Bonds. Corporate. Bonds. Understand. Act.

Transcription

1 Bonds Corporate Bonds Understand. Act.

2 Analysen & Trends Decisive Insights for forwardlooking investment strategies 2

3 Content 4 Corporate Bonds 5 Corporate Credit 6 Corporate Credit Value Drivers 12 Change in the Corporate Market since Some Features of Corporate Credit Management 15 Corporate Credit Contributes to Diversified Investment Imprint Allianz Global Investors GmbH Bockenheimer Landstr Frankfurt am Main Global Capital Markets & Thematic Research Hans-Jörg Naumer (hjn) Ann-Katrin Petersen (akp) Stefan Scheurer (st) Gregor Krings Data origin if not otherwise noted: Thomson Reuters Datastream Allianz Global Investors / AllianzGI_VIEW 3

4 Corporate Bonds Corporate bonds might enhance the risk / return profile due to their unique features as an asset class. * Undertakings for Collective Investments in Transferable Securities In 2009, some UCITS* specialising in corporate credit turned in remarkable performances. The best of them in the eurozone were up nearly 70 %; they outperformed the major Western indices (Nasdaq + 44 %), and were close to the levels of the Shanghai (Hang Seng Index: + 80 %) and Sao Paulo (Bovespa Index: +83 %) stock markets (Source: Datastream). While their performance in 2010 (+ 16 %) and 2011 ( 2 %) were less outstanding, they much exceed that of european stocks (e. g.: DJ Eurostoxx 50: 4 and 18 % respectively). Many investors therefore continue to hold corporate credit UCITS as part of their asset allocation. But what is corporate credit? Why has it been one of the top performers among the different asset segments since 2009? After turning in such a solid performance, why does this segment continue to offer potential? After we define corporate credit, we will examine what drives its value, then look at the market changes over recent years, before identifying a few of the characteristics of its management, then identifying what it brings to a diversified portfolio. 4

5 Corporate Credit Corporate credit means bond debt issued by private companies. Here we will discuss only listed issues. The total value of bonds in issue in the eurozone is EUR 16 trillion in August Government debt comprises about 38 % of this market, 5 % is debt issued by private companies, and 53 % by private financial institutions. (source: INSEE (Institut National de la Statistique et des Etudes Economiques)). In the US, the proportion of corporate bonds is higher. High-yield bonds are issued by companies with lower creditworthiness, in particular with regard to longer maturities (below BBB ). Bonds issued by companies with an uncertain future are described as junk bonds (rating of BB or below). By definition, yields of investment grade bonds, which are more secure, are lower than yields of high-yield bonds, which are riskier. There are two types of corporate bonds: Investment grade bonds have the highest rating (at least BBB- rating). The issuers are solid companies with high solvency (creditworthiness). It is unlikely that such companies will not fulfil the interest payment and maturity (below BBB-) terms of their bonds. 5

6 Corporate Credit Value Drivers 1. Corporate bonds and changes in interest rates Most importantly, corporate bonds, as with all bonds, are very sensitive to interest rate changes. If the yields of government bonds increases, the yield of corporate bonds with the same maturity will most likely increase as well. However, as is the case with all bonds, their market value may then go down. The drop in value is greater the more sensitive the bond is, that is, for long maturities and / or for lower yield of. Conversely, if the yields on government bonds falls, then the rate on corporate bonds will likely decrease and their market value would increase. The greater the sensitivity of the bond, the greater the increase in value. The price of a corporate bond is sensitive to the same factors, that change yields of government bonds. Investment-grade bonds are more sensitive than high-yield bonds, since their yield is lower by definition. But the change in yields of on government bonds is not the only factor. 2. Corporate bonds and creditworthiness In fact, the yield of a corporate bond is primarily dependent on the solvency, i. e. the creditworthiness of the issuer. In the major developed countries, it is generally accepted that there is no debt with lower risk than a government bond or government debt (Although there are some exceptions). Corporate debt is riskier than government debt, and this justifies a higher yield. The difference is called the spread. The higher the creditworthiness of the issuer (e. g. investment-grade bonds), the lower the spread. The lower the creditworthiness of the issuer (e. g. high-yield bonds), the higher the spread. It is therefore essential to hold securities the creditworthiness of which would improve. An improvement in issuer risk warrants a lower spread, which tends to result in a lower overall yield and an increase in the value of the securities. Conversely, it is just as important to avoid securities with deteriorating creditworthiness. An increase in risk warrants a higher spread, which tends to result in a higher overall yield and a decrease in the value of the securities. 6

7 3. Creditworthiness and credit ratings The creditworthiness of an issuer is rated by specialised rating agencies, such as Standard & Poor s, Moody s and Fitch Ratings. The rating is deemed to be directly related to credit risk, in terms of the issuer s relative credit quality. (see Figure 1) Investment grade debt has a rating of BBB- or higher. High-yield debt has a rating of below BBB. The existence of multiple rating agencies means, in theory, that there will be diverse points of view, but the 2008 financial crisis and the more recent sovereign debt crisis in the eurozone showed their credit ratings are not immune to some criticism. For this reason, active portfolio managers in corporate debt have long assembled teams of analysts to independently monitor the major issuers. Figure 1: Bond ratings by rating agencies Creditworthiness Moody s* Standard & Poor s** Best quality (excellent ability to repay debt) Aaa AAA AAA High quality (very strong ability to repay debt) Aa AA AA Above-average quality (good ability to repay debt) A A A Average repayment ability Baa BBB BBB Below-average quality (somewhat speculative, exposure to risk) Ba BB BB Low quality (speculative, exposure to risk) B B B Poor quality (risk of non-payment) Caa CCC CCC Highly-speculative Ca CC CC No interest paid or bankruptcy declaration filed C D D In default C D D Fitch Ratings** Source: Allianz Global Investors Capital Market Analysis * Ratings from Aa to Ca by Moody s can be modified by adding a 1, 2 or 3 to show the relative place within the category. ** Ratings from AA to CC by Standard & Poor s and Fitch Ratings can be modified by adding a plus or minus sign to show the relative place within the category. 7

8 4. Credit rating and study of risk the Cash Flow to Debt Ratio (in %); A thorough analysis of a company is needed to understand its credit quality. the Debt to Equity Ratio (in %) also called gearing; * Earnings before interest, taxes, depreciation and amortization Its equity (shares) and medium and longterm debt (bonds) are what comprise a company s long-term resources, in other words an essential part of the company s liabilities. An analysis of the issuer s sector, its market positioning, strategy, balance sheets and financial statements must verify that day-to-day operations will allow the company to service its liabilities appropriately over the long term. The equity analysis and credit analysis of a company go through these same steps. Equity analysis examines the value per share, which represents ownership of a portion of the company in terms of its current and future profitability. Credit analysis examines the value of a bond, which is ownership of a portion of the company s debt and the company s ability to service its debt and repay the principal at maturity. debt as a multiple of EBITDA*, i. e. the gross operating margin. The table below shows the distribution of these three ratios and the different ratings in terms of operational risk (y-axis) and financial risk (x-axis). A company with an excellent business model can only present a minimal financial risk if it has an annual cash flow of at least 60 % of its debt, a debt-to-equity ratio of less than 25 % and debt of less than 1.4 times EBITDA. This warrants a rating of AAA. Lower ratios correspond to a modest financial risk and warrant a rating of AA. If the financial ratios are even lower, this warrants a rating of BBB. (see Figure 2) There are three important financial analysis ratios: Figure 2: Table of ratings and financial ratios in terms of business and financial risk Financial Risk Profile Business risk profile Minimal Modest Intermediate Aggressive Highly leveraged Excellent AAA AA A BBB BB Strong AA A A BBB BB Satisfactory A BBB+ BBB BB+ B+ Weak BBB BBB BB+ BB- B Vulnerable BB B+ B+ B B Financial risk indicative ratios* Minimal Modest Intermediate Aggressive Highly leveraged Cash Flow (Funds from operations / Debt) (%) > < 15 Debt leverage (Total Debt / Capital) (%) < > 55 Debt / EBITDA** < 1,4 1,4 2,0 2,0 3,0 3,0 4,5 > 4,5 Source: Standars & Poor s, 2010; Allianz Global Investors Capital Market Analysis * Fully adjusted, historicallydemonstrated, and expected to continue consistently; ** Earnings before interest, taxes, depreciation and amortization 8

9 Figure 3: Historical rating changes of corporate debt by Standard & Poor s 100 % 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % Upgrade Downgrade Default Withdrawn rating Unchanged rating Source: Standard & Poor s, 2011 Annual Global Corporate Default Study and Rating Transitions; March 2012 A rating is reviewed regularly, at least annually. It can be maintained, improved or downgraded, or placed under review with positive or negative implications, pending the conclusion of a study (see Figure 3). Since 1998, one can observe that downgradings occur at the peak of the cycle and when growth is falling ( , ), and upgradings when growth resumes ( , ). 9

10 5. Default risk All issuers have a default risk, i. e. being unable to fulfil the terms of issue of their bonds. The default may result from the delayed payment or non-payment of interest due, or non-payment of part or all of the capital. The default rate measures the percentage of companies that have defaulted within a given sample. This sample is defined, for example, by rating, debt seniority or economic sector. The table below shows, for each of the 3-year periods between 1996 and 2011, for an initial rating (y-axis), the risk of or the opportunity for migration towards a lower or higher rating, or even default (x-axis). Thus, a rating of AAA has a 0 % default risk within three years, while a rating of BBB has a 0.65 % risk, etc. (see Figure 4). Figure 4: 3-year ratings migration rate (%) From / to AAA AA A BBB BB B CCC / C Default Other Europe ( ) AAA 57,28 22,07 4,46 0,23 0,23 0,00 0,23 0,00 15,49 (7,85) (8,02) (4,32) (1,34) (1,57) (0,00) (1,57) (0,00) (6,81) AA 0,56 61,15 24,26 2,27 0,34 0,00 0,04 0,09 11,30 (0,51) (8,81) (8,45) (1,47) (0,40) (0,00) (0,16) (0,19) (3,14) A 0,04 5,33 66,39 12,62 0,66 0,24 0,13 0,20 14,38 (0,18) (2,53) (6,10) (3,19) (0,62) (0,33) (0,22) (0,25) (4,18) BBB 0,00 0,36 10,56 58,16 6,95 1,66 0,29 0,65 21,37 (0,00) (0,40) (2,57) (3,71) (3,77) (1,33) (0,55) (1,06) (6,45) BB 0,00 0,00 0,96 9,96 37,16 12,36 0,67 3,45 35,44 (0,00) (0,00) (2,45) (3,72) (6,78) (5,09) (0,93) (3,68) (7,58) B 0,00 0,00 0,00 0,51 11,00 28,70 4,17 13,27 42,35 (0,00) (0,00) (0,00) (0,73) (5,18) (7,12) (2,70) (11,72) (12,57) CCC / C 0,00 0,00 0,00 0,00 0,00 9,09 3,03 54,55 33,33 (0,00) (0,00) (0,00) (0,00) (0,00) (7,52) (5,58) (25,60) (26,08) Source: Standard & Poor s, 2011 Annual European Corporate Default Study and Rating Transitions; April 2012 Figure 5: Influence of recovery rate on yield differential (spread) Par value Recovery rate Effective loss rate Default probability Probable loss Current spread Probable net spread 100 % 55 % 45 % 2 % 0.90 % 4 % 3.10 % 100 % 50 % 50 % 2 % 1.00 % 4 % 3.00 % 100 % 45 % 55 % 2 % 1.10 % 4 % 2.90 % 100 % 40 % 60 % 2 % 1.20 % 4 % 2.80 % 100 % 35 % 65 % 2 % 1.30 % 4 % 2.70 % Source: Allianz Global Investors Capital Market Analysis,

11 Figure 6: Price of CDS and spread on a Global Wines and Spirit Company s debt in basis points Global Wines and Spirits Company Sen 5YR CDS*t Global Wines and Spirits Company 5Y Bond Spread Source: Datastream, Allianz Global Investors Capital Market Analysis *Credit Default Swap In case of a default, the investor normally does not lose the entire value of his invested capital. Let us take a diversified corporate bond portfolio, offering an average current spread of 4 % (see figure 5). If the default probability is 2 %, the investor will not loose these 2 % altogether. The default probability must be supplemented by the recovery rate, i. e. the proportion of capital affected by the default, but ultimately recovered by the creditor. The default probability (e. g. 2 %) and the effective loss rate (e. g. 45 %) together determine the probable net spread (i. e. (current spread 4 %) ((default probability 2 %) x (effective loss rate 45 %)) = 3.10 %). At a given time during the economic cycle and for a specific rating, an investor can use these two rates to estimate his probable loss and deduct it from the spread to obtain the effective remuneration supplement (probable net current spread). 6. CDS and the hedging of default risk A holder of debt or bonds can use the credit default swap (CDS) market to hedge against issuer default risk. The market fixes the price of a CDS as a percentage of the hedged capital, which is the cost of the insurance premium to be paid in exchange for guaranteeing the default risk. The price increases when the creditworthiness of the issuer decreases and its rating falls. And the price goes down as the rating increases. For example, the Figure below shows the close correlation between the spread on 5-year bonds issued by a global wines and spirits company and the market price of its CDS. (see Figure 6). 11

12 Change in the Corporate Market since 2006 Figure 7 shows US market rate changes of 10-year government bonds, and investmentgrade and high-yield corporate bonds with the same duration. During the previous economic cycle, five periods were identified. Until July 2007, the economy was marked by growth. Long-term rates trended upwards, but the spread between government bonds and investment grade bonds stayed relatively stable, at around 0.8 %. The spread on high-yield bonds was at 2.5 % at the end of the period. Between July and 1rst quarter of 2008, during the subprime crisis, the decrease in the Federal Reserve s (FED) key interest rate facilitated the fall in long-term interest rates. The spread on investment grade debt increased from 0.8 % to 2 %, while on highyield debt it approached 7 %. From early in 2008 to March 2009, the crisis worsened. The yield of on government bonds stayed stable at around 3.5 % to 4 %, then fell to nearly 2 % on the bankruptcy of Lehman Brothers. However, the spread on investment-grade bonds more than doubled to 4.60 %, and the spread on high-yield debt exceeded 20 %! In March 2009, the spreads fell to 3.40 % and 15 %, respectively. Beginning in March 2009, the situation normalised. Long-term rates on government bonds began to recover from the historic slump. At the same time, rates on corporate bonds fell significantly. The spread on investment-grade bonds fell to %, on average. The spread on high-yield bonds had an even more severe decline, to 4.20 %. In April 2010, the crisis in the eurozone resulted in massive purchases of bonds of the most solvent countries. There was at that time a more acute perception of risk, which has revived concerns about corporate debt and caused spreads to rise again. Figure 7: Yields of government bonds, investment-grade bonds and high-yield bonds 25 % 25 % 20 % 20 % 15 % 15 % 10 % 10 % 5 % 5 % 0 % % Barclays Custom IG Corp Index RY Barclays US HY Composite RY US Benchmark 10 Years DS Govt Index RY Source: Datastream, Allianz Global Investors Capital Market Analysis, April

13 The same occured in late spring 2011 with the eurozone crisis revival. While investment-grade bonds bond rates stabilized, their spread increased with the falling rates on government bonds. However, high yield bond rates rose, swelling spreads up to higher levels again. This last cycle of corporate credit was atypical, as it was magnified by the financial crisis. However, a few things were learned about the investment-grade and high-yield segments: 1. During economic growth, the rise in longterm interest rates diverts the investor away from government bonds, and often from investment-grade bonds. However, high-yield credit is attractive if the lowering of spreads, justified by improved creditworthiness, is equal to or greater than the recovery of long-term rates. 2. When long-term rates on government bonds rise, economic growth slows, corporate debt increases, financial results are disappointing and there is increased risk. The rate on corporate debt and the spread increases in relation to government debt. Corporate debt is then a bad investment. 3. During a recession, long-term rates fall to their lowest point, but the corporate default risk rises, justifying the increase in corporate debt rates. This means that the spread on corporate debt peaks. Corporate debt is then a very poor investment. 5. By definition, the risks related to the highyield segment are higher than risks in the investment-grade segment. For this reason: high-yield bonds have a wider spread against government bonds than investment-grade bonds against government bonds; a worsening economic and financial environment has a greater impact on high-yield bonds than on investmentgrade bonds; when the economy is recovering, the potential gain in the high-yield segment is greater than in the investment-grade segment. In 2009, these gains were exceptional. 4. When economic activity stabilises or begins to recover, long-term interest rates gradually rise and business risk falls steadily. Yields of corporate debt fall. The narrowing of the spread makes corporate bonds, and high-yield bonds in particular, among the best investments. 13

14 Some Features of Corporate Credit Management An investor s portfolio benefits from the unique features of corporate bonds as an asset class. 1. The dual nature of a corporate bond A corporate bond can be described as having a dual nature: equity and bond. As debt, its value is closely linked to the quality of the issuer, that is, its capacity to honour its commitments and to perform. The market also assesses this risk through the price of the issuer s shares. A corporate bond, which is an interest-rate instrument dependent on the bond market, is therefore theoretically related to the equities market by the business risk. When a company wants to raise capital, it can issue listed equities, which makes the buyer a co-owner of the company. Alternatively, the company may issue listed corporate bonds, which make the buyer a creditor of the company. Thus, investors holding equities or bonds from the same issuer have two different levels of confidence with regard to that issuer. This means that: The corporate bond manager must closely monitor information provided by the issuer (borrower). In fact, any change affecting the operating account could impact its solvency, credit risk and the value of its bonds. The manager must analyse the accuracy of the spread on a corporate bond to the default risk of the issuer. If the spread is excessive with regard to current or future risks, he purchases the bond. If the spread is too narrow with regard to identified risks, he will reduce holdings in the bond. A corporate bond manager must, as with equities, diversify his portfolio by sector, and within the same sector between various companies. He may choose a macroeconomic or top-down approach to switch between cyclical and defensive sectors. He may also use a bottomup approach, focusing on individual securities. 14

15 2. Corporate bonds and volatility Another characteristic of corporate bonds is their volatility: Due to its high yield, a high-yield bond with an unchanged spread is less sensitive to a rise in long-term interest rates than an investment-grade bond, and even less so than a government bond of the same duration. The price of a corporate bond also depends on the creditworthiness of the issuing company, which is more uncertain than that of a country. This has a determining impact on its yield, and therefore on its value. Corporate bonds are also more volatile than government bonds. However, corporate bonds are less risky than equities. In the event of liquidation, the creditor is theoretically paid before the owner. Corporate bonds are therefore likely to be less volatile than equities. 3. Corporate bonds and liquidity One last, but significant, characteristic of corporate bonds is lower liquidity. They only represent 5 % of the euro denominated bond universe, and the nominal value of each issue is generally far much lower than that of a public bond. The lack of liquidity gives rise to market imperfections, i. e. distortions between the price and therefore the spread, and the intrinsic risk of the bond. These market distortions offer excellent opportunities for investors, but they can also make it difficult for investors to divest their holdings when the market declines rapidly. The bond-equity duality of corporate credit was apparent in mid The equities markets, after a solid rebound, were less attractive to investors. High-yield bonds offered a wide spread, with no real relation to the actual risk. Knowledgeable investors preferred to assume business risk as a creditor through corporate bonds, because they considered the risk to be lower than that as co-owner through equities. Corporate Credit Contributes to Diversified Investment Corporate debt makes a significant contribution to diversified investment. Its distinctive market behaviour makes it a unique asset segment. First, a correlation between high-yield debt and investment-grade debt does not exist, which means that the two segments have specific differences in their behaviour. This is also true of their correlation with sovereign debt: investment-grade debt has a high correlation with sovereign debt, while highyield debt has a negative correlation. (see Figure 8) Then, because it is representative of business risk, high-yield debt has a significant correlation with equities. Over the long term ( ), high-yield debt has outperformed equities at the start of economic upturns, before underperforming during subsequent years. (see Figure 9) Figure 8: Corporate Bonds as an instrument for portfolio optimization High Yield (HY) Investment Grade (IG) Bonds 7 10Y Bonds 1 10Y High Yield (HY) % % 0.71 % 4.92 % Investment Grade (IG) % % % % Bonds 7 10Y 0.71 % % % % Bonds 1 10Y 4.92 % % % % HY: Bank of America Merrill Lynch European Currency High Yield Index (Total Return), IG: Barclays Euro Aggregate Corporate Index (Total Return), BONDS 7 10Y: Citigroup World Government Bond Index Euro Government 7 10 Years (Total Return), BONDS 1 10Y: IBoxx Euro Sovereign Ezone All Maturities (Total Return) Source: Datastream, Allianz Global Investors Capital Market Analysis,

16 Figure 9: Annual performance of high-yield (HY) debt and equities 80 % 60 % 40 % During default periods and the first year of recovery, High Yield outperforms the S&P 20 % 0 % 20 % High Yield outperforms the S&P 500 by more than 10 % per year 40 % Subprime crisis 60 % Return High Yield corporate bonds (Merrill Lynch US High Yield Master II Index) Equity returns (S&P 500 Index) Avg. Source: Bloomberg, Allianz Global Investors Capital Market Analysis Over a shorter period ( ), corporate debt in the eurozone has provided major opportunities for diversification based on its weak correlation with other asset segments and the attractiveness of its performance compared to its risks. The data on investmentgrade and high-yield debt relative to government bonds and blue chip stocks demonstrate (see Figure 10): the attractive risk / return ratio, as illustrated by the Sharpe ratio: of investment-grade debt in 2005, and especially of high-yield debt in , during the upwards phase of the cycle; of high-yield and investment-grade debt during the recovery of ; their lack of attractiveness during phases of maturity or the economic downturn in ; the attractive performance of high-yield debt during the period. Over a 7 year period of disappointing stock indexes performances, corporate bonds have proved to offer similar sharpe ratios to government bonds, with similar (Investment Grade) or much higher (High Yield) returns. Olivier Gasquet Annotation Figure 10 Sharpe ratio: The sharpe ratio (or reward-to-variability ratio) is a measure of the excess return (asset return less risk free interest rate) per unit of risk (volatility in %) in an investment asset. The higher the sharpe ratio, the more attractive the investment asset. 16

17 Figure 10: Investment-grade (IG) and high-yield debt in Euro Performance and volatility compared ( ) Annualised performance Period IG Euro* HY Euro* Government bonds 3 5 years* Government bonds 7 10 years* Dow Jones Euro Stoxx 50* Interbank rate* % 6.37 % 3.47 % 6.41 % % 2.14 % % % 0.92 % 0.65 % % 2.91 % % 3.29 % 2.97 % 1.20 % 9.62 % 3.99 % % % 6.01 % 8.08 % % 3.99 % % % 6.22 % 5.08 % % 0.73 % % % 2.66 % 2.23 % 2.82 % 0.44 % % 2.24 % 4.45 % 6.60 % % 0.89 % % 6.25 % 3.78 % 4.07 % 0.51 % 2.15 % Annualised volatility Period IG Euro* HY Euro* Government bonds 3 5 years* Government bonds 7 10 years* Dow Jones Euro Stoxx 50* Interbank rate* % 3.38 % 1.88 % 3.60 % % 0.07 % % 1.74 % 1.85 % 3.53 % % 0.10 % % 3.36 % 2.00 % 3.66 % % 0.14 % % % 3.87 % 6.04 % % 0.14 % % 8.74 % 2.76 % 5.13 % % 0.04 % % 5.61 % 2.82 % 4.49 % % 0.02 % % 6.26 % 3.42 % 5.57 % % 0.04 % % 6.63 % 2.76 % 4.68 % % 0.13 % Sharpe Ratio Period IG Euro* HY Euro* Government bonds 3 5 years* Government bonds 7 10 years* Dow Jones Euro Stoxx 50* Interbank rate* Source: Allianz Global Investors Quantitative Research & Capital Market Analysis; April 2012 * Investment Grade (IG) Euro: Barclays Euro Aggregate Index (TR); High Yield (HY) Euro: Bank Of America Merrill Lynch European Currency High Yield Index (Euro) (TR); Staatsanleihen Euro 3 5 Jahre: Barclays Euro Aggregate 3 5 Years Sovereign (Euro) Index (TR); Staatsanleihen Euro 7 10 Jahre: Barclays Euro Aggregate 7 10 Years Sovereign (Euro) Index (TR); Dow Jones Euro Stoxx 50: Euro Stoxx 50 (TR); Interbankenzins: EONIA; TR = Total Return Index 17

18 Notes 18

19 Disclaimer Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. Past performance is not indicative of future performance. Bond prices will normally decline as interest rates rise. Bonds are subject to the credit risk of the issuer. High-yield or junk bonds have lower credit ratings and involve a greater risk to principal. Emerging markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates. No offer or solicitation to buy or sell securities, nor investment advice / strategy or recommendation is made herein. In making investment decisions, investors should not rely solely on this material but should seek independent professional advice.the views and opinions expressed herein, which are subject to change without notice, are those of the issuer and / or its affiliated companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or willful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This is a marketing communication. This material has not been reviewed by any regulatory authorities, and is published for information only, and where used in mainland China, only as supporting materials to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors US LLC, an investment adviser registered with the US Securities and Exchange Commission; Allianz Global Investors Europe GmbH, an investment company in Germany, subject to the supervision of the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) RCM (UK) Ltd., which is authorized and regulated by the Financial Services Authority in the UK; Allianz Global Investors Hong Kong Ltd. and RCM Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator. 19

20 Allianz Global Investors GmbH Bockenheimer Landstr Frankfurt am Main March 2013