Capital Markets Notes

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1 Capital Markets Notes n. 1 - January 2002 INVESTMENT GRADE FINANCIAL CORPORATE BONDS: TERM STRUCTURE ESTIMATION AND RELATIVE VALUE Enrico Bernini Dean Fantazzini

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3 IntesaBci 1 INTRODUCTION The corporate bond market in the euro area is constantly increasing as a proportion of the international debt market. The main industry represented in the corporate debt market is still financial services with a net issued amount of almost EUR 140bln in Apart from the increasing number of financial bonds issued by many institutions like other non financial firms the development in the liquidity of these securities as actively traded bonds in secondary markets is also remarkable. Because of this, the issue of pricing has become relevant for traded corporate debt. For this purpose it is essential to be able to calculate a fair value that can be compared to the spot market price of a corporate bond. That is, to be able to calculate a fair curve that can be compared to the spot market prices of a set of corporate bonds of the same credit class but with different times to maturity The aim of this paper is twofold. On one hand we estimate a fair credit spread curve for every investment grade class of financial corporate bonds listed in the euro area. On the other hand we provide a relative value framework: a rich-cheap analysis tool that allows us to discern if a listed corporate bond presents a premium instead of a discount or a fair price. In addition, we are interested in assessing the critical factors an analyst has to consider in order to read, interpret and correctly evaluate the results of this model. The paper is composed as follows. In section 2 we shall discuss the estimation methodology we apply to obtain corporate spread fair curves. In section 3 we present the relative values of corporate bonds for every investment grade class in the euro area. Section 4 states the conclusions we have reached. THE ESTIMATION OF TERM STRUCTURES The term structure estimation is the starting point of what is often called rich-cheap analysis namely the relative valuation of an asset with respect to a comparable fair value. The object of the term structure estimation is to establish the discount factor function, which provides a reliable zero-coupon rate for any given maturity of a bond. We shall consider several term structures, one for each investment grade corporate rating class, plus the government curve. The last one provides a basis to which the corporate rates are compared. 2 The German government bond (i.e. Bund) are assumed to be the risk-free rate securities 1 Source: IntesaBci elaborations on CapitalData Bondware data. 2 On this point it is important to state how much delicate is this necessary assumpion. Referring to a government curve we ask for a credit spread no biasing condition. Most of benchmarks in the government bond market are rich. The direct effect would be to produce higher corporate spread levels, ceteris paribus. As a consequence we select government bonds that may be either benchmark for their maturity or not, in order to obtain a reliable curve for our corporate spread evalutation purposes.

4 2 IntesaBci for the whole euro area financial market. The zero curve for these securities is estimated by third order basis spline functions (i.e. 3 rd Order B-splines). The sample The selection criteria In order to be representative as a sample, it is a strict requirement that the issues under consideration are liquid. Considering that not all of them are listed on a debt market in Europe it is essential to define a selection criterium to identify the most liquid corporate bonds. For each credit class the bonds are selected according to the following set of criteria: i) age: namely, how much time has passed from the date of issue; ii) bid-ask spread: the higher the uncertainty on its fair price, the higher its bid-ask spread; iii) amount issued: the greater the issued debt amount on the primary market, the greater should be its active trading on the secondary market, whatever that market is (i.e. over-thecounter or a listed stock exchange). This therefore acts as a reasonable and effective proxy of its liquidity. In particular: the term to maturity is never less than a year and the age is never less than three years; no bid-ask spread constraints are applied to the selection; 500bln euro is the minimum amount required for Standard&Poor s AAA and AA credit ratings, while a reduced size of 100bln euro for A and BBB. This is in order to collect a sufficient and effective number of issues for each credit class. For the last two classes an exception is made: these samples also consider European bonds issued in euros in Great Britain. 3 These filter conditions together eliminate most of the illiquid issues on the euro area financial corporate bond market, as an effective requirement to obtain a robust and significant estimation for every credit spread curve we obtain. The sample definition The whole investment grade bond sample is composed of the four main traditional rating classes on issues, reported here per credit class referring to their Standard&Poor s Credit Ratings. 4 3 E.g. Imperial Tobacco Finance, UK domicile. 4 S&P Rating Services and Moody s Investors Service: AAA-Aaa, AA-Aa, A-A and BBB-Baa.

5 IntesaBci 3 When an S&P rating was not available on any considered issues the Moody s Investor s Service ratings have been used to allocate the bond into its homogeneous credit class. In order to raise a sufficient number of corporate bonds for each class, single credit subclasses are considered together. This allows us to obtain a consistent and reliable estimation of the zero curve and relative value results. 5 The bonds considered in the analysis belong to the Banking or Financial Services sectors, as classified by Reuters3000 Fixed Income. Our other sources of data were Bloomberg Corporate 6, JPMorgan Bond Indices and Merrill Lynch EMU Financial Index. Every bond in our sample is listed by Reuters Composite, which has provided listing and homogeneity of data for all the securities considered. A complete list of the collected securities is in Appendix 1 The Sample Securities. 7 The sample of bonds for each credit class also includes four Euribor contracts with maturities of 1, 3, 6 and 12 months in order to provide regularity to the zero curve we obtain in the time-to-maturity domain. This is due to the low liquidity level of corporate bonds with time-to-maturity of less than one year. 8 The presence of these securities allows us to greatly improve the robustness and signficance of estimated spline coefficients, reducing their statistical standard errors. The 55 AAA corporate bonds collected in the sample span a time period of over twelve years, from Osterreicheische Postparka 5 1 / 4 % coupon with maturity at 11 November 2002 to BNG 4 1 / 2 % coupon, with maturity at 10 March The 30 AA corporate bonds collected in the sample also span a time period of over twelve years, from Bayerische Hypo 5 7 / 8 % coupon with maturity at 10 October 2002 to Generali Finance 4 3 / 4 % 12 May The 41 A corporate bonds collected in the sample cover a period of over fourteen years, from Reiffeiesen Zentralbank 4 7 / 8 % 27 March 2003 to Fortis Lux Finance 6 3 / 8 % coupon, with maturity at 16 February The 33 BBB corporate bonds collected in the sample cover a time period of almost ten years, from Credit Lyonnais 8 3 / 4 % 6 November 2002 to BCP Finance Bank Ltd 6 1 / 4 % 29 March This investment grade class has a shorter time-to-maturity due to the increased credit risk associated with these issues. As a result of this it has been difficult to find bonds in this credit class with a longer maturity. 5 As a consequence, the ten individual sub-classes are not analysed in this work. But with the growing of the corporate bond market in the euro area, specific term structure estimation will early become a reality and interesting results are already available by the authors. 6 On Bloomberg: MER Go, then Corporate Go to start with. 7 Other kinds of data such as Liquidation Status and Redemption, relevant in rich-cheap analysis have been collected for further analysis. A part from sub-class splitting, other researches have to be addressed towords other features of corporate and financial bonds such as Liquidation Status and Redemption, on which a fair price might be conditional to. 8 Such illiquidity would produce a strong short term swing in the curve. For details on this point, cf. Bernini E. and Fantazzini D., 2001, Stima di Strutture a Termine: il Caso dei Corporate Spread Finanziari, Collana Ricerche 01/01 IntesaBci, September (p.39-40).

6 4 IntesaBci The data presented in this paper were last updated on 30 November Estimation of zero curves Since the credit spread curves usually present a more regular shape in relation to the bond yield-to-maturity curve, we have reduced the order of the used splines by a lower grade of their degree of freedom. As a result, a quadratic spline (rather than a cubic one) has been chosen to estimate the spread zero curve. As quadratic spline functions require fewer nodes this has improved the estimation. 9 The advantage of this approach is that it has reduced the root mean squared errors, i.e. a better estimation of the sample data. The estimated zero curve functions we obtain are regular and they are showed in figure 1. Figure 1 SPREAD ZERO CURVES Investment Grade Financial Corporate Spreads: AAA - AA - A - BBB Ratings Spread mag-02 ago-02 nov-02 feb-03 mag-03 ago-03 nov-03 feb-04 mag-04 ago-04 nov-04 feb-05 mag-05 ago-05 nov-05 feb-06 mag-06 Maturity BBB ago-06 nov-06 feb-07 mag-07 ago-07 nov-07 feb-08 mag-08 ago-08 nov-08 feb-09 mag-09 ago-09 nov-09 On the base of these curves every single rating class has been estimated in prices and yield-to-maturity. The root mean squared error (RMSE) between theoretical and market yield-to-maturity is a measure that gauges the ability of the proposed model to accomodate any single sample of data. The same measure of dispersion has been considered with regard to prices. A AA AAA Table 1 summarises the root mean squared error we obtained for each credit class, confirming (as expected) monotony in its values: the higher the credit stance, the lower the 9 Cf. Bernini E. and Fantazzini D., 2001, Op.Cit.

7 IntesaBci 5 dispersion of data (and consequently the RMSE). Table 1 ROOT MEAN SQUARED ERRORS (IN BASIS POINTS) ROOT MEAN SQUARED ERROR 45,00 40,00 35,00 30,00 25,00 20,00 15,00 10,00 5,00 0,00 AAA AA A BBB RELATIVE VALUE ANALYSIS The curve estimation of the zero-coupon rates allows to calculate the so-called fair price of a security, enabling a rich-cheap analysis: if the market price is higher than the fair price then the security is rich, otherwise it is cheap. Similarly, we define the fair yield-to-maturity as that corresponding to the fair price for a given maturity. A corporate bond is rich if its yield to maturity is lower than the fair yield-tomaturity, and cheap otherwise. The corporate premium or discount is defined by the difference π = [(ytm fair ) (ytm real)] where, ytm fair = ytm real = yield to maturity correspondent to the estimated fair price yield to maturity that corresponds to the real market price such that: if π is positive (i.e. ytm fair > ytm real) the corporate is rich because of its lower yield to maturity with respect to its fair one. This corresponds to the simple fact that the corporate bond price is higher than the estimated fair price. Similarly, if π is negative (i.e. ytm fair < ytm real) the corporate is cheap on the basis of the same reasoning. This convention allows us to recognise positive premia and negative discount factors π, and therefore whether a considered security is rich or cheap.

8 6 IntesaBci Figure 3 YIELD TO MATURITY CURVE CORPORATE FINANCIAL AAA Curva dei rendimenti a scadenza - Titoli AAA 7,00% 6,50% 6,00% 5,50% 5,00% 4,50% 4,00% 3,50% 3,00% DEXIA MUNICIPAL AGENCY OESTERREICHISCHE POSTSPARKA. DSL FINANCE HYPOTHENKEN IN ESSEN RABOBANK NEDERLAND RABOBANK NEDERLAND DEXIA MUNICIPAL AGENGY BAYERISCHE LANDESBANK ALLGEMEINE HYPO BNG DEUTSCHE POST BANK DEUTSCHE POST BANK OESTERREICHISCHE KONTROLLB. WESTDEUTSCHE LANDESBANK DEUTSCHE GENOSSENSCHAFTS-HYPO WUERTTEMBERGISCGE BFG HYPOTHEKENBANK MUENCHENER HYPO LANDWIRTSCHAFTLICHE R.BANK DEUTSCHE GENOSSENSCHAFTS-HYPO LANDESBANK BADEN-WUERTTEMBERG WESTFAELISCHE LANDSCHAFT-BOD. NEDERLANDSE WATERSCHAPSBANK NV CRH DEUTSCHE HYPO DEPFA DEUTSCHE PFANDBRIEF. BNG BNG Figure 4 YIELD TO MATURITY CURVE CORPORATE FINANCIAL AA Curva dei rendimenti a scadenza - Titoli A 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% RAIFFEISEN ZENTRALBANK DRESDNER BANK FORTIS FINANCE NV BAYERISCHE HYPO UND VEREINSB. LINDE FINANCE SNS BANK NEDERLAND BAYERISCHE HYPO UND VEREINSB. FORTIS FINANCE NV UNIBAIL UNIBAIL INTERNATIONAL ENDESA NUERNBERGER HYPO SOCIETE GENERALE LINDE FINANCE ING BANK SNS BANK NEDERLAND NUERNBERGER HYPO CCCI ROYAL BANK OF SCOTLAND BNP PARIBAS ALLGEMEINE HYPO ING BANK FORTIS FINANCE NV BSCH ISSUANCE BAYERISCHE HYPO UND VEREINSB. BANK OF IRELAND CCCI BSCH ISSUANCE COMMERZBANK UNICREDITO ITALIANO CCCI NATWEST BANK CCCI BNP PARIBAS SOCIETE GENERALE SOCIETE GENERALE FORTIS LUX FINANCE Corporate spread dynamics The corporate spread dynamics over time matter in valuation. Benchmark corporate bonds are usually rich in price, due to their liquidity premium. Market prices tend to be higher than their fair prices over time: their difference is almost always positive and it tends to fluctuate around a positive constant delta defined as the average of

9 IntesaBci 7 these differences over a period in time. New issued corporate bonds tend to be rich when they are issued, because of their large tradable outstanding, becoming cheap after varying periods of time. These and other features, such as liquidation status and redemption for example, constitute relevant variables to be considered in relative value analysis. This is the analysis that we suggest could be adopted by traders and practitioners in this field. CONCLUSIONS In this paper we have estimated the term structure of government, corporate and credit spreads and explained how it is possibile to define relative values for euro investment grade financial corporate bonds, with respect to the relevant yield curve. For this purpose two factors were important: the yield curve estimation methodology we have employed and the sample we have defined for this purpose. On one hand we considered the B-spline methodology to achieve reliable term structures, i.e. likelihood, smooth and regular curves. On the other hand we have defined five distinct and independent sets of data as the bond sample dataset: one for government debt and one for each investment grade credit rating class. With respect to the considered methodology, the introduction of a multi-curve model, based on the joint estimation of term structures, has allowed us to make a parsimonious estimation of the curves due to a larger set of available data (as opposed to a single-curve estimation alternative). Regarding the whole sample of data we built an updated dataset composed of the four main investment grade corporate bonds plus a euro area government bond set. This was because of their liquidity and because they are commonly used for credit spread estimation. Robust and stable results on curve estimations were achieved for every single investment grade class in this work. The estimation of zero-coupon rate curves has allowed us to evaluate the corporate bond fair prices, making rich-cheap analysis feasibile. For every rating class curve it was possible to evaluate the relative price of a bond with respect to its fair curve, and also to define a global dispersion property of a set of bonds with the same credit rating. This means that a credit spread curve provides an ideal model that can effectively explain collective bond prices dynamic behaviour over time. Features like liquidation status, redemption, debt seniority and prices dynamic behaviour, constitute new relevant variables to be considered in further relative value researches.

10 8 IntesaBci APPENDICES Appendix 1 : The sample securities Table 1 FINANCIAL CORPORATE BONDS: AAA CREDIT RATING CLASS REUTERS RIC TITOLO MATURITY CEDOLA OGGI EURIBOR AAA 1 MESI EURIBOR AAA 3 MESI EURIBOR AAA 6 MESI EURIBOR AAA 12 MESI AT = OESTERREICHISCHE POSTSPARKA. 11-nov-02 5,25 DE = DSL FINANCE 05-dic-02 5,125 DE = DSL FINANCE 04-feb-03 4,5 NL = RABOBANK NEDERLAND 05-mag-03 4,5 DE257463= HYPOTHENKENBANK IN ESSEN 16-lug-03 4,5 DE243351= DSL BANK 17-giu-04 3,5 FR048638= DEXIA MUNICIPAL AGENGY 21-giu-04 4,5 DE215826= MUENCHENER HYPO 01-lug-04 5 NL = RABOBANK NEDERLAND 12-lug-04 3,625 DE343814= WUERTTEMBERGISCGE HYPO 16-ago-04 4,25 NL = RABOBANK NEDERLAND 13-ott-04 4,75 DE226453= DEXIA HYPOTHEKENBANK AG 24-gen-05 4,75 FR049742= DEXIA MUNICIPAL AGENGY 26-apr-05 5 AT = OESTERREICHISCHE KONTROLLB. 08-ago-05 7 DE = BAYERISCHE LANDESBANK 19-gen-06 4,875 DE335656= NUERNBERGER HYPO 23-gen-06 6 DE202783= ALLGEMEINE HYPO 01-feb-06 5,25 AT = OESTERREICHISCHE KONTROLLB. 21-feb-06 6,375 NL = BNG 28-feb-06 4,75 DE251560= BAYERISCHE HYPO UND VEREINS 01-mar-06 4,75 DE = DSL BANK 20-apr-06 3,875 FR049979= DEXIA MUNICIPAL AGENGY 26-apr-07 5,375 DE = DSL BANK 13-ago-07 5,625 DE253803= DEUTSCHE HYPO 06-set-07 5 AT = OESTERREICHISCHE KONTROLLB. 12-set-07 5,75 DE222008= BAYERISCHE HYPO UND VEREINS 15-gen-08 5,5 DE307505= WESTDEUTSCHE LANDESBANK 08-feb-08 5,25 AT = OESTERREICHISCHE KONTROLLB. 25-apr-08 5,25 DE232115= DEUTSCHE GENOSSENSCHAFTS-HYPO 19-giu-08 4,75 DE276476= KREDITANSTALT FUER WIEDERAUFBAU 01-set-08 5,625 DE343738= WUERTTEMBERGISCGE HYPO 02-ott-08 4,25 FR048564= COMPAGNIE DE FINANCEMENT FONCIER 25-ott-08 5,125 DE308150= BFG HYPOTHEKENBANK 06-nov-08 5 DE276078= KREDITANSTALT FUER WIEDERAUFBAU 04-gen-09 5 DE101552= MUENCHENER HYPO 15-gen-09 5 DE309083= LANDWIRTSCHAFTLICHE R.BANK 23-mar-09 5 DE = LANDWIRTSCHAFTLICHE R.BANK 30-apr-09 4,125 DE350904= DEUTSCHE GENOSSENSCHAFTS-HYPO 13-ago-09 5,25 DE236652= DEUTSCHE GENOSSENSCHAFTS-HYPO 01-apr-10 5,5 FR018656= CRH 25-apr-10 5,75 DE102381= LANDESBANK BADEN-WUERTTEMBERG 06-lug-10 5,5 DE276080= KREDITANSTALT FUER WIEDERAUFBAU 11-ago-10 4,75 DE340216= WESTFAELISCHE LANDSCHAFT-BOD. 13-ott-10 5,25 NL = BNG 25-ott-10 5,625 NL = NEDERLANDSE WATERSCHAPSBANK NV 19-apr-11 5,125 DE215860= MUENCHENER HYPO 19-apr-11 4,25 FR018624= CAISSE DE REFINANCEMENT HYPO. 25-apr-11 4,2 NL = BNG 04-lug-11 5,25 DE253795= DEUTSCHE HYPO 14-feb-12 6 DE315955= RHEINBODEN HYPOTHEKENBANK 24-ago-12 5 DE247536= DEPFA DEUTSCHE PFANDBRIEF. 15-gen-13 5,5 FR048572= COMPAGNIE DE FINANCEMENT FONCIER 02-mar-13 5,375 NL = BNG 05-giu-13 5,375 DE276079= KREDITANSTALT FUER WIEDERAUFBAU 17-giu-13 5,125 NL = BNG 10-mar-14 4,5 Table 2 FINANCIAL CORPORATE BONDS: AA CREDIT RATING CLASS

11 IntesaBci 9 REUTERS RIC TITOLO MATURITY CEDOLA OGGI EURIBOR AA 1 MESI EURIBOR AA 3 MESI EURIBOR AA 6 MESI EURIBOR AA 12 MESI DE = BAYERISCHE HYPO 10-ott-02 5,875 FR = BNP 29-set-03 6,5 DE = BAYERISCHE HYPO 20-nov-03 5,375 AT = BANK AUSTRIA 23-apr-04 3,5 DE = DEUTSCHE FINANCE (NETHERL.) 28-apr-04 3,5 DE = DEUTSCHE FINANCE (NETHERL.) 19-mag-05 5 DE = DRESDNER FINANCE BV 25-mag-05 5 NL = ING GROEP NV 03-mag-06 5 DE = DRESDNER FINANCE BV 19-gen-07 4 NL = ING GROEP NV 01-ago-07 6 DE259986= DEUTSCHE HYPOTHEKENBANK 21-set-07 5,25 FR = CAISSE NATIONAL DES CAISSES 31-gen-08 5,25 DE = RWE FINANCE 18-apr-08 5,375 FR = CREDIT LOCAL DE FRANCE 25-apr-08 5,25 DE = DRESDNER FINANCE BV 04-gen-09 5,25 DE = DEUTSCHE FINANCE (NETHERL.) 04-gen-09 5 NL = ING BANK 29-gen-09 4,25 FR = CREDIT LOCAL DE FRANCE 25-apr-09 4,75 IT = INA 28-mag-09 4,5 NL = ABN AMRO BANK 24-giu-09 4,75 DE = DEUTSCHE FINANCE (NETHERL.) 28-lug-09 4,25 DE = DEUTSCHE BAHN FINANCE 15-giu-10 6 DE = WESTDEUTSCHE LANDESBANK 04-apr-11 5,25 NL = ABN AMRO BANK 16-mag-11 5,625 DE = DEUTSCHE FINANCE (NETHERL.) 18-mag-11 5,5 DE273822= DGZ-DEKABANK 06-giu-11 5,5 FR = CREDIT LOCAL DE FRANCE 20-ago-12 5,75 DE = DEUTSCHE FINANCE (NETHERL.) 20-ago-13 5,125 DE229459= DEPFA DEUTSCHE PFANDBR. 15-gen-14 4,5 IT = GENERALI FINANCE 12-mag-14 4,75

12 10 IntesaBci Table 3 FINANCIAL CORPORATE BONDS: A CREDIT RATING CLASS REUTERS RIC TITOLO MATURITY CEDOLA EURIBOR A 1 MESI EURIBOR A 3 MESI EURIBOR A 6 MESI EURIBOR A 12 MESI AT = RAIFFEISEN ZENTRALBANK 27-mar-03 4,875 DE = DRESDNER BANK 01-apr-03 6,75 NL = FORTIS FINANCE NV 17-ott-03 5,75 DE = BAYERISCHE HYPO UND VEREINSB. 02-feb-04 5,25 DE = LINDE FINANCE 27-feb-04 4,875 NL = SNS BANK NEDERLAND 21-set-04 4,75 DE = BAYERISCHE HYPO UND VEREINSB. 12-lug-05 5,5 NL = FORTIS FINANCE NV 19-set-05 5,75 FR = UNIBAIL 30-gen-06 5,625 FR = UNIBAIL 15-giu-06 4,375 ES = INTERNATIONAL ENDESA 08-nov-06 5,75 DE335694= NUERNBERGER HYPO 23-gen-07 5 FR = SOCIETE GENERALE 12-mar-07 6 DE = LINDE FINANCE 14-giu-07 6,375 NL = ING BANK 01-ott-07 6 NL = SNS BANK NEDERLAND 15-ott-07 5,875 DE335667= NUERNBERGER HYPO 11-feb-08 5,25 FR = CCCI 25-apr-08 5,25 GB = ROYAL BANK OF SCOTLAND 22-lug-08 5,25 FR = BNP PARIBAS 07-ago-08 5,625 DE202931= ALLGEMEINE HYPO 15-set-08 5,75 NL = ING BANK 23-feb-09 4,625 NL = FORTIS FINANCE NV 07-apr-09 4,625 ES = BSCH ISSUANCE 06-lug-09 5,125 DE = BAYERISCHE HYPO UND VEREINSB. 15-gen-10 5,625 IE = BANK OF IRELAND 10-feb-10 6,45 FR = CCCI 26-apr-10 6,25 ES = BSCH ISSUANCE 05-lug-10 6,375 DE = COMMERZBANK 12-lug-10 6,5 IT = UNICREDITO ITALIANO 16-mar-11 6 FR = CCCI 25-apr-11 4,5 GB = NATWEST BANK 30-giu-11 5,125 FR = CCCI 16-ott-12 6,125 FR018709=PA BNP PARIBAS 30-ott-12 5,8 FR018712=PA SOCIETE GENERALE 05-nov-12 5,65 FR = SOCIETE GENERALE 27-apr-15 6,625 NL = FORTIS LUX FINANCE 16-feb-16 6,375

13 IntesaBci 11 Table 4 FINANCIAL CORPORATE BONDS: BBB CREDIT RATING CLASS REUTERS RIC TITOLO MATURITY CEDOLA EURIBOR BBB 1 MESI EURIBOR BBB 3 MESI EURIBOR BBB 6 MESI EURIBOR BBB 12 MESI FR = CREDIT LYONNAIS 06-nov FR = BANQUE WORMS SA 24-feb IT = FIAT FINANCE AND TRADE LTD 17-ott IT = PARMALAT FINANCE CORP BV 08-dic-03 6 IT109327=MI BANCA NAZIONALE DEL LAVORO 15-mar GB = IMPERIAL TOBACCO FINANCE 15-mar IT = FIAT FINANCE AND TRADE LTD 31-mar IT = PARMALAT FINANCE CORP BV 23-giu CH = METRO FINANCE BV 12-lug-04 5 PL = TPSA EUROFINANCE BV 27-ott FR = CREDIT LYONNAIS 16-set IT = PARMALAT FINANCE CORP BV 07-feb DE = METALLGESELLSCHAFT FINANCE BV 25-lug IT = FIAT FINANCE AND TRADE LTD 01-ago GB = ALLIED DOMECQ FINANCIAL SERVICES 14-dic IT = PARMALAT FINANCE CORP BV 06-feb-06 6 ES = SOL MELIA EUROPE BV 09-feb PL = TPSA EUROFINANCE BV 01-mar CH = METRO FINANCE BV 09-mar GB = ALLIED DOMECQ FINANCIAL SERVICES 18-apr IT = FIAT FINANCE AND TRADE LTD 25-mag GB = IMPERIAL TOBACCO FINANCE 27-set IT = FIAT FINANCE AND TRADE LTD 13-dic DE = HEIDELBERGER ZEMENT FINANCE BV 22-feb PL = TPSA EUROFINANCE BV 13-mar IT = PARMALAT FINANCE CORP BV 23-ott-07 7 IT = PARMALAT FINANCE CORP BV 25-lug IT = PARMALAT FINANCE CORP BV 30-mar DE = HEIDELBERGER ZEMENT FINANCE BV 09-apr IT = FIAT FINANCE AND TRADE LTD 24-feb PT = BCP FINANCE BANK LTD 29-mar

14 12 IntesaBci Table 5 GOVERNMENT BOND: BUND REUTERS RIC TITOLO MATURITY CEDOLA OGGI EURIBOR GOVT 1 MESI EURIBOR GOVT 3 MESI EURIBOR GOVT 6 MESI EURIBOR GOVT 12 MESI BUND OBL 22-feb-02 4, BUND OBL 17-mag-02 4, BUND SCHATZ 14-giu BUND BRD 22-lug BUND OBL 19-ago-02 4, BUND SCHATZ 13-set BUND TREUHAND 01-ott-02 7, BUND BRD 21-ott-02 7, BUND OBL 12-nov BUND TREUHAND 02-dic-02 7, BUND SCHATZ 13-dic-02 4, BUND BRD 20-dic-02 7, BUND TREUHAND 29-gen-03 7, BUND OBL 18-feb-03 4, BUND BRD 22-apr-03 6, BUND TREUHAND 23-apr-03 6, BUND OBL 19-mag-03 4, BUND TREUHAND 11-giu-03 6, BUND SCHATZ 13-giu-03 4, BUND TREUHAND 09-lug-03 6, BUND BRD 15-lug-03 6, BUND OBL 26-ago-03 3, BUND SCHATZ 12-set-03 3, BUND BRD 15-set BUND OBL 11-nov-03 3, BUND TREUHAND 12-nov BUND OBL 17-feb-04 3, BUND TREUHAND 04-mar-04 6, TREUHAND 13-mag-04 6, BUND BRD 15-lug-04 6, TREUHAND 09-set-04 7, BUND BRD 11-nov-04 7, BUND BRD 03-gen-05 7, BUND BRD 12-mag-05 6, BUND BRD 14-ott-05 6, BUND BRD 05-gen BUND BRD 16-feb BUND OBL 17-feb BUND BRD 26-apr-06 6, BUND OBL 18-ago-06 4, BUND BRD 04-gen BUND BRD 04-lug BUND BRD 04-gen-08 5, BUND BRD 04-lug-08 4, BUND 04-lug-08 4, BUND BRD 04-gen-09 3, BUND BRD 04-lug BUND BRD 04-lug-09 4, BUND BRD 04-gen-10 5, BUND BRD 04-lug-10 5, BUND BRD 04-gen-11 5, BUND BRD 04-lug BUND BRD 20-giu BUND BRD 04-gen-24 6, BUND BRD 04-lug-27 6, BUND BRD 04-gen-28 5, BUND BRD 04-lug-28 4, BUND BRD 04-gen-30 6, BUND BRD 04-gen-31 5,5

15 IntesaBci 13 Appendix 2 : Rich-Cheap Analysis Values Figure 5 Rich Aaa Rich AAA Financial Corporate Bonds (Real vs Fair YTM) 16,00 14,00 12,00 10,00 8,00 6,00 4,00 2,00 0,00-2,00 HYPOTHENKEN IN ESSEN 16/07/03 LANDWIRTSCHAFTLICHE R.BANK 30/04/09 KREDITANSTALT FUER WIEDERAUFBAU 17/06/13 DEUTSCHE HYPO 06/09/07 DEXIA MUNICIPAL AGENGY 26/04/05 BFG HYPOTHEKENBANK 06/11/08 LANDWIRTSCHAFTLICHE R.BANK 23/03/09 OESTERREICHISCHE KONTROLLB. 12/09/07 LANDESBANK BADEN-WUERTTEMBERG 06/07/10 WESTFAELISCHE LANDSCHAFT-BOD. 13/10/10 OESTERREICHISCHE KONTROLLB. 25/04/08 DEUTSCHE POST BANK 17/06/04 COMPAGNIE DE FINANCEMENT FONCIER 02/03/13 DEUTSCHE HYPO 14/02/12 DEPFA DEUTSCHE PFANDBRIEF. 15/01/13 BNG 28/02/06 MUENCHENER HYPO 19/04/11 KREDITANSTALT FUER WIEDERAUFBAU 01/09/08 RABOBANK NEDERLAND 13/10/04 NEDERLANDSE WATERSCHAPSBANK NV 19/04/11 DEUTSCHE POST BANK 20/04/06 BAYERISCHE LANDESBANK 19/01/06 BNG 25/10/10 KREDITANSTALT FUER WIEDERAUFBAU 04/01/09 BNG 04/07/11 RABOBANK NEDERLAND 12/07/04 KREDITANSTALT FUER WIEDERAUFBAU 11/08/10 Figure 6 CHEAP AAA Cheap AAA Financial Corporate Bonds (Real vs Fair Spreads) 0,00 CRH 25/04/11 BNG 10/03/14 BNG 05/06/13 RABOBANK NEDERLAND 05/05/03 DEUTSCHE GENOSSENSCHAFTS-HYPO 13/08/09 DEUTSCHE POST BANK 13/08/07 MUENCHENER HYPO 15/01/09 DEUTSCHE GENOSSENSCHAFTS-HYPO 01/04/10 BAYERISCHE HYPO UND VEREINS 15/01/08 NUERNBERGER HYPO 23/01/06 BAYERISCHE HYPO UND VEREINS 01/03/06 ALLGEMEINE HYPO 01/02/06 DEUTSCHE GENOSSENSCHAFTS-HYPO 19/06/08 DSL FINANCE 04/02/03 OESTERREICHISCHE KONTROLLB. 08/08/05 OESTERREICHISCHE KONTROLLB. 21/02/06 DEXIA MUNICIPAL AGENCY 21/06/04 MUENCHENER HYPO 01/07/04 DSL FINANCE 05/12/02 DEXIA HYPOTHEKENBANK AG 24/01/05 WUERTTEMBERGISCGE HYPO 02/10/08 WESTDEUTSCHE LANDESBANK 08/02/08 WUERTTEMBERGISCGE HYPO 16/08/04 RHEINBODEN HYPOTHEKENBANK 24/08/12 DEXIA MUNICIPAL AGENGY 26/04/07 COMPAGNIE DE FINANCEMENT FONCIER 25/10/08 OESTERREICHISCHE POSTSPARKA. 11/11/02 CRH 25/04/10-10,00-20,00-30,00-40,00-50,00-60,00

16 14 IntesaBci Figure 7 RICH AA Rich AA Financial Corporate Bonds (Real vs Fair YTM) 30,00 25,00 20,00 15,00 10,00 5,00 0,00 CREDIT LOCAL DE FRANCE 25/04/09 DEUTSCHE FINANCE (NETHERL.) 28/07/09 DRESDNER FINANCE BV 25/05/05 ING GROEP NV 01/08/07 DEUTSCHE FINANCE (NETHERL.) 18/05/11 ING GROEP NV 03/05/06 DRESDNER FINANCE BV 19/01/07 BNP 29/09/03 DEUTSCHE FINANCE (NETHERL.) 19/05/05 BAYERISCHE HYPO 20/11/03 BANK AUSTRIA (*) 23/04/04 CREDIT LOCAL DE FRANCE 20/08/12 WESTDEUTSCHE LANDESBANK 04/04/11 CREDIT LOCAL DE FRANCE 25/04/08 DEUTSCHE HYPOTHEKENBANK 21/09/07 DGZ-DEKABANK 06/06/11 DEPFA DEUTSCHE PFANDBR. 15/01/14 FIGURE 8 CHEAP AA Cheap AA Financial Corporate Bonds (Real vs Fair YTM) CAISSE DEUTSCHE DEUTSCHE NATIONAL DEUTSCHE DEUTSCHE GENERALI FINANCE BAYERISCHE BAHN DRESDNER DES FINANCE FINANCE RWE FINANCE FINANCE (NETHERL.) HYPO 10/10/02 ABN AMRO FINANCE FINANCE BV CAISSES (NETHERL.) ING BANK ABN AMRO (NETHERL.) 0 INA 28/05/09 18/04/08 12/05/14 20/08/13 Special BANK 24/06/09 15/06/10 04/01/09 31/01/08 04/01/09 29/01/09 BANK 16/05/11 28/04/

17 IntesaBci 15 Figure 9 RICH A Richest A Financial Corporate Bonds (Real YTM wrt Fair YTM) 50,00 45,00 40,00 35,00 30,00 25,00 20,00 15,00 10,00 5,00 0,00 BNP PARIBAS 30/10/12 INTERNATIONAL ENDESA 08/11/06 BANK OF IRELAND 10/02/10 RAIFFEISEN ZENTRALBANK 27/03/03 SNS BANK NEDERLAND 21/09/04 SNS BANK NEDERLAND 15/10/07 CCCI 26/04/10 FORTIS FINANCE NV 17/10/03 CCCI 16/10/12 BAYERISCHE HYPO UND VEREINSB. 02/02/04 BAYERISCHE HYPO UND VEREINSB. 12/07/05 CCCI 25/04/11 NATWEST BANK 30/06/11 FORTIS FINANCE NV 07/04/09 BAYERISCHE HYPO UND VEREINSB. 15/01/10 ALLGEMEINE HYPO 15/09/08 FORTIS FINANCE NV 19/09/05 NUERNBERGER HYPO 11/02/08 NUERNBERGER HYPO 23/01/07 Figure 10 CHEAP A Cheapest A Finacial Corporate Bonds (Real YTM wrt Fair YTM) 0,00 BSCH ISSUANCE 06/07/09 BSCH ISSUANCE 05/07/10 UNIBAIL 30/01/06 UNIBAIL 15/06/06 COMMERZBANK 12/07/10 LINDE FINANCE 14/06/07 BNP PARIBAS 07/08/08 LINDE FINANCE 27/02/04 SOCIETE GENERALE 27/04/15 ROYAL BANK OF SCOTLAND 22/07/08 UNICREDITO ITALIANO 16/03/11 SOCIETE GENERALE 12/03/07 ING BANK 01/10/07 ING BANK 23/02/09 DRESDNER BANK 01/04/03 FORTIS LUX FINANCE 16/02/16 SOCIETE GENERALE 05/11/12 CCCI 25/04/08-10,00-20,00-30,00-40,00-50,00-60,00-70,00

18 16 IntesaBci Figure 11 RICH BBB Rich BBB Financial Corporate Bonds (Real vs Fair YTM) 80,00 70,00 60,00 50,00 40,00 30,00 20,00 10,00 0,00 HEIDELBERGER ZEMENT FINANCE BV 09/04/09 HEIDELBERGER ZEMENT FINANCE BV 22/02/07 IMPERIAL TOBACCO FINANCE 15/03/04 METRO FINANCE BV 12/07/04 FIAT FINANCE AND TRADE LTD 13/12/06 BANCA NAZIONALE DEL LAVORO 15/03/04 BCP FINANCE BANK LTD 29/03/11 ALLIED DOMECQ FINANCIAL SERVICES 14/12/05 IMPERIAL TOBACCO FINANCE 27/09/06 ALLIED DOMECQ FINANCIAL SERVICES 18/04/06 CREDIT LYONNAIS 16/09/04 METRO FINANCE BV 09/03/06 Figure 12 CHEAP BBB Cheap BBB Financial Corporate Bonds (Real vs Fair YTM) 0,00 TPSA EUROFINANCE BV 01/03/06 PARMALAT FINANCE CORP BV 08/12/03 TPSA EUROFINANCE BV 27/10/04 TPSA EUROFINANCE BV 13/03/07 PARMALAT FINANCE CORP BV 30/03/09 PARMALAT FINANCE CORP BV 06/02/06 FIAT FINANCE AND TRADE LTD 17/10/03 FIAT FINANCE AND TRADE LTD 01/08/05 SOL MELIA EUROPE BV 09/02/06 FIAT FINANCE AND TRADE LTD 31/03/04 METALLGESELLSCHAFT FINANCE BV 25/07/05 FIAT FINANCE AND TRADE LTD 25/05/06 PARMALAT FINANCE CORP BV 23/06/04 PARMALAT FINANCE CORP BV 23/10/07 FIAT FINANCE AND TRADE LTD 24/02/10 CREDIT LYONNAIS 06/11/02 PARMALAT FINANCE CORP BV 07/02/05 PARMALAT FINANCE CORP BV 25/07/08 BANQUE WORMS SA 24/02/03-10,00-20,00-30,00-40,00-50,00-60,00-70,00-80,00

19 IntesaBci 17 Appendix 3 : Nodes And Estimated Coefficients Table 6 B-SPLINE NODES IN THE TIME-TOMATURITY DOMAIN: BUND B-Splines GOVERNMENT Start End NODO NODO NODO NODO NODO NODO NODO NODO NODO NODO NODO NODO NODO Table 7 B-SPLINE NODES IN THE TIME TO-MATURITY DOMAIN: AAA B-Splines SPREAD AAA Start End NODO NODO NODO NODO NODO NODO NODO Table 8 B-SPLINE NODES IN THE TIME-TOMATURITY DOMAIN: AA B-Splines SPREAD AA Start End NODO NODO NODO NODO NODO NODO NODO

20 18 IntesaBci Table 9 B-SPLINE NODES IN THE TIME TO MATURITY DOMAIN: A B-Splines SPREAD A Start End NODO NODO NODO NODO NODO NODO NODO Table 10 B-SPLINE NODES IN THE TIME TO-MATURITY DOMAIN: BBB B-Splines SPREAD BBB Start End NODO NODO NODO NODO NODO NODO NODO Table 11 ESTIMATED COEFFICIENTS FOR SPLINE FUNCTIONS Coefficienti Std. Error(HAC) P-VALUE GOVT AAA AA A BBB

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