An Understanding of the Capital Markets - Citibank Understanding of the Capital Markets By: ... India and China) ... A Promising Story of Growth and Development

The Financial Professionals Forum 2012

An Understanding of the Capital Markets By: Mario Espinosa

Managing Director and Co-Head of Latin America Credit Markets

1


Table of Contents

1. Capital Markets Overview 3

2. Alternatives for Corporate Debt Financing 12

3. Banking Environment 14

4. Citi’s Presence and Franchise 19

1. Capital Markets Overview


The Advantages of the Emerging Markets

Emerging market economies have weathered the storm better than industrialized nations and have outpaced developed nations in growth terms

Responsible fiscal policies by most EM nations have allowed them to bounce back quicker than the majority of industrialized nations – As a result, the European debt crisis has not directly affected LatAm

The economies of the emerging countries enjoy strong investment and capital inflows as well as established and well-capitalized banking institutions

For the most part since January 2007, the equity indexes of BRIC nations (Brazil, Russia, India and China) have outperformed those of industrialized nations

2.9% 2.2%

2.8%

1.7% 2.1% 2.2%

4.1% 3.3%

4.2%

1.3% 1.3% 1.6% 1.5%

-0.4%

0.7%

6.2% 5.7% 6.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2011 2012F 2013F

Global U.S. LatAm Developed Nations Eurozone Emerging Markets

GDP Growth Equity Performance EM vs. Industrialized Nations

(80%)

(60%)

(40%)

(20%)

--

20%

40%

60%

Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

U.K. U.S. Brazil China India

2


Current Global Growth vs Pre-Crisis Average

Latin America and the Caribbean: A Promising Story of Growth and Development

(Legend’s colors indicate %Growth 2011-2012 minus %Growth 2000-2007)

For most regions of the world, economic growth between 2000 and 2007 was much higher than it is today, whereas emerging markets have more growth today than they did back then, placing this region, and most notably Latin America, as an attractive asset class with strong fundamentals

Below (2.0%)

Between (2.0%) and 0.0%

Between 0.0% and 2.0%

Above 2.0%

Insufficient Data

3


Local Banks Regional Banks International Banks

Corporates, Governments, Quasi Sovereigns and Financial Institutions have three main sources for securing financing…

Introduction to Financing Alternatives in the Debt Markets

Regional Markets

Asset Managers

Local Pension Funds

Hedge Funds

Regional Banks

Insurance Companies

International Bond

Markets Asset

Managers

Pension Funds

Hedge Funds

Private Banks

Insurance Companies

Syndicated Loan

market

Local Banks

Regional Banks

International Banks

Corporates

Governments

Quasi-Sovereigns

Financial Institutions

4


Capital Markets at Citigroup

CMO Product Partners

• Derivatives • New Products • Liability Management • Structured Bonds • Capital Strategies

Issuer

Equity Capital Markets Capital Markets Origination

Syndicate

Sales and Trading

Investors

Investment Bank / Corporate Bank

Private

Public

Who Do We Work With? – CMO works closely with coverage in

Investment & Corporate Banking, Product Partners in Equity and Fixed Income and with Syndicate.

What Do We Do? – CMO advises corporate clients on debt

and hybrid capital solutions in the fixed income markets, both in the U.S. and internationally

Why Access the Market?

Refinancing; M&A; Growth Capital ;Capital Structure Optimization

Issuer Considerations

Financial Impact; Ratings; Regulatory; Tax Legal

Market Considerations

Public vs. Private; USD vs. Non-USD; Institutional vs. Retail; Size, Timing, Maturity; Marketing; Market Conditions

5


43.3

74.2 82.9

51.5 46.5 44.3

63.0

22.2

0.0

20.0

40.0

60.0

80.0

100.0

2005 2006 2007 2008 2009 2010 2011 2012

Volu

me

(US$

BN

)

35.1 33.9 42.7

19.5

67.2

90.7 94.4

69.5

0.0

20.0

40.0

60.0

80.0

100.0

2005 2006 2007 2008 2009 2010 2011 2012

Volu

me

(US$

BN

)

25.2 24.1

17.8 13.8

17.8

29.6 29.5

18.8

0.0

7.0

14.0

21.0

28.0

35.0

2005 2006 2007 2008 2009 2010 2011 2012

Volu

me

(US$

BN

)

International LatAm Capital Markets Regional LatAm Bond Markets

Syndicated LatAm Loan Market Cumulative LatAm Credit Markets

▲ 05-11 CAGR: 2.6%

Historical Debt Issuance in LatAm DCM

Source all graphs: Dealogic as of August 2012

▲ 05-11 CAGR: 17.9%

▲ 05-11 CAGR: 6.9% ▲ 05-11 CAGR: 10.3%

103.6

132.2 143.3

84.8

131.6

164.6

186.9

110.5

0.0

40.0

80.0

120.0

160.0

200.0

2005 2006 2007 2008 2009 2010 2011 2012

Volu

me

(US$

BN

)

6


▲ Largest pocket of liquidity

▲ Longest possible tenors (30 years and Perps)

▲ Free up cash flow given bullet payment at maturity

▲ Significant structural flexibility, incurrence test for non-investment grade issuers and no financial covenants for investment grade

Pros

Issuers generally access institutional U.S. market with a 144A/Reg S transaction – Enhances speed of execution and simplicity – Sale of securities on a firm commitment basis

Subsequent resale to non-U.S. investors and to qualified institutional buyers (“QIBs”) – 144A / Reg S are the most common securities in LatAm, however, frequent issuers also access

through registered transactions In recent years we have also witnessed offerings in non US markets in currencies such as

EUR/GBP/CHF/JPY/AUD An offering in the International Capital Markets generally takes 8 weeks for infrequent/first-time

issuers but a frequent SEC-registered issuer can access the market within one week

Traditional International Capital Markets

▼ Ratings required

▼ Standard terms for draw downs (only one) and prepayment (bullet)

▼ Limited prepayment flexibility

▼ Typically more expensive than bank financing

Cons

7


International Issuance Breakdown 2012 YTD

Country Sector

Traditional International Capital Markets (Cont’d)

Tenor

21%

19%60%

Corporate Sovereign Financial

52%

22%

15%

5%4% 2%

>7-10 years >10 years >3-5 years2-3 years Perp >5-7 years< 2 years

50%

24%

6%5%

3%

12%

Brazil Mexico Peru

Colombia Chile Other

Source all graphs: Dealogic as of 2012YTD

8


LatAm Syndicated Loan Market Review

LatAm Loan Spreads Average spreads in 2Q’12 have come down

from the previous quarter

LatAm Loan Share by Tenor Tenors between 1 to 5 years remain

most tapped

Source all graphs: Dealogic as of 2Q 2012

9


LatAm Syndicated Loan Market Review (cont’d)

LatAm Issuance by Loan Type Term Loans comprise bulk of LatAm

lending in 2Q’12

LatAm Loan Issuance by Purpose 2Q’12 Project and Trade Financing comprise over half

of issuance in 2Q’12

Other denotes: Working Capital, Debt CP Support, Dividend Recapitalization and Shipping Other denotes: Bridge Facilities, Export Credit, Mezzanie Loans, Buyer Credit and L/C Facilities

Source all graphs: Dealogic as of 2Q 2012

31%

25% 11%

8%

7%

6%

5% 4% 3%

Project Financing

Trade Financing

Acquisitions

Refinancing

Other

GCP

Repayment

ECA

Capex

10

2. Alternatives for Corporate Debt Financing


Understanding the Company’s Objectives

Upside

▲ Largest pocket of liquidity

▲ Longest possible tenors (10, 30 years)

▲ Structural flexibility

– Non-Investment Grade: Incurrence Covenants

– Investment Grade: No financial covenants

– No need to pledge security

International Bond Market Syndicated Loan Market

Upside

▲ Relationship focused

▲ Experience in assessing risks and projected cashflows

▲ Prepayment flexibility

▲ Taps into Mexican bank peso liquidity

Downside ▼ Ratings required ▼ One Draw Down and One Payment

Downside ▼ Amortization payments ▼ Maintenance covenant packages ▼ Shorter tenors than bond market ▼ Cross sell required by banks to meet

returns ▼ Often requires asset or stock security

11


The optimal amount of leverage is a trade-off between the benefits of the tax shield, the higher likelihood of financial distress and rising cost of capital.

BenefitsCosts

Implications of Higher Leverage

PossibleFinancialDistress

More leverage implies a higher likelihood of financial distress

Possible costs include: – Diverting management’s focus– Loss of capital markets access– Suppliers and clients reluctant

to do business

IncreasedCost ofCapital

Higher leverage = lower credit ratings and higher cost of debt

Cost of equity increases as equity holders require compensation for increased risk

Loss ofFinancialFlexibility

Less capacity to use debt for funding strategic initiatives (such as acquisitions or capex)

TaxShield

For a typical US C-corporation, increasing leverage provides a ‘tax shield’ by reducing taxable income with interest expense– Provides a benefit to the

company’s cost of capital

Value of tax shields depends on the company’s ability to generate positive earnings

Estimated by (tax rate * taxable income after considering NOLs)

ImprovedIncentives

Increased leverage increases management’s incentive to extract operating efficiencies, as interest expense creates a ‘hurdle rate’ of return on capital that must be cleared– Agency costs are reduced

Understanding the Company’s Optimal Leverage

12

3. Banking Environment


European Banks’ Key Indicators: Snapshot

Market Cap of Top 30 EU Banks (1) More Than Halved

Credit Ratings Have Been Adjusted (2)

European BanksNon-European BanksSource: Moody’s, SNL, Bloomberg, FactSet as of June 25, 2012.

Notes: (1) 30 largest listed European banks, by market capitalisation as at June 25, 2012. (2) Moody’s ratings of main operating banking entities.

1,174

1,020

727700

469 461

408

-

200

400

600

800

1,000

1,200

2006 2007 2008 2009 2010 2011 2012YTD0

100

200

300

400

500

Market Cap European Banks EURO STOXX BANKS - Performance

Mar

ket C

ap (E

RU b

n) Price (EUR)

Loss in Market Cap: 61%

Total Return of Euro Stoxx Banks since Jan

2006: (69.8%)

Dec. '07 Aug. '12 Notches

BBVA Aa1 Baa3 (9) Banco Santander Aa1 Baa2 (7) Bank of America ML Aaa Baa2 (8) Danske Bank Aa1 Baa1 (6) OTP A2 Ba2 (6) RBS Plc. Aaa Baa1 (7) Citibank N.A. Aa1 A3 (5) Lloyds TSB Bank Plc. Aaa A2 (5) UBS Aaa A2 (5) Barclays Bank Plc Aa1 A3 (2) BNP Paribas Aa1 A2 (4) Credit Agricole Aa1 A2 (4) Deutsche Bank Aa1 A2 (4) Intesa Sanpaolo Aa2 Baa2 (6) KBC Bank NV Aa2 A3 (4) Societe Generale Aa1 A2 (4) UniCredit Aa2 Baa2 (6) Credit Suisse Aa1 A2 (4) DnB Aa1 A1 (3) Erste Bank Aa3 A3 (3) JPMorgan Chase Bank N.A. Aaa A2 (5) Morgan Stanley Bank N.A. Aa3 Baa1 (4) Natixis Aa2 A2 (3) Nomura Holdings Plc. A3 Baa3 (3) Royal Bank of Canada Aaa Aa3 (3) Goldman Sachs Banks USA Aa3 A3 (3) Nordea Aa1 Aa3 (2) Macquarie Bank A1 A2 (1)

13


Higher leverage

= Maximize

RoE

Banking Sector – the New Norm?

Change in Banking Sector Drivers Old World

Strong credit fuelled growth 1

Low provisions 2

Robust NIMs 3

Light touch regulation 4

Abundance of liquidity 5

Lower leverage to reduce risk

= Lower RoE

New World

Low growth & pressure from sovereign crisis 1

Deteriorating asset quality 2

Record low interest rates 3

Higher capital requirements / deleveraging needs

4

Higher funding costs and liquidity requirements

5

14


Implications of Basel III

Minimum Capital Ratios

Constituents of Capital

Liquidity Requirements

Leverage Requirements

Basel III Main Enhancements from Basel II and Basel I

As Basel III is incorporated throughout the market, cost of funds and return hurdles for ALL BANKS are expected to increase, especially for non-investment grade credits.

15


6050403020100

10.0%

9.5

9.0

8.5

8.0

Total Debt / Total Capitalization (%, Market Value)

Cos

t of C

apita

l (%

)

Lo

we

st

Co

st(B

ase

l I)

Lo

we

st

Co

st(B

ase

l II)

HYIG

6050403020100

10.0%

9.5

9.0

8.5

8.0


Cos

t of C

apita

l (%

)

Lo

we

st

Co

st(B

ase

l I)

Lo

we

st

Co

st(B

ase

l II)

HYIG

6050403020100

10.0%

9.5

9.0

8.5

8.0


Cos

t of C

apita

l (%

)

Lo

we

st

Co

st(B

ase

l I)

Lo

we

st

Co

st(B

ase

l II)

HYIG

AA A BBB BB B -30 to -20 bps -30 to -20 bps

0 bps

75 to 100 bps

~ 250 bps

Break-even Pricing Implication (in bps) for a $100MM Unsecured 5yr Loan to

maintain Returns on Risk Rated Capital

Illustrative

Basel III will increase the cost of debt for lowered rated companies

Basel II / III

Basel I

Implications of Basel III (cont’d)

16


Basel I Minimum

Basel III Minimum

Basel III Minimum + Buffer(2.5%)

Basel III Minimum + Buffer + G-SIB Surcharge (2.5%)

Tier 1 CommonTier 1 Capital

5% 6%

4.5% 6%

7%

8.5%

9.5%

11%

How Much Capital Will Banks be Required To Hold?

Basel I Minimum

Basel III Minimum

Basel III Minimum + Buffer

Basel III Minimum + Buffer + G-SIB Surcharge

17

4. Citi’s Presence and Franchise


Citi’s Presence in LatAm & CCA

Source: SDC Thomson Reuters as of April 14, 2011

International Bonds LTM

Ranking Bookrunner Proceeds (US$MM)

No. Deals Share

1 Itau BBA 2,965 27 11.8%

2 2,908 38 11.6%

3 HSBC 2,226 26 8.9%

4 BBVA 2,153 37 8.6%

5 Bradesco BBI 1,851 19 7.4%

6 Santander 1,823 29 7.3%

7 Banco do Brasil 1,495 10 6.0%

8 BTG Pactual 1,449 14 5.8%

9 BCP 588 13 2.3%

10 Bancolombia 417 9 1.7%

Source: Dealogic as of August 21, 2012


No. Deals Share

1 2,990 21 6.5%

2 HSBC 2,226 11 4.9%

3 Itau BBA 1,966 15 4.3%

4 BNP Paribas 1,578 6 3.5%

5 JPMorgan 1,478 11 3.2%

6 Sumitomo Mitsui 1,200 8 2.6%

7 BBVA 1,178 6 2.6%

8 Credit Agricole 1,118 8 2.4%

9 ING 974 7 2.1%

10 BAML 936 6 2.1%

Domestic Bonds LTM Syndicated Loans LTM


No. Deals Share

1 Deutsche Bank 14,583 35 13.9%

2 HSBC 12,687 43 12.1%

3 12,261 40 11.7%

4 JPMorgan 10,283 33 9.8%

5 Credit Suisse 9,213 27 8.8%

6 BAML 7,009 28 6.7%

7 Morgan Stanley 5,331 16 5.1%

8 Santander 5,137 16 4.9%

9 Goldman Sachs 4,136 16 3.9%

10 Itau BBA 3,587 19 3.4%

18

efficiency, renewable energy & mitigation

In January 2007, Citi released a Climate Change Position Statement, the first US financial institution to do so. As a sustainability leader in the financial sector, Citi has taken concrete steps to address this important issue of climate change by: (a) targeting $50 billion over 10 years to address global climate change: includes significant increases in investment and financing of alternative energy, clean technology, and other carbon-emission reduction activities; (b) committing to reduce GHG emissions of all Citi owned and leased properties around the world by 10% by 2011; (c) purchasing more than 52,000 MWh of green (carbon neutral) power for our operations in 2006; (d) creating Sustainable Development Investments (SDI) that makes private equity investments in renewable energy and clean technologies; (e) providing lending and investing services to clients for renewable energy development and projects; (f) producing equity research related to climate issues that helps to inform investors on risks and opportunities associated with the issue; and (g) engaging with a broad range of stakeholders on the issue of climate change to help advance understanding and solutions.

Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.

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An Understanding of the Capital Markets - Citibank Understanding of the Capital Markets By: ... India and China) ... A Promising Story of Growth and Development