailing Rating Drift (left) and HY 12-Month Trailing Upgrade/Downgrade Ratio (right)
15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% 1999 US Europe
2.5 2.0 1.5 1.0 0.5 0.0 1999 US Up/Down Europe Up/Down

2001

2003

2005

2007

2009

2011

2013

2001

2003

2005

2007

2009

2011

2013

Source: Deutsche Bank, Moodys, Bloomberg Finance LP

On the back of rating actions, we were curious to see how leverage levels have performed since the crisis as both the US and Europe are running at record levels for YTD HY issuance. Figure 5 shows EUR Fixed Rate Issuance YTD at 53bn along with a respective Maturity Wall Profile for both Loans and Bonds. Its interesting to note that even just looking at 2013 YTD, we have already surpassed the high Full Year issuance record set back in 2010 of 40bn. Figure 5: EUR Fixed Rate HY Issuance (left, bn) and EUR HY Bond and Leverage Loan Maturities (right, bn)
60 50 40 30 20 10 0 Jan-Sep Oct-Dec 70 60 50 40 30 20 10 Loans Bonds

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0 2014 2015 2016 2017 2018 2019 2020 2021+

Source: Deutsche Bank, Dealogic DCM Anaytics, S&P LCD

Given such a record year for issuance, leverage levels have of course been a key concern. In order to look at what has been going on with leverage, we turn to the Leveraged Loan market for guidance. In Figure 6 Debt/EBITDA levels actually have remained relatively constant throughout 2013 (+0.3x YTD). Since the post crisis low of 3.3X in May of 2009 we have indeed seen levels steadily increase to their current state of 4.5x. If we look historically back to 1998, 4.5x is actually the median multiple so although we are 1.2x off crisis lows this is by no means an aggressive ratio. On the right side of Figure 6 the analysis of Spread per Unit of Leverage (SPL) is displayed, also starting toward the end of 2008. As one might expect with current market conditions and with leverage increasing over the past five years, we have seen SPL tighten by circa 27bps from its high in Q2 2010.

Deutsche Bank AG/London

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Deutsche Bank AG/London

Figure 6: Rolling Average 3 Month Total Debt/EBITDA in Europe (left) and Spread per Unit of Leverage (right)
6.0x 5.5x 5.0x 4.5x 4.0x 3.5x 3.0x Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Rolling Avg. 3-Month Total Debt/EBITDA Ratios 140 130 120 110 100 90 80 70 60 50 3Q08 Spread per Unit of Leverage - Europe

3Q09

3Q10

3Q11

3Q12

3ME 8/13

Source: Deutsche Bank, S&P Note: SPL based upon weighted average institutional spread versus average pro forma total debt leverage ratios; data reflects the environment in Leveraged Loans

To summarize our findings Loan standards in 2013 for Europe have seen less and less tightening along with a decreasing default rate environment in Q3

Going out 12 months we see default rates for European HY decreasing from the current level of 3.4% to circa 2.5% Although downgrades are still outnumbering upgrades we have seen improvement in both rating drift and the upgrade/downgrade ratio European Currency Issuance YTD has now surpassed any full year of issuance in history at 53bn Despite record issuance we have only seen a mild uptick in Debt/EBITDA multiples which are now in line with the 15 year median of 4.5x Figure 7: EZ Manufacturing PMI
65 60 55 50 45 40 35 30 1998 2001 2004 2007 2010 2013 Eurozone PMI

In addition to positive credit fundamentals, the Eurozone as a whole has been on a stable path to recovery. Looking to Figure 7 we see that the latest Manufacturing PMI print came in at 51.1 after four consecutive positive growth periods (August Manufacturing PMI was 51.4). We have seen a similar trend in the US as the ISM has increased from 49.3 in March of this year to 56.7 in September. Of course, we do provide caution going forward as political agendas have stolen much of the headlines lately and markets await further resolutions in Italy and the US.

Source: Deutsche Bank, Bloomberg Finance LP, Moodys

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Deutsche Bank AG/London

3 October 2013 HY Strategy Monthly: Q4 Outlook / Q3 Review

HY Performance Overview
Q3 ended with three months of positive total returns, overall up +3.5% for the quarter. July was the strongest month followed by September and August (+2.0%, +1.1% and +0.3%). YTD returns on the index increased from +4.2% in August to +5.3%. September saw all 9 sectors in positive territory with Consumer Services, Telecom and Technology taking the lead with gains of +1.9%, +1.8% and +1.4%. Energy, Health Care and Consumer Goods underperformed in September with total returns of +0.4%, +0.6% and +0.7% respectively. As we can see in Figure 8, spreads continued to tighten along with yield until Bernankes speech on the 18th, as post-taper shock speculation took hold of markets and spreads and yields reacted accordingly. EUR currency fixed rate HY issuance has maintained a record YTD run-rate with 10bn issued in September. The YTD total is up to 53bn, which is higher than any previous Full Year total, even above the Full Year record set in 2010 of 40bn. Figure 8: iBoxx EUR HY YTD Performance
Annual Benchmark Spread (LHS) Annual Yield (RHS) 7.5% 7.3% 7.1% 6.9% 6.7% 6.5% 6.3% 6.1% 5.9% 5.7% 30 Jan 01 Mar 31 Mar 30 Apr 30 May 29 Jun 29 Jul 28 Aug 5.5% 27 Sep

680 650 620 590 560 530 500 470 31 Dec

Source: Deutsche Bank, Markit

Deutsche Bank AG/London

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Deutsche Bank AG/London

HY Euro Index Monthly Returns

After what could only be called an eventful end to the month, September was actually the third best performing month for HY this year (Figure 9). The iBoxx Euro HY Index gained +1.1% in September after lighter volume in August which returned +0.3%. Financials have continued to outperform NonFinancials, gaining +1.2% and +1.1% this month after a slightly larger difference last month (Financials +0.7% and Non-Financials +0.2%). In Figure 10 we then look at excess returns over the past month, Q3 and YTD. Figure 9: iBoxx HY Euro Index: Monthly Total Returns
4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% Jan
Source: Deutsche Bank, Markit

All

Non-Financials

Financials

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Figure 10: iBoxx EUR HY Total Returns and Excess Returns

September 2013 EUR HY Total Returns 1-5Yr Bund Total Returns Excess Returns 1.1% 0.3% 0.8% Q3 2013 3.5% -0.3% 3.2% YTD 5.3% -0.2% 5.5%

Source: Deutsche Bank, Markit Note: Excess Returns have been calculated at the basic level of subtracting the iBoxx 1-5Yr Bund Total Return Index from the iBoxx EUR HY Total Return Index

Sector Performance Breaking down performance further by sector in Figure 11, we saw all 9 sectors in positive territory this month with Consumer Services, Telecom and Technology taking the lead with gains of +1.9%, +1.8% and +1.4%. Energy, Health Care and Consumer Goods were the underperformers in September with total returns of +0.4%, +0.6% and +0.7% respectively. Despite the poor performance in June, HY has been positive on a total returns basis every other month of 2013 meaning a strong showing for Q3 and YTD. For the quarter Consumer Services, Basic Materials and Telecom top performance with +4.5%, +4.3% and +4.1%. Even the worst performing sector this quarter, Energy, was still able to maintain a gain of +2.2%. YTD Financials have held the top spot +7.2% followed by Telecom and Consumer Services, +6.7% and +6.4% respectively.

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3 October 2013 HY Strategy Monthly: Q4 Outlook / Q3 Review

Figure 11: September, Q3 and YTD iBoxx EUR HY Sector Performance

2% 1% September Total Returns 5% 4% 3% 2% 1% 0% Q3 Total Returns 8% 6% 4% 2% 0% YTD Total Returns

Cons

Technology

Basic Mats

Source: Deutsche Bank, Mark-it

In Figure 12 - Figure 15, we dive deeper into the five best and worst performing individual bonds in each broad sector. Overall, individual credits performed mostly to the upside with only marginal moves to the downside in Non-Financials. Figure 12: iBoxx EUR HY Industrials September 2013 Performance
Industrials Best Performing Ticker NWORLD NOKSIE NWORLD RCOLIN KPERST Coupon 7.875 7.125 7.875 8.500 10.250 Maturity 15-Jan-21 15-Apr-20 01-May-18 15-Jan-21 15-Aug-17 Bid Price Price Change 52.250 110.897 75.688 100.050 106.255 12.58 8.98 6.19 3.80 3.76

Figure 14: iBoxx EUR HY Consumer September 2013 Performance

Consumer Best Performing Ticker FROSTB IDEABB EDCON EDCON EDCON Coupon 12.750 11.750 5.724 9.500 9.500 Maturity 04-May-19 01-May-18 15-Jun-15 01-Mar-18 01-Mar-18 Bid Price Price Change 86.250 71.003 93.255 94.630 94.630 15.25 8.50 5.51 4.38 4.38

Industrials Worst Performing Ticker LGFP ROTPHA BEZINC STERV FREGR Coupon 4.750 6.125 8.875 4.432 2.875 Maturity 23-Mar-20 15-Nov-19 15-May-18 07-Oct-16 15-Jul-20 Bid Price Price Change 101.593 99.293 105.893 101.683 98.380 -2.24 -1.96 -1.86 -1.58 -1.52

Consumer Worst Performing Ticker ATUGRP SZUGR BARY AGROK FIIM Coupon 7.469 5.250 5.625 10.000 6.250 Maturity 01-Oct-14 30-Jun-15 15-Jun-21 07-Dec-16 09-Mar-18 Bid Price Price Change 20.000 101.577 108.065 106.073 110.228 -3.33 -1.79 -0.89 -0.85 -0.79

Source: Deutsche Bank, Markit

Source: Deutsche Bank, Markit

Figure 13: iBoxx EUR HY Telco, Cable, Utilities and Infrastructure September 2013 Performance
Telco, Cable, Utilities and Infrastructure Best Performing Ticker EIRCMF NOKIA ONOSM PAJFP SIEMNS Coupon 9.250 6.750 8.500 8.875 10.750 Maturity 15-May-20 04-Feb-19 01-Mar-20 01-Jun-18 15-Nov-15 Bid Price Price Change 100.250 111.250 112.587 94.083 95.250 7.75 6.16 4.25 3.83 3.25

Figure 15: iBoxx EUR HY Financials September 2013 Performance

Financials Best Performing Ticker CAJARU ETHIAS HSHN RBS BACR Coupon 1.024 4.747 1.026 7.092 4.875 Maturity 16-Mar-15 20-Dec-15 14-Feb-17 29-Sep-17 15-Dec-14 Bid Price Price Change 82.000 70.000 64.000 92.250 85.313 9.00 8.75 6.83 6.17 4.81

Telco, Cable, Utilities and Infrastructure Worst Performing Ticker ELEPOR CGMFP ESIM CGMFP CPSPW Coupon 4.125 6.750 5.125 7.000 7.125 Maturity 29-Jun-20 01-Apr-20 27-Oct-14 27-Jul-15 20-May-18 Bid Price Price Change 99.420 94.380 101.400 106.130 107.055 -1.98 -1.79 -0.65 -0.63 -0.50

Financials Worst Performing Ticker BANMAR MONTE MONTE MONTE MONTE Coupon 1.175 5.000 4.875 5.600 1.225 Maturity 01-Jun-17 21-Apr-20 31-May-16 09-Sep-20 30-Nov-17 Bid Price Price Change 45.000 82.598 88.500 87.992 71.125 -12.00 -6.90 -6.83 -4.63 -2.88

Source: Deutsche Bank, Markit

Source: Deutsche Bank, Markit

Deutsche Bank AG/London

Cons Goods

Health Care

Financials Telecom Cons All Industrials Non-Fins Cons Goods Energy Technology Basic Mats Media Health Care

Technology

Industrials

Financials

Non-Fins

Telecom

Cons Goods

Health Care

Basic Mats

Cons

0%

Media

All

Energy

Industrials

Telecom

Financials

Non-Fins

All

Energy

Media

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3 October 2013 HY Strategy Monthly: Q4 Outlook / Q3 Review

HY New Issuance Volume and Performance

September was a much busier month for new supply as we saw issuance of circa 10bn (European currency) and $45bn (USD) compared to 0.3bn and $14bn in August. Figure 16 below plots the YTD trend going back to 1999 with current levels vastly outperforming any previous year, in either currency. YTD European currency issuance stands at 53bn, surpassing the YTD in 2011 of 27bn and full year 2010 issuance high of 40bn. In the USD market, we have had $290bn YTD surpassing 2012s YTD total of $239bn but still below last years full year total of $341bn. Figure 16: European Currency (bn, left) and USD ($bn, right) YTD 2013 HY (Fixed Rate Non-Financial) Issuance
60 50 40 30 20 10 0 Jan-Sep Oct-Dec 400 350 300 250 200 150 100 50 0 Jan-Sep Oct-Dec

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: Deutsche Bank, Dealogic DCM Analytics

New Issue Performance In Figure 17 we break down September issuance by individual security to see how Septembers new deals have fared since being issued. Figure 17: HY Issuance Performance September 2013
Rating
Issuer Bravida Holding AB Continental AG Enel SpA EDP Finance BV Telefonica Europe BV Telefonica Europe BV Avanti Communications Group PLC Borets Finance Ltd Commerzbank AG NXP BV / NXP Funding LLC SPCM SA EDU UK BondCo PLC Phosphorus Holdco PLC Jerrold Finco Plc TVN Finance Corp III AB Peugeot SA Polish Television Holding BV Renault SA Fiat Finance & Trade SA Hapag-Lloyd AG Lafarge SA Abengoa Finance SAU Veneto Banca SCPA MPT Operating Partnership LP Continental AG Currency EUR EUR EUR EUR EUR EUR USD USD USD USD USD GBP GBP GBP EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR Announce Date 04 Jun 13 02 Sep 13 03 Sep 13 05 Sep 13 11 Sep 13 11 Sep 13 26 Sep 13 19 Sep 13 12 Sep 13 10 Sep 13 25 Sep 13 12 Sep 13 18 Sep 13 16 Sep 13 06 Sep 13 10 Sep 13 11 Sep 13 11 Sep 13 12 Sep 13 20 Sep 13 20 Sep 13 25 Sep 13 25 Sep 13 26 Sep 13 02 Sep 13 Amount (bn) 225 750 1,250 750 625 1,125 370 420 1,000 500 250 205 205 200 430 600 300 600 400 250 750 250 300 200 750 Maturity 15 Jun 19 09 Sep 20 10 Jan 74 14 Sep 20 PERP PERP 01 Oct 19 26 Sep 18 19 Sep 23 15 Sep 16 15 Jan 22 15 Sep 18 01 Apr 19 15 Sep 18 15 Dec 20 18 Jan 19 15 Jan 21 19 Sep 18 14 Oct 19 01 Oct 18 30 Sep 20 05 Feb 18 18 Jan 16 01 Oct 20 09 Sep 20 Coupon 3ME+500 3.125% 6.500% 4.875% 7.625% 6.500% 10.000% 7.625% 8.125% 3.500% 6.000% 8.875% 10.000% 9.750% 7.375% 6.500% 11.000% 3.625% 6.750% 7.750% 4.750% 8.875% 4.250% 5.750% 3.125% Ba1 B1e (P)Caa1 Ba1 B2e #N/A N/A Ba1 Baa3 B1 B1 BBB+ BBBBB+ B BB BB BB+ Moody's (P)B2 Baa3 Ba1 Ba1 Ba1 Ba1 Caa1 (P)B1 Ba2 B3 (P)Ba3 (P)B3 (P)Caa2 CCC+ B+ B+ S&P B BB+ BB+ BB+ BB+ BB+ B BB BB+ B+ BB+ Issue 100.00 99.23 98.96 99.28 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.00 100.00 100.00 99.37 100.00 99.59 101.23 100.00 99.55 100.25 99.75 100.00 99.23

Price
Current 99.75 102.17 98.94 100.19 101.31 101.14 101.88 98.66 102.85 101.38 101.56 99.50 99.38 105.50 100.56 103.88 101.69 100.63 103.44 99.94 101.63 101.59 99.71 102.38 102.17 Change -0.25 2.95 -0.02 0.91 1.31 1.14 1.88 -1.34 2.85 1.38 1.56 -0.50 0.38 5.50 0.56 4.51 1.69 1.04 2.20 -0.06 2.08 1.34 -0.04 2.38 2.95

Source: Deutsche Bank, Dealogic DCM Analytics, Bloomberg Finance LP

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Deutsche Bank AG/London

2013

3 October 2013 HY Strategy Monthly: Q4 Outlook / Q3 Review

Implied Defaults and Default Spread Premiums: September

Figure 18 below outlines current 5Yr spread levels as well as the Implied Default Rates over a 0%, 20% and 40% recovery assumption. Worst and Average figures are also highlighted with the right figure pointing to Default Spread Premiums by rating band. Figure 18: September Month-End Implied Defaults (Left) and Default Spread Premiums assuming a 40% Recovery(Right)
Actual 5yr Implied 5yr Cumulative Default Cumulative Default Rate Rates (since 1970) 5yr 0% 20% 40% Spread Recovery Recovery Recovery IG Non-Fin AA A BBB HY Non-Fin BB B CCC 127 59 82 164 475 385 589 895 6.0% 2.7% 3.9% 7.7% 20.4% 16.6% 24.9% 37.1% 7.3% 3.3% 4.8% 9.4% 24.5% 20.1% 29.9% 43.9% 9.3% 4.2% 6.1% 12.0% 30.8% 25.3% 37.4% 53.7% Worst 2.4% 1.8% 2.5% 5.8% 31.6% 23.0% 41.1% 66.3% Average 1.0% 0.4% 0.8% 1.9% 21.3% 10.1% 25.0% 51.8%

350 250 150 50 -50 -150 -250 -350 AA A

Average

Worst

BBB

BB

CCC

Source: Deutsche Bank Note: Default Spread Premiums are the current spread level subtracted by the spread required to compensate for default

New Key Analyst Recommendations

On 23 September 2013 the High Yield Research Team published its quarterly Top Picks report, we highlight these trade ideas below:

Buy Com Hem EUR 287 million 10.75% Senior Notes due 2019 (8.6% YTW) Buy Gestamp EUR 500 million 5.875% Senior Secured Notes due 2020 (5.9% YTW) Sell Lecta EUR 200 million 8.875% Senior Secured Notes due 2019 (9.9% YTW) Sell Stena (Buy 5yr CDS protection) 395/410 Buy Sunrise EUR 275 million 8.75% PIK Notes due 2019 (8.8% YTW) Buy Takko EUR 380 million 9.875% Senior Secured Notes due 2019 (10.6% YTW)

Key Risks: Investments in the high yield asset class are subject to higher-thanaverage default rates and potential loss of principal. Key risk factors associated with each individual recommendation are outlined as part of each abbreviated credit summary. Link to full report:
http://pull.db-gmresearch.com/p/2729-B3D0/36449161/European_HY_one-stop.pdf

Deutsche Bank AG/London

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3 October 2013 HY Strategy Monthly: Q4 Outlook / Q3 Review

Key Analyst Remarks/Change in Recommendations for September

Below we now go through key changes to Analyst recommendations over the past month. We have provided the contact details for each Analyst plus additional commentary after the summary table in Figure 19. Figure 19: Summary of Key Analyst Comments in September 2013
Company Stena CDS Virgin Media Virgin Media Virgin Media Telenet Group Telenet Group Telenet Group Telenet Group Telenet Group Telenet Group Wind Telecom Wind Telecom CDS New World Res. New World Res.
Source: Deutsche Bank

Size (Mn)

Coupon

Maturity

Current SELL Phelan/O'Neal Khanna/ Velimoukhametova Khanna/ Velimoukhametova Khanna/ Velimoukhametova Velimoukhametova/ Khanna Velimoukhametova/ Khanna Velimoukhametova/ Khanna Velimoukhametova/ Khanna Velimoukhametova/ Khanna Velimoukhametova/ Khanna Khanna/ Velimoukhametova Khanna/ Velimoukhametova O'Neal/Phelan O'Neal/Phelan

Analyst Change Date Recommendation Change 04-Sep-13 18-Sep-13 18-Sep-13 18-Sep-13 20-Sep-13 20-Sep-13 20-Sep-13 20-Sep-13 20-Sep-13 20-Sep-13 23-Sep-13 23-Sep-13 30-Sep-13 30-Sep-13 Downgrade to Credit Sell Downgrade to Credit Hold Downgrade to Credit Hold Downgrade to Credit Hold Initiated Coverage with a Credit Hold Initiated Coverage with a Credit Hold Initiated Coverage with a Credit Hold Initiated Coverage with a Credit Hold Initiated Coverage with a Credit Hold Initiated Coverage with a Credit Hold Downgrade to Credit Hold Downgrade to Credit Hold Upgrade to Credit Hold Upgrade to Credit Hold

650 1,100 250 100 500 300 400 450 250 442

5.500% 6.000% 7.000% 5.300% 6.375% 6.625%

2021 2021 2023 2016 2020 2021

HOLD HOLD HOLD HOLD HOLD HOLD HOLD HOLD HOLD HOLD HOLD

E+3.875% 2021 6.250% 6.750% 2022 2024

12.250% 2017

500 275

7.875% 7.875%

2018 2021

HOLD HOLD

Upgrade/Downgrade Commentary: Stena CDS - (Richard Phelan - +44 207 547 4713): We rate Stenas cash bonds a CreditHold. However, we are using these Q2 2013 results and near historical tights on the 5 yr CDS as a catalyst to downgrade the CDS to a CreditSell (we recommend investors buy 5yr protection). We have previously been cautious about expressing an outright bearish view in CDS, and inclined to view positively de-leveraging potential, although discretionary capex decisions in recent years has put downward pressure on the credit metrics. With the announcement of a new large, uncontracted semi-submersible order and potentially another to be negotiated before year-end, we expect the commitment to de-leveraging management has expressed in earlier public communications will be delayed. Financial leverage is already high as a consequence of a multi-year investment programme, and the company is more than ever exposed to potential headwinds in the drilling sector or continued challenges in the shipping segment. (4 September 2013)

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3 October 2013 HY Strategy Monthly: Q4 Outlook / Q3 Review

Virgin Media - (Vivek Khanna - +44 207 547 2905): We downgrade our recommendation on VMED 5.5% Sr Sec Nts due 2021 (non-callable), VMED 6% Sr Sec Nts due 2021 and VMED 7% Sr Nts due 2023 to CreditHold, from CreditBuy, to bring it in line with the remaining bonds in the capital structure and the 5-yr CDS, all rated CreditHold. At the end of Q213, leverage through the Sr Sec and Sr Unsec bonds was 4.0x and 4.7x, implying spread per turn of leverage of 78bps for the VMED 5.5% Sr Sec 21s and c.92bps for the 6% Sr Sec 21s and 7% Sr Unsec 23s. We expect Sr Sec and Sr Unsec leverage to remain in the 4.0x and 5.0x marks respectively, as per Liberty Globals target leverage levels for its subsidiaries, and with the sufficient capacity under the restricted payments test, we believe the cash flows will be distributed to parent. We do not believe current levels offer value at these levels and therefore rate the entire capital structure CreditHold. (18 September 2013) Telenet Group - (Neyla Velimoukhametova - +44 207 545 0231): We rate Telenet senior secured bonds, all pari passu between each other, CreditHold. Despite the benign competitive environment and the solid mid-single digit EBITDA growth of +4.6% on a 3-yr FY2013-15 CAGR; driven by growth in the MVNO segment; the limited deleveraging prospects under the Liberty Globals majority ownership and the apparent lack of relative value offer Telenets senior secured bonds little scope for tightening at these levels, in our view. (20 September 2013) Wind Telecomunicazioni - (Vivek Khanna - +44 207 547 2905): We downgrade our recommendation on WINDIM 12.25% PIK Nts due 2017 and on the WINDIM 5-yr CDS to CreditHold from CreditBuy, as we believe the risk reward is no longer attractive at the current levels. The 5-yr CDS, trading c.50bps wider than VimpelComs similarly-dated cash-pay bonds z-spread, appears to offer limited room for tightening over the medium term. Furthermore, considering the higher leverage due to lower EBITDA estimates, asset cover today is less supportive and could pave the way for a less bondholder-friendly outcome. (23 September 2013) New World Resources - (Maggie ONeal - +44 207 547 6939): We view the proposed divestiture of the coke business as positive for NWR due to the liquidity support it provides in the context of currently loss-making mining operations. Additionally, the expected proceeds from the sale are in line with our expectations. We are therefore upgrading our recommendation on both the Senior Secured Notes due 2018 (bid: 74.0; YTW: 16.76%; STW: 1,613bps) and Senior Unsecured Notes due 2021 (bid: 52.0; YTW: 22.13%; STW: 2,094bps) from CreditSell to CreditHold as this transaction, should it be completed, affords the company additional time to proceed with its business optimization measures (approximately 6-9 months more than our previous expectation). Against the backdrop of this positive development, we note that management still needs to deliver on the balance of its targets to put the company on solid footing; notably, they need to reduce labour costs, optimize mining operations and maintain lower capex. (30 September 2013)

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Appendix 1
Important Disclosures Additional information available upon request
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Stephen Stakhiv/Nick Burns/Jim Reid

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3 October 2013 HY Strategy Monthly: Q4 Outlook / Q3 Review 3 October 2013

Regulatory Disclosures 1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless "Japan" or "Nippon" is specifically designated in the name of the entity. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

Risks to Fixed Income Positions

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates - these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.

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David Folkerts-Landau
Global Head of Research Marcel Cassard Global Head CB&S Research Asia-Pacific Michael Spencer Regional Head Ralf Hoffmann & Bernhard Speyer Co-Heads DB Research Germany Andreas Neubauer Regional Head Guy Ashton Chief Operating Officer Research Richard Smith Associate Director Equity Research North America Steve Pollard Regional Head

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