Overview of Capital Markets

1
Overview of Capital Markets
2
Topics to Address

• Purpose
• Players/Instruments
• Recent Events/Trends in Capital Markets
• Equity Capital Markets
• Credit Markets

3
I. Purpose
4
Purpose of Capital Markets

• Efficient Allocation of Capital
• Diversification of Risk
• Catalyst for Productive Economic Growth

5
II. Players/Instruments
6
Key Players in a Capital Markets Transactions
Issuer (MFI)
Underwriter
Exchange
Investor
Regulator
Rating Agency
7
Intermediaries Facilitate Capital Flows
Intermediaries Facilitating the Flow of Capital
Institutions Seeking Capital
Investors withCapital
Investment Management
Principal Investing (Merchant Banking)
Public Companies
Financing Advisory (Investment Banking)
Debt Capital Markets
Private Companies Funds
Equity Capital Markets
Governments Agencies
Investment Research
8
Key Players in Capital Markets Transactions
Issuer
Underwriter
Rating Agency
Exchange
Investors
Regulator
9
Capital Markets Instruments Defined
10
III. Recent Events/Trends in Capital Markets
11
October 2007
German stock market boom shows no signs of
fizzling Reuters, 25-May-2007
LBO boom pushes European names to the top of
trading list Euroweek, 08-Jun-2007
We are now into year five of the bull market
with European equities around 150 per cent higher
than at their 2003 trough The Independent,
12-May-2007
Some think the bubble will deflate gently rather
than burst, while others continue to question
whether the housing boom is, in fact, a bubble at
all CFO Magazine, 1-May-2007
Despite credit worries league tables show a
market in exceptionally good health Thomson
Reuters, 07-Jul-2007
Although the US housing market is slowing, this
should accelerate interest rate cuts stimulating
other sectors Investment Week, 02-Apr-2007
The markets enthusiasm for the riskiest, most
cyclical areas of the market is reflected in the
outperformance of these kinds of stocks when
compared with businesses with stable earnings and
reliable dividends, Dresdner said The Daily
Telegraph, 06-Jul-2007
Still volatile but more resilient Thomson
Reuters, 11-Aug-2007
12
November 2008
Fresh repricing on way. Senior bondholders have
been exposed to massive losses for the first time
during this credit crisis by the Lehman collapse,
and the level of risk premium demanded for such
instruments is expected to surge Thomson
Reuters, 20-Sep-2008
Numbers confirm new-issue slowdown Thomson
Reuters, 04-Oct-2008
Probably the biggest financial crisis of all
time The Spectator, 01-Nov-2008
Soros world faces worst finance crisis since
WW2 Reuters News, 21-Jan-2008
The most severe global financial catastrophe
since the Great Depression Australian
Financial Review, 15-Aug-2008
Freefall Friday Just when we think it cant get
any worse, it does The Sun 10-Oct-2008
13
A. Equity Capital Markets
14
Current Equity Market Focus Has Shifted from
Financial Risk to Macroeconomic Risk
Sep-2008 ? US
GSEs taken into conservatorship ? Lehman /
Merrill Lynch ? AIG's 85bn bailout by Fed ?
Massive surge in volatility ? Breakdown in
confidence ? JP Morgan acquires WaMu ? Fortis,
Glitnir, Dexia BB and Hypo Real Estate
bailed out by governments ? Wells Fargo acquires
Wachovia ? Revised TARP passed
Source Bloomberg as of 25-Nov-2008 (a) TED-sprea
d is the difference between the 3m Libor and 3m
T-Bills.
15
No Place to Hide Where Have the Defensive
Sectors Gone?
1
2
3
4
5
6
7
8
Source Bloomberg. Analysis based on DJ Stoxx 600
Sector Indices data as of 26-Nov-2008
16
Valuations Have Come Down DramaticallyLast 12
Months
Source Goldman Sachs Research Nov-2008
17
Earnings Growth Revisions
Source IBES consensus (a) Upgrades less
downgrades, as percentage of total estimates
(last 4 weeks).
18
Macro Outlook Driving Equity Capital Markets
Source GS Research
19
Analysis of Buy-Side Community
Source Hedge Fund Research Global Hedge Fund
Industry Report Third Quarter 2008 AMG
20
New Issuance Activity Continues, But More
Selectively
Source Dealogic, IFR and Bloomberg as of 26-Nov
21
B. Credit Markets
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Reduction in Market Liquidity

• Mark to market losses
• Capital write-downs
• Principal liquidations

• Mark to market losses
• CP funding evaporates
• Forced portfolio liquidations

• Knock-on from HF withdrawals
• Money market fund liquidations

Banks
SIVs/Conduits
CreditFunds

• CDS spreads widen dramatically
• Cash bonds underperform CDS
• Liquidation puts further pressure on spreads
• IG Decompresses HY

Sub-prime
Credit
Banks
Monolines
CLOs/CDOs
Banks

• Senior financing hard to source
• Steep asset value falls
• Restructuring and liquidation

• Rating Agency downgrades
• Emergency equity funding

• Reduced risk appetite
• Limited underwriting
• Reduced balance sheet for flow
• Funding costs rise
• Counterparty risk increases

Source Goldman Sachs
23
Global Policy Response in Q3 2008 Stabilising
Credit Spreads?
TARP Announced
UK Government Rescue Package
Credit Crunch Starts
Bear Stearns Bailout
Lehman Bankruptcy / AIG Bailout
Monoline Downgrades
BNP Freezes MM Redemptions
24
Significant Bond Maturitiesin 2009

• Corporate redemptions 31 higher in 2009 vs. 2008
• Significant competition from FIG and SSA issuers

Q1 2009 is one of the busiestredemption quarters
ever
Includes Redemptions from global issuers and
transactions into the major currency markets
(USD/GBP/EUR) Source Bloomberg, Dealogic.
Includes only European issues in USD/GBP/EUR with
initial maturity higher than 18m and size higher
than 100m Note GBP redemptions converted into
USD equivalent using an exchange rate of 2.0016
for 2007 and 1.9689 for 2008 and 2009. EUR
redemptions converted into USD equivalent using
an exchange rate of 1.3705 and 1.5336 for 2008
and 2009
25
New Issue Premiums Finding a New and Wider
Equilibrium
425
Altria
400
(1.4bn Nov-2008)
375
350
EXCEL SOURCE copied at 13-Nov-08 102705
DEBTSYNDICATES\Presentations\02 New Issue
Premiums Finding a New Equilibrium.xls (Scatter
Chart)
325
Diageo
300
(1.5bn Jan-2013)
275
Philip Morris
250
(1.25bn
IBM
225
Spread to CDS (Basis Points)
Mar-2014)
(750m Jan-2014)
200
175
RWE
Diageo
GDF Suez
(1bn Jan-2019)
Cargill
150
(850m
(900m Jan-2019)
(1bn Nov-2013)
(500m Jul-2015)
Jul-2013)
125
Glencore
100
KPN
(750m Apr-2015)
(850m
Philip Morris
DSM (tap)
75
Wolters Kluwer
Jan-2016)
(200m Nov-15)
(750m Sep-2015)
(750m Apr-2018)
50
Daimler
Saint Gobain
(750m Sep-2015)
25
(750m Sep-2013)
0
22-Feb-08
12-Apr-08
1-Jun-08
21-Jul-08
9-Sep-08
29-Oct-08
18-Dec-08