EFTA01458276.pdf

1 September 2016 Corporate Credit: Back to school - The edge of normality IG Commodity Bonds: Value in the Vol? Whilst EUR HY has very limited exposure to commodity related issuers, the EUR IG credit market has a more material exposure, albeit still notably less than the USD credit market. Here we take a look at the impact of the selloff on these EUR IG commodity related names and potential opportunities. C; oornroodIty hen d: during the coromociily ofl Amid generally weak performance in the EUR IG credit market over the past few months, bonds issued by basic materials and oil and gas issuers have been amongst the worst performers. The sell-off has been driven by the resumption of steep declines in commodity values. The tight relationship between the sell-off in commodity markets and of commodity companies' bonds can be seen in Figure 21 and Figure 22. Figure 21: Basic Materials and Oil and Gas• IG Bonds ASW spreads minus Figure 22: Correlation by sector to iBoxx IG Corporate All index spread vs commodity prices commodity index .i pESC Material/ - An X01 nis Gas ex Rebalance -MI 2s —commodity mon (RR& inv 170 100 Wr I (RHS. twee) r30 •Convletion to CRY Index (June - August) 20 190 IS 110 80 50 10 40% 230 60 70 6 430% 250 0 00% 270 40 90 -5 -100% -10 290 20 110 -IS 310 4 /see7; 1C ert e /S teke -20 330 0 130 Jan 14 Jul 14 Janis Jul 15 Jan 14 Jai 14 Jan 15 Jul 15 • ce Sans Daarat• 94* OSO abersep Anew /L/1/314ear- Moe 'Sam IN oragats•aw *ads to baba b ens Obnarbtra I Sourer Ababa Sank 054 Scabby Anima LIP NYbalablibila aI IbIbarl a bebib OS owllaannila Single-A and especially BBB commodity bonds trading as If already downgraded For this analysis we focus on non-financial, non-subordinated bonds only. What is clear is that IG basic resource and oil and gas bonds are trading much wider than the rest of the market now, especially in single-As and BBBs (Figure 231. Single-A commodity bonds are quite wide vs. other single-As whilst oil and gas and especially basic resource BBB bonds are trading very wide vs. the rest of the BBB market. iFigure 23: Single-A (LHS) and BBB Bonds (RHS) BMK spreads vs. matur ty by sector • Bask Resources • Chemicals • Basic Resources ta Chemicals 300 Oil & Gas • Rest 600 Oil & Gas • Rest — Linear (Rest) — Linear IReell 250 • 600 200 • i 400 • ci. • v) 150 • to300 • wirl; `* 03 100 • co 200 • c. 50 - 100 - 0 0 0 10 20 30 40 0 5 10 16 20 26 Years to Maturity Years to Maturity Source abaft Bank Abate Cabal The market is clearly trading with a palpable fear of downgrades, especially in BBBs where the potential downgrade to HY is particularly stark. You can see Deutsche Bank AG/London Page 13 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0118114 CONFIDENTIAL SDNY_GM_00264298 EFTA01458276