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2 0 0 8May You Live in Interesting Times
7 October, 2008
Confidential 2
AGENDA
Living in Interesting Times
• Liquidity Crunch and the Corporate Treasurer
• Liquidity Crunch and the Investor
• Current Operational Topics
• Thinking Forward
• Appendix: Greenwich Associates
Confidential 3
May you live in interesting times: a curse come true?
• Commodity prices up, or down again?
• Inflation spiking, or moderating again?
• EOS, Silverjet, Zoom, XL
• Alitalia, BA/Iberia, LH/SAS
• Bear Stearns, Northern Rock, Lehman, ML
• ?
Confidential 4
63%
60%
60%
53%
39%
34%
30%
26%
23%
11%
12%
65%
42%
61%
43%
40%
20%
23%
22%
24%
7%
4%
8%
67%
47%
60%
49%
41%
22%
32%
26%
18%
7%
9%
73%
60%
57%
37%
45%
30%
26%
26%
15%
14%
59%
OverallAsia PacificEuropeNorth America
Responsible for Current Market Turmoil in the United States
Government Institutions and Regulators* (471)
The U.S. Federal Reserve/Central Bank (341)
* U.S. Congress, U.S. Securities and Exchange Commission and U.S. Treasury DepartmentNote: Based off responses from 900 respondents globally
Consumers (303)
Accounting Regulations (266)
The Housing Construction Industry (100)
Investment Banks (555)
Mortgage Underwriters (533)
Rating Agencies (533)
Hedge Funds (226)
Sellers of Credit Default Industry (203)
Nobody is Responsible (5)
Other (103)
Confidential 5
Responsible for Current Market Turmoil in the United States
Other Mentions:
• “All of the parties that bought poorly written securities or changed their underwriting/risk taking standards.” – Asset Manager, North America
• “Bush's economic policies.” – Asset Manager, North America
• “Government policy encouraging lending to low income people and lax lending standards overall.” –Asset Manager, North America
• “Greed of homebuilders, banks and consumers.” – Asset Manager, Europe
• “Lack of understanding of underlying risk.” – Asset Manager, Europe
• “Loose credit policy across the board; free money thanks to Alan and cheap lending by banks based more on asset valuation then credit scoring. Also, consumer desire for goods that led them to borrow to spend so lets blame advertising at the same time.” – Asset Manager, Europe
• “Many are responsible. We have had low interest rates and low spread for too long. We ended up with all the same positions which were too leveraged.” – Corporate, Europe
• “Mr. Greenspan, due to his period of easy money and low interest rates.” – Corporate, Europe
• “Real estate speculators.” - Asset Manager, North America
• “The cheap money over the last 15years and clearly a misunderstanding in modeling risk this was compounded by rates being keep extremely low and a housing market worldwide that contributed too large a percentage to everyone's GDP.” – Asset Manager, North America
• “Wrong Compensation Incentives of IB [Investment Banks].” – Asset Manager, Europe
Confidential 6
32%
31%
19%
18%
30%
32%
18%
20%
33%
35%
13%
19%
32%
28%
23%
17%
The U.S. FederalReserve/ Central
Bank
U.S. Governmentinstitutions and
regulators
The "free market"
None of the above
Global
Asia Pacific
Europe
North America
Entity that Inspires Most Confidence in Addressing Current Market Turmoil
Note: Based off responses from 882 respondents globally
Confidential 7
Not at all confident
24%
Uncertain16%
Very/ Somewhat confident
61%
Level of confidence in the U.S. Federal Reserve’s $700 Billion Bailout Plan
Note: Based off responses from 901 respondents globally
92%
58%
64%
61%
0% 25% 50% 75% 100%
Europe
Asia Pacific
North America
Latin America
Confidential 8
No20%
Uncertain14%
Yes65%
Short Selling of Financial Services Firms
Note: Based off responses from 868 respondents globally
Do you think short selling of financial services firms should be allowed?
Yes32%
Uncertain14%
No55%
No39%
Uncertain14%
Yes47%
Asset Managers Corporates Pensions
Confidential 9
A clear majority of companies expect their economies to deteriorate over the next six months, with a positive turn not until 12-18 months out.
No Change18%
Deteriorate Significantly/Deteriorate
71%
Improve Significantly/
Improve11%
Expected Length of Time BeforePositive Economic Turn
6 Months
2 Years
18 Months
12 Months
Note: Based on interviews with 100 U.S. companies in February, and 291 U.S. companies in September of 2008.
16%
49%
28%
7%
0%
4%
50%
32%
11%
4%
February 08
September 08
Longer than 2 years
U.S. Companies – September 2008
Confidential 10
52%
47%
52%
69%
53%
24%
23%
22%
5%
27%
22%
25%
24%
15%
20%
2%
0%
0%
0%
1%
1 - 2 years12 Months or lessMore than 2 yearsUncertain
Expected Length of Time Before Positive Economic Turn
Latin America (13)
North America (492)
Note: Based off responses from 889 respondents globally
Global (889)
Asia Pacific (84)
Europe (310)
Confidential 11
23%
21%
22%
15%
24%
67%
70%
70%
77%
66%
6%
9%
5%
0%
6%
3%
1%
4%
8%
3%
1 - 2 years12 Months or lessMore than 2 yearsUncertain
Amount of Time Before Equity Markets Hit Bottom
Latin America (13)
North America (490)
Note: Based off responses from 897 respondents globally
Global (887)
Asia Pacific (84)
Europe (310)
Confidential 12
Corporate Bond Spreads only match those of 2002/2003 while FI spreads exceed them, highlighting how difficulties in the Financial System will extend the current difficult environment
Confidential 13
Note: Based on interviews with 291 companies in the United States in September 2008.
The strongest increase in demand for financial products is for hedging products and funding products.
-15
-16
-12
-9
-6
14
13
15
24
22
-50 -25 0 25 50
Expected Change in Need for Funding (% of Companies)
Funding forOngoing Operations
Funding for Capital Expenditures
Acquisition Finance
Structured Finance
Hedging Products
Increase/Increase SignificantlyDecrease/Decrease Significantly Companies’expected change in
need for funding shows only
relatively modest shifts, with expected
increases and decreases nearly netting to zero.
Need for funding for ongoing operations
is up, while need for funding capital expenditures or
acquisition finance is flat to down
slightly.
Confidential 14
The Short View: Credit squeeze outlook
Lending officers said they were continuing to tighten standards, whether on credit cards, prime mortgages, consumer or business loans, even though a strong majority of banks had done this in the second quarter. That implies a squeeze on consumption, and lower investment, as the year goes on.
Polling lenders in the eurozone, seemed a little less gloomy, but only on the surface. There were slight decreases in the proportion of banks planning to tighten standards for corporate loans. Furthermore, lending officers said demand for company loans was decreasing and economic risks were putting pressure on them to tighten.
In Europe and the US, the cost of insuring against default for investment-grade companies has risen but stayed well below recent highs, while the default risk for high-yield or lower-quality credits has shot up, almost regaining its highs. Spreads payable on speculative-grade credits are at their highest in four months.
Financial Times PUBLISHED: AUGUST 14 2008
Confidential 15
Tightening of Credit Standards is expected to continue in the USA and Europe
0
10
20
30
40
50
60
1st Qtr 2nd Qtr 3rd Qtr
EuropeUSA
Note: Third quarter values are expectedSource: ECB and FRB Quarterly Lending Conditions surveys
Confidential 16
Both in Europe and the US banks expect loan demand to weaken, but in the US more than before and in Europe less than before
-20
-15
-10
-5
0
5
10
15
20
1st Qtr 2nd Qtr 3rd Qtr
EuropeUSA
Note: Third quarter values are expectedSource: ECB and FRB Quarterly Lending Conditions surveys
Confidential 17
AGENDA
Living in Interesting Times
• Liquidity Crunch and the Corporate Treasurer
• Liquidity Crunch and the Investor
• Current Operational Topics
• Thinking Forward
• Appendix: Greenwich Associates
Confidential 18
5%
66%
69%
67%
0%
51%
69%
76%
0%
58%
74%
66%
2%
58%
70%
71%
70% of Investors Expect a Recession in the United StatesFebruary 2008
Limited borrowing capacity for corporates
Recession in the United States
Global economic downturn
Note: Based on responses from 234 global institutions.
Total Institutions
Asia (ex Japan)
Europe
North America
None of the above
Confidential 19
Performance of CDOs and Structured Credit Products has Made morethan One Half of Investors Reluctant to Invest in themFebruary 2008
Uncertain, 22%
No, 19%
Yes, 58%
Note: Based on responses from 221 global institutions.
Yes, 50%
No, 29%
Uncertain, 21%
Yes, 56%
No, 13%
Uncertain, 31%
Asia (ex Japan) Europe North America
Has the performance of CDOs/ structured products made you less likely to invest in these products in the future?
Confidential 20
But a Meaningful Minority Plan to Invest in Illiquid InstrumentsFebruary 2008
Yes, 37%No, 63%
Asset-backed commercial paper
Agency securities
High-yield credit bonds
50%
48%
46%
41%
33%
28%
26%
24%
24%
24%
22%
17%
Mortgage-backed securities
Note: Based on responses from 128 global institutions.
Asset-backed securities
Commercial mortgage-backed securities
High-yield CDS
Distressed debt
Leveraged loans
Emerging markets bonds
Covered bonds
Collateralized debt obligations
Which illiquid instruments did you or do you plan to invest in?
Did you or do you plan to invest in illiquid instruments due to the turmoil in the credit markets?
Confidential 21
33%
27%
14%
15%
60%
83%
38%
47%
54%
60%
56%
60%
76%
56%
64%
65%
Systemic and Counterparty Risk Have Become Bigger ConcernsFebruary 2008
United States (Q1 2007)
Europe (Q2 2007)
Global (Q3 2007)
Note: Asked of 1,007 U.S. investors from 2/12 – 4/12/07; asked of 1,106 European investors from 5/21 – 7/27/07; asked globally of 251 fixed-income and equity derivative investors from 8/30 – 9/7/07 and 214 from 1/22-2/6/08.
Systemic/market risk
Credit/default risk
Liquidity
Counterparty risk
Global (Q1 2008)
Proportion of Investors Citing Each Factor as a Top Risk
Confidential 22
AGENDA
Living in Interesting Times
• Liquidity Crunch and the Corporate Treasurer
• Liquidity Crunch and the Investor
• Current Operational Topics
• Thinking Forward
• Appendix: Greenwich Associates
Confidential 23
Return expectations for cash investment have declined in the United States following declining interest rates and more conservative portfolio allocations.
7.1%
3.8%
4.9%
6.7%
5.5%
3.7%
Note: Based on responses from 95 companies in the United States, 99 in Europe, and 66 in Asia from February 2008 and 678 in the United States from April through June 2007, 100 in Europe and 174 in Asia from August through November 2007.
United States
Europe
Asia
February 2008
February 2008
February 2008
October 2007
October 2007
May 2007
Target Annual Return on Cash Investments
Confidential 24
U.S. companies are shifting more cash investment into higher-rated securities.
4%
0%
1%
8%
17%
71%
0%
0%
0%
5%
16%
78%
Note: Based on responses from 65 companies the United States from February 2008 and 617 from April through June 2007.
AAA/Aaa
AA/Aa
No Ratings/Other
February 2008May 2007
A/A
BBB/Baa
BB/BA or below
Cash Portfolio Allocation US companies
Confidential 25
European companies have shifted cash investments toward lower-rated/higher-yielding securities.
21%
0%
3%
15%
28%
32%
4%
0%
4%
22%
47%
22%
Note: Based on responses from 53 companies in Europe from February 2008 and 110 from August through November 2006.
AAA/Aaa
AA/Aa
No Ratings/Other
February 2008October 2007
A/A
BBB/Baa
BB/BA or below
Cash Portfolio Allocation European companies
Confidential 26
Similar to U.S. companies, Asian firms have moved toward higher-rated securities for cash investments.
26%
1%
3%
8%
17%
45%
6%
3%
5%
16%
31%
49%
Note: Based on responses from 36 companies in Asia from February 2008 and 247 from August through November 2006.
AAA/Aaa
AA/Aa
No Ratings/Other
A/A
BBB/Baa
BB/BA or below
February 2008October 2007
Cash Portfolio Allocation Asian companies
Confidential 27
3.4
5.1
4.34.7
4.7
4.8
4
4.2
3.9
3.93.83.7
3.3
5.2
5.8
5.255.4
4.8
4.4
2004 2005 2006 2007
Top Tier Europe
European Airlines
Asia
Asian Airlines
U.S.
U.S. A irlines
Banks used
Average number of banks used for Cash Management Services by airlines declines unlike in the wider market
Confidential 28
55%
56%
61%
63%
59%
63%
Share of Wallet to the Lead PCM Bank
Total Asia
Top Tier Europe
United States
AirlinesOverall
Distribution of PCM wallet to the lead PCM bank virtually unchanged
Confidential 29
SEPA and electronic payments are catalysts for consolidation but not main drivers
Yes, 30%No, 70%
Anticipate consolidating cash management service needs among fewer providers? Reasons
28%
6%
32%
58%
Greater use of electronic payments & receipts
Pressure from large credit provider
The effects of SEPA being introduced
Other
Confidential 30
Companies still do not anticipate meaningful changes from SEPA and half have not made detailed plans to take advantage of its benefits
Expected Impact of SEPA:
27%
7%
12%
11%
12%
61%
31%
11%
18%
10%
14%
60%
Reduction of the number of accounts used in different European countries for
the purpose of payments and collections
Reduction of the number of finance/treasury centers within Europe
Reduction of the number of cash management providers used
Reduction in the amount of working capital required for your European
operations
More accurate cash flow forecasting
No significant change
When will you have necessary payment data for clients in order to take advantage of SEPA?
38%
15%
47%
36%
19%
44%
Already mostly in place
In place by the end of 2007
No detailed plans yet
20062007
Confidential 31
75%
91%
69%
84%
97%
90%
Fraud Prevention Extremely Important in Selecting Providers*
Total Asia
Top Tier Europe
United States
* Based on ratings of “4” or “5” on the 5-point scale.
20072006
Fraud prevention is becoming more important in Europe in selecting cash management providers
Confidential 32
Key Sources of Fraud Monitored and Controlled: Internal sources of fraud are becoming a greater concern
Top Tier Europe
40%
50%
46%
42%
39%
16%
56%
57%
39%
30%
30%
11%
Total Asia
58%
42%
42%
45%
37%
7%
63%
43%
50%
43%
37%
4%
Check Processing (for receivables or payables)
Internet-based or other electronic forms of payments (receivables or payables)
Illicit use of company funds for payments to third parties by your employees
Misappropriation of funds by employees or your company
Protection of financial data of customers or suppliers (e.g. customer credit card details
stored in your databases)
Other
20072006
Confidential 33
A meaningful minority of companies expects to move to direct access to SWIFT shortly
Yes, 28%No, 72%
Plans to move company to direct access to SWIFT
When do you expect company to begin using SWIFT?
* Includes liquidity management, supply chain management, trade finance, cash management, and foreign exchange.
0-3 months
4-6 months
7-12 months
1-2 years
2-3 years
3+ years
44%
10%
16%
8%
4%
18%
Confidential 34
AGENDA
Living in Interesting Times
• Liquidity Crunch and the Corporate Treasurer
• Liquidity Crunch and the Investor
• Current Operational Topics
• Thinking Forward
• Appendix: Greenwich Associates
Confidential 35
• Funding cost has soared and access is getting harder
• Companies will need to change the way in which they manage their bank relationships
• More consistent access to capital markets requires a different approach to debt capital markets providers and investors
• New tools and payments options coming on-stream
• Increasing concerns about fraud in operations
• What you should think about next……
Changes in availability and cost of external funding will trigger fundamental changes in companies’ funding strategies
Confidential 36
Thinking Forward: Are You Prepared?
Funding Costs and RisksHow to demonstrate credit qualityMarketing the company to InvestorsMore limited funding options (sources and structures of capital)Nervous intermediariesHas the ability of our business to generate funds internally deteriorated relative to the competition. Do we have better or worse access to funding than competitors?Which banks demonstrate a consistent and ongoing commitment to corporate clients despite the credit crisis?How do I need to adapt my communication with bond holders to improve access to public markets?Risks to the asset side of my balance sheet from bank counterparty risk?
Operational ChallengesSurprisingly modest preparedness for SEPAHow can your banks help in fraud prevention?
Confidential 37
AGENDA
Living in Interesting Times
• Liquidity Crunch and the Corporate Treasurer
• Liquidity Crunch and the Investor
• Current Operational Topics
• Thinking Forward
• Appendix: Greenwich Associates
Confidential 38
Provide decision-makers in institutional financial markets with market intelligence and expert advice - based on proprietary, comprehensive market research and in-depth analysis
Provide consistent quantitative and qualitative metrics to improve customer/provider relationship management and promote greater efficiency in the markets
Corporate Banking, Investment Banking, Cash Management, Foreign Exchange, Derivatives, Fixed Income, Brokerage, Asset Management
Offices in Stamford (USA), Tokyo, Singapore, London and Toronto
Standardized ongoing programs as well as tailored studies
The Greenwich Associates Mission
Confidential 39
Corporate Finance
Commercial Banking
Treasury Services
Investment Management
Fixed IncomeBrokerage
Buy-Side Services Sell-Side Services
• Over 30 years of experience• 40,000 Research Partner relationships in over 70 countries• Provide consulting advisory solutions to over 250 clients globally• Over 100 research programs underwritten by Greenwich annually
Our Business ModelGreenwich Associates’ principal focus is monitoring and analyzing the relationship dynamics between buyers and sellers of financial services.
• Peer-Based Compensation
• Greenwich Rankings
• Market Trends Analysis
• Peer Benchmarks/Best Practices
• “Hot Topic” Research
• Customized Research
• Consulting Services
• Consulting Services
• Competitive Positioning
• Customer Behavior
• Customer Satisfaction
• Best Practices
• Market Trends Analysis
• Account-level Reporting
• Custom Research
Greenwich Associates
Confidential 40
Value ExchangeGreenwich produces high quality, relevant, and actionable financial industry intelligence. Market-driven feedback results in confident business decision-making based on objective information.
Professional Interviews
Value Delivered
• Greenwich Report
• Online access to extensive research library
• Customized research
• Direct feedback to service providers
• Relevant questions
• Experienced Executive Interviewers
• Flexible interviewing methods• In-person• Telephone• Internet
• Institutional and individual focus
• Continuous market feedback sets research agenda
• Research Partner support:• Executive Interviewer• Customer Service• Community Manager• Lead Consultant
Relationship Management