EFTA01458276

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 iBoxx IG Corporate All index spread vs commodity prices .i p ESC Material/ - An X01 nis Gas ex Rebalance -MI Wr I twee) 2s mon 170 100 •Convletion to CRY Index (June - August) 20 —commodity (RR& inv 190 (RHS. r30 IS 110 80 50 10 6 230 60 70 40% 430% 0 250 00% -5 270 40 90 -100% -10 290 20 110 -IS -20 Jan 14 Jul 14 Janis Jul 15 310 330 0 130 4 /see7; 1C ert e/S teke • ce Jan 14 Jai 14 Jan 15 Jul 15 Figure 22: Correlation by sector to commodity index 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 NY bal ablibila a I IbIbarl a be bib OS owl laannila 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 300 250 • 200 • v) 150 • 03 100 • 50 - • Bask Resources • Chemicals Oil & Gas • Rest — Linear (Rest) 600 600 i 400 • ci. to300 • co 200 • 100 - 0 0 0 10 20 30 40 0 5 10 16 20 26 • Basic Resources ta Chemicals Oil & Gas • Rest — Linear IReell wirl; `* c. • Source abaft Bank Abate Cabal Years to Maturity 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 Years to Maturity Page 13 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0118114 SDNY_GM_00264298 EFTA01458276