Credit Opinion: Deutsche Bahn AG

Credit Opinion: Deutsche Bahn AG Global Credit Research - 01 Oct 2014 Berlin, Germany Ratings Category Moody's Rating Outlook Stable Issuer Rating -Dom Curr Aa1 Senior Unsecured MTN -Dom Curr (P)Aa1 Commercial Paper -Dom Curr P-1 Other Short Term -Dom Curr (P)P-1 Deutsche Bahn Finance B.V. Outlook Bkd Senior Unsecured Stable Aa1 Bkd Commercial Paper -Dom Curr Bkd Other Short Term -Dom Curr P-1 (P)P-1 Contacts Analyst Phone Falk Frey/Frankfurt am Main 49.69.707.30.700 Matthias Volkmer/Frankfurt am Main Matthias Hellstern/Frankfurt am Main Key Indicators [1]Deutsche Bahn AG 6/30/2014(L) 12/31/2013 12/31/2012 12/31/2011 12/31/2010 Revenue ($ Billion) $54.5 $52.8 $51.6 $54.2 $46.9 EBITA Margin 5.2% 5.2% 6.2% 5.6% 4.0% EBITA / Avg. Assets 3.5% 3.4% 4.2% 3.7% 2.5% Debt / Book Capitalisation 67.2% 66.8% 66.0% 64.7% 66.1% Debt / EBITDA 5.3x 5.2x 4.8x 4.8x 5.6x FCF / Debt 0.7% -2.4% -0.2% 0.6% 4.5% RCF / Net Debt 20.7% 18.6% 20.4% 20.0% 20.2% (FFO + Interest) / Interest 5.6x 5.4x 5.5x 5.3x 5.3x [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. Source: Moody's Financial Metrics Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers - - GDP growth driving profitability in freight and logistics

- Subdued profitability despite continuous efficiency improvements - Stable relationship with the Aaa-rated German government as sole shareholder and ongoing high state support - Ability to retain leading market positions Corporate Profile Deutsche Bahn AG (DB) is a vertically integrated rail and logistics group that owns and operates the German national rail transportation network. DB is one of the largest rail and logistics companies worldwide, generating revenues of EUR39.5 billion (LTM June 2014). The company combines rail track infrastructure and passenger and freight transportation services under its holding umbrella. DB is the market leader in the European rail freight business based on tonne kilometres (tkm) and ranks second overall in European rail passenger transport in terms of revenue. In addition, the company ranks third in public road passenger transport in Europe, is the largest provider of land transport in Europe, and one of the world's leading sea transport (based on twenty-foot equivalent units, or TEUs) and air freight (in terms of tonnage), as well as logistics (in terms of revenue), groups. SUMMARY RATING RATIONALE Given its 100% ownership by the German government, the strong link between DB's ratings and the government's rating is based on the strong government support that is incorporated into the company's rating in accordance with our rating methodology for government-related issuers (GRIs). More specifically, our rating methodology for GRIs formally segregates DB's rating into four components: (1) a baseline credit assessment (BCA) - a measure of a company's standalone risk - of aa3; (2) the Aaa domestic currency rating of the Federal Republic of Germany; (3) `high' dependence; and (4) `high' support. The aa3 BCA takes into consideration (1) DB's size and leading market position; and (2) the predictability of the legal framework for railway companies in Germany and the stable environment in which the company operates, but also weaknesses in its financial profile, particularly in its (a) cost position and profitability, (b) leverage, and (c) free cash flow (FCF) coverage leaving the BCA currently weakly positioned. However, In that respect we note that DB's weak leverage and FCF coverage are largely driven by the company's vertically integrated business model and substantial investment needs in rail track infrastructure. DETAILED RATING CONSIDERATIONS DB BENEFITS FROM BROAD DIVERSIFICATION AND SIZE With revenues of around EUR40 billion, DB maps to the highest category of our rating methodology grid in terms of size. This is supported by the company's broad diversification into several different areas: passenger transport (rail and bus), rail freight, logistics and rail infrastructure, each of which has reached a critical mass of 10% of revenues. Although not measured by the rating methodology, DB's business profile benefits from notable regional diversification, with approximately 42% of revenues generated outside of Germany, the company's home market. PREDICTABILITY OF LEGAL FRAMEWORK HELPED BY SOLID OPERATING ENVIRONMENT We consider the stability of DB's operating environment in Germany to be highly supportive and predictable. Germany has set the pace for rail sector liberalisation and its government has put in place a stable legal framework. The stability of the operating environment is illustrated by (1) the government's constitutional obligation to provide functional rail infrastructure; (2) the budgeting of regionalisation funds in the medium-term planning process; and (3) the existence of a service and financing agreement between DB and the federal government, with well-defined quality levels. As a result of the liberalisation of the German rail sector for competition - Germany is among the frontrunners within the EU - DB is experiencing a continuous gradual decline of its market share in both, passenger transport and rail freight. However, with a decline of 1-2% per year (based on Moody's analysis and external market research), the development is manageable and allows DB to deal with. For 2012 (latest data available, "EU transport in figures" published by the European Commission) we still calculate a quite strong share of 84.3% (based on passenger and freight kilometres) in the domestic rail market which translates into a "Aa" score for the subfactor "competition environment" under our rating methodology grid. LONG-DISTANCE BUS SERVICES EMERGE AS NEW COMPETITORS

Since the liberalization of the German market for long-distance bus services, more than 250 routes have been registered and service providers are competing with very low ticket prices against each other but also against long-distance train connections offered by DB. Revenues in the long-distance bus market are estimated based on external market research at around EUR160 million in 2014 and expected to grow to EUR350 million in 2015. DB is also active in the market with its own offerings, particularly focusing on connections that are not well covered through the existing long-distance train network and a subsidiary is offering bus services from and to Berlin. DB is, however, not expected to engage in price wars in order to gain market share and it is not assumed that DB will see long-distance bus services as a core business. The impact of long-distance bus services on DB's traditional passenger rail transport business will become more and more visible over time as DB starts to offer a higher volume of discounted train tickets and will lose some market share in segments with price sensitive customers, who might use buses instead. As rail transport operations are largely driven by fixed costs, a reduction in the number of passengers will directly impact margins. In 2013, we estimate that low double digit million of revenues were lost as a direct result of long-distance bus services. DB's own estimate for 2014 is about EUR50 million. This compares with about EUR3.9 billion of revenues generated in long-distance passenger rail transport in 2013. PROFITABILITY REMAINS CONSTRAINED The rating grid shows DB to be a negative outlier in terms of cost position and profitability, an area in which the company's performance remains constrained by a low return on capital employed (especially in rail freight and infrastructure) and low profitability. In the first half of 2014, DB's revenues increased slightly by 1.9% year on year on a comparable basis mainly due to operational improvements in Europe and positive consolidation effects. DB's EBITA margin increased slightly to 5.6% for the first half of 2014 versus 5.5% in the same period in 2013. Lower comparables in 2013 (one-off effects from the severe winter and the flood in June 2013) supported the moderate improvements in operational performance. As a result of the weaker than expected performance in the passenger rail transport segment, which to some extent is driven by the emergence since 2013 of private long-distance bus operators in Germany, DB has revised down moderately its outlook for full year 2014 revenues (EUR40.5 billion vs. EUR41.0 billion forecasted in March). EBIT (adjusted by DB) is expected to be above EUR2.2 billion, slightly above the result seen in 2013. We expect the negative cost factors from personnel will continue to weigh on the margins in the second half. However, we expect DB's profitability to recover in 2014 supported by its track record of continuous efficiency improvements since 2010, provided that the economy will resume a stable and sustainable growth from 2014 onwards. LOWER DIVIDEND PAYMENT SUPPORTS POSITIVE FCF GENERATION DB's commencement of regular dividend payments from 2011 and the continuous increase in its net capex materially weakened the company's FCF generation in recent years. The dividend paid in 2014 has been cut to EUR200 million (versus EUR525 million in 2013), which at roughly constant capex levels led to a positive free cash flow generation. For the last 12 months ended June 2014, DB's cash flow from operations remained at a high level of above EUR4.8 billion and FCF turned to a positive amount of EUR226 million compared to EUR(697) million in 2013. Looking ahead, we expect that DB will further increase its annual gross capex to a level of above EUR9.5 billion reflecting the initiative to improve customer satisfaction and the quality of rail infrastructure. Although a significant proportion of investments into rail network is financed by the federal government (as this relates to infrastructure investment that is within its responsibility), investments into the fleet have to be funded largely by DB. As a result, we anticipate that DB's net share in capex will increase. Therefore, we expect that the company's FCF will be at best balanced over the next three to five years. NO MATERIAL LEVERAGE IMPROVEMENT EXPECTED As a result of a slight increase in gross debt and a flat EBITDA development, DB's leverage deteriorated moderately to 5.3x in H1 2014 from 5.2x per end of 2013. Looking ahead we expect to see a slight improvement back to below 5.0x at year-end 2014 driven by a recovery in EBITDA, but no material improvement in this dimension for the next few years. Deleveraging, if any, will have to be driven by EBITDA improvements. DB's gross debt is likely to continue to increase as a result of the company's ongoing dividend payment and an expected further increase in net capex, driven by the continuation of growth and modernisation programmes. Management's medium-term financial targets are to achieve - all figures on a reported basis - (1) an operating cash flow/net debt ratio, including leasing, of 30% (moderately down to 20.2% in H1 2014 from 20.5% in 2013); (2)

a return on capital employed of 10% (H1 2014: 6.5% vs. 2013: 6.8%); (3) gearing of 100% (H1 2014: 109% vs. 2013: 110%); and (4) a net debt/ebitda ratio of 2.5x (H1 2014: 3.2x vs. 2013: 3.2x, as reported). Until the 2008-09 global financial crisis, and especially the sharp decline in the freight market, DB was able to make strong progress towards these metrics, which have since been constrained by the acquisition of Arriva in 2010. However, DB's continued ambition to accomplish these targets over the medium term and its continuing steady performance improvements on all of these targets, as shown in its 2013 report, have put the company well on course to achieve these targets, which would have been temporarily slowed down due to the operating underperformance in 2013. Liquidity Profile We expect that DB will maintain satisfactory liquidity over the next 12 months, primarily reflecting our expectation that (1) the company will be able to maintain its excellent access to the capital markets; (2) it will be able to continue to generate sizeable funds from operations; in addition to (3) the high likelihood that, in the event of need, the company would receive support from the federal government - its 100% shareholder - which would have both the motivation and legal mechanisms to provide a timely cash injection. Such an injection, for liquidity purposes, would go beyond the government's statutory duty to preserve DB's operations from insolvency. Even without this support, we would consider DB's liquidity profile to be solid. Rating Outlook The stable outlook on DB's ratings is in line with the stable outlook on the Aaa rating of its support provider, the Federal Government of Germany. This reflects the fact that any significant adjustment in the rating of the German government would cause us to reassess the amount of credit uplift incorporated in DB's rating. What Could Change the Rating - Up In the absence of any change in DB's standalone profile, or underlying sovereign support, we expect that DB's ratings will remain primarily driven by the Federal Republic of Germany's government bond rating. At this stage, we do not expect any strengthening of the support beyond its current high level or any change in dependence. Furthermore, the rating is highly sensitive to any increase in the company's BCA. The BCA would most likely come under upward pressure from a continuing improvement in (1) DB's operational performance, such that EBITA margins are sustainably in the high single digits in percentage terms; and (2) the company's financial performance, such that its debt/ebitda ratio is consistently below 3.5x, assuming no changes to the budgeted investment subsidies. What Could Change the Rating - Down While DB's Aa1 issuer rating is sensitive to any weakening of the expected strong support from the federal government, given the constitutional framework and DB's economic importance, we expect that the likelihood of support will remain high. However, DB's BCA, and in turn its senior unsecured rating, could be affected by (1) a permanent deterioration in the company's operating performance, with, for instance, EBITA margins remaining below 6% (LTM June 2014: 5.2%) and debt/ebitda not returning to a level comfortably below 5.0x (LTM June 2014: 5.3x); (2) a weakening of the company's business profile resulting from a change in its integrated business model; and (3) a major reduction in ongoing infrastructure subsidies. Likewise, structural subordination would have a negative rating impact, should DB Mobility Logistics AG start to raise external funding. Other Considerations APPLYING THE GRI FRAMEWORK The rating also takes into account the following: - The German government's local currency rating, currently set at Aaa, with a stable outlook, which captures the ability of the government to support DB in the event of need. - The `high' default dependence between DB and the German government, which reflects (1) DB's geographic diversification, mainly via its international logistics and freight-forwarding activities; (2) the increasing presence of its rail freight activities in neighbouring European rail markets; (3) that Germany is a key artery in international rail traffic; and (4) the strong integration of infrastructure into the international economy and trade flow, which further

underpins the high default dependence between DB and the German government. - Our expectation that the government will provide DB with a high level of support (71%-90%) in the event of need, which is based on (1) the constitutional requirement that the government remains the owner of the rail infrastructure and is responsible for ensuring it is functional; (2) the 100% state ownership of the ultimate holding company; (3) the strategic importance for Germany's economy of a functioning, well-funded rail infrastructure; (4) an overall strong political consensus regarding the public role of DB and the importance of its activities for the German economy; and (5) DB's dominant role as a regional transport provider in addition to its de facto longdistance passenger rail monopoly. Since these key factors will remain unchanged when a 24.9% share of DB Mobility Logistics AG (DBML), a subholding company under the umbrella of DB, should be floated, our assumption of a high level of support will not be affected. MAPPING TO GRID-INDICATED RATING DB's BCA of aa3 is one notch above the indication received from the application of our "Global Passenger Railways" rating methodology grid. Key strengths identified relate to size and market position, reflecting the company's strengths as a leading market player. The methodology grid indicates weaknesses with regard to profitability, return on assets, leverage and cash flow coverage. Rating Factors Deutsche Bahn AG Passenger Railway Industry Grid [1][2] Current LTM [3]Moody's 12-18 Month Forward 6/30/2014 ViewAs of 9/15/2014 Factor 1 : SIZE (15%) Measure Score Measure Score a) Revenue ($ Billion) $54.5 Aaa $54.2 - $54.9 Aaa b) Number of Passenger Transported (PKM billion) Aa Aa Aa Aa Factor 2 : MARKET POSITION (40%) a) Stability of Operating Environment Aaa Aaa Aaa Aaa b) Market Characteristics Aaa Aaa Aaa Aaa c) Competitive Environment Aa Aa Aa Aa Factor 3 : COST POSITION AND PROFITABILITY (15%) a) EBITA Margin 5.2% Ba 5% - 5.5% Ba b) EBITA / Avg. Assets 3.5% Ba 3.4% - 3.6% Ba Factor 4 : CAPITAL STRUCTURE (15%) a) Debt / Book Capitalisation 67.2% A 65% - 70% A b) Debt / EBITDA 5.3x Ba 5x - 5.5x Ba Factor 5 : CASH FLOW AND INTEREST COVERAGE (15%) a) FCF / Debt 0.7% Baa 0% - 1% Baa b) RCF / Net Debt 20.7% Baa 20% - 23% Baa c) (FFO + Interest) / Interest 5.6x A 5.5x - 6x A Rating: a) Indicated Rating from Grid A1 A1 b) Actual Rating Assigned Aa1 Government-Related Issuer Factor a) Baseline Credit Assessment aa3 b) Government Local Currency Rating Aaa c) Default Dependence High (70%) d) Support High (71-90%) e) Final Rating Outcome Aa1

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