Barclays Capital Tuesday Credit Call

Sell in May but Should You Stay Away?

Brad Rogoff Praveen Korapaty Jigar Patel June 7, 2011

Please see analyst certifications and important disclosures starting after slide 16

Agenda
Credit Strategy Brad Rogoffs Piece Corporate Bonds/CDS Trading Chris Scarpelli Hybrid Capital Dan Silver High Yield Dustin Martin - Energy/Front End Cash Bill Fenwick Retail/Healthcare Cash Eric Rogers Yankee Credit Conference Call Information Tuesday, 7:45am (EST) Conference ID: 25800323 Dial-in: +1-866-644-3260 +1-706-634-9973 Replay: Live.barcap.com Credit Conference Calls

Last week, credit was broadly wider with both CDS and HY underperforming. CDX IG is now back to mid-April levels, and the HY Index OAS is back to early-January levels
CDX IG (5/276/3, bp)
95.0 94.0 93.0 92.0 91.0 90.0 89.0 27-May 31-May Intraday Range 1-Jun 2-Jun Close 3-Jun 91 89 87 28-Mar 97 95 93

CDX IG and US Credit Index OAS (bp)

w/w change in price CDX IG: -$0.91 IG Index: +$0.23 w/w chg: +2bp
139 137 135 133 131 129

8-Apr 19-Apr CDX IG

30-Apr

125 11-May 22-May 3-Jun US Credit OAS (rhs)

w/w chg: +4bp

127

CDX HY (5/276/3, $)
102.4 102.2 102.0 101.8 101.6 101.4 101.2 101.0 27-May 31-May Intraday Range
___________________________ Source: Bloomberg, Barclays Capital.

CDX HY and US HY Index OAS (bp)

480 470 460 450 440 430 420 28-Mar

w/w change in price CDX HY: -$0.91 HY Index: -$0.29

510

w/w chg: +17bp

500 490 480 470

w/w chg: +21bp

8-Apr 19-Apr CDX HY 30-Apr

460 450

1-Jun

2-Jun Close

3-Jun

440 11-May 22-May 3-Jun US HY OAS (rhs)

Equities and the dollar continued their decline, and treasuries rallied
S&P 500 Sectors (w/w % Change)
0.0 (0.5) (1.0) (1.5) (2.0) (2.5) (3.0) (3.5) Cons Mat Disc Ind Fin Telec S&P Cons Tech Energy Util Hcare Stp

CRB Index Components (w/w Change)

8% 6% 4% 2% 0% -2% -4% -6% -8%

Equity weakness was widespread, with all ten S&P sectors finishing in the red

While the CRB index was +0.68%, there was significant dispersion among the underlying components

Silver

Coffee

OJ

Copper

Cocoa

Gasoline

Sugar

Corn

Crude Oil

Aluminum

Soybean

Heat Oil

DXY (Dollar Index)

82 81 80 79 78 77 76 75 74 73 72 3-Jan
0 (5) (10) (15) (20) (25) (30) (35) (40) (45)

UST Change in Yields (bp)

28-Jan

22-Feb

19-Mar

13-Apr

8-May

3-Jun

2y

5y

7y Last week

10y YTD

30y

___________________________ Source: Bloomberg, Barclays Capital.

Nat Gas

Cotton

Cattle

Nickel

Gold

Wheat

Hogs

CRB

Macro data now appear uniformly weak, with few bright spots (like ISM non-manufacturing)
ISM Manufacturing Indices
70 65 60 55 50 Jan-10 PMI

Conference Board Consumer Confidence

75 70 65 60 55 50 45 40

Last months 6.9pt drop in the PMI index was the sharpest monthly decline since Jan 84

Largest downside surprise since June 10

Jun-10

Nov-10 New Orders

May-11 Employment

Jan-10

May-10

Sep-10 Survey

Jan-11 Actual

May-11

S&P/Case-Shiller Home Price Index (y/y, %)

5 3 1 55 (1) (3) (5) Jan-10 50 45 Jan-10 65 60

ISM Non-Manufacturing Indices

Non-Manufacturing indices rebounded after Aprils sharp decline

May-10 Survey

Aug-10

Dec-10 Actual

Mar-11

Jun-10 NMI

Nov-10 New Orders

May-11 Employment

___________________________ Source: ISM, Conference Board, S&P/Case-Shiller, Bloomberg, Barclays Capital.

Payroll growth was also weak, driven by lackluster growth in private sector hiring and losses in government jobs
Change in Nonfarm Payrolls (000s)
300 200 100 0 (100) (200) Aug-10 Survey Nov-10 300 250 200 150 100 50 0 (50) May-11 Jan-11 Feb-11 Mar-11 Private Services Apr-11 Govt May-11 Total Private Goods

Payroll Growth by Sector (000s)

Lowest gain in payrolls since last summer

Feb-11 Actual

Average Hourly Earnings (m/m %)

0.50 0.40 0.30 0.20 0.10 0.00 (0.10) Jan-10

Barclays Capital Economics: Key Highlights

Overall, this was a very weak jobs report. The weakening in private sector job growth hints that the private sector may be turning a bit more cautious than we had thought The unemployment rate rose to 9.1%%, reflecting an increase in household employment (+105k), an increase in unemployment (+167k), and a 272k increase in the civilian labor force Nonfarm payrolls grew by 54k, well below our forecast of 190k and consensus of 165k. Private payrolls grew by 83k, also well below our forecast of 210k and consensus of 170k.

While the overall report was disappointing, hourly earnings growth was a bright spot

May-10

Sep-10

Jan-11

May-11

One bright spot was average hourly earnings growth, which came in at +0.3% m/m, above expectations of 0.2%

___________________________ Source: Bureau of Labor Statistics, Haver Analytics, Bloomberg, Barclays Capital.

Given the steady stream of weak data, we have revised our GDP and rates forecasts lower
GDP Growth and Contribution (% q/q, saar)
8

Barclays Capital Revised Rates Forecast (%)

5.0 4.5 4.0 3.5

Q2 GDP growth forecast was revised downward to 2% from 3.5%, and Q3 was revised down to 3% from 3.5% 6
4 2

In light of lower growth expectations, our end-of-year 2y and 10y forecasts are now 0.7% and 3.25%, down by 0.4% and 0.5%, respectively.

3.0

0 (2) (4)
1.5

Barclays Capital Forecast

2.5 2.0

(6) (8) (10) 2Q08 4Q08 2Q09 4Q09 Private Consumption Inventory Govt. Inv. + Consumption GDP q/q % 2Q10 4Q10 2Q11 Non Resid Inv. Residential Inv. Trade Prev. Forecast 4Q11

1.0 0.5 0.0 2y 5y Q3 11 Prev Forecast Q4 11 Prev Forecast Spot 10y 30y Q3 11 New Forecast Q4 11 New Forecast

___________________________ Source: Federal Reserve, Haver Analytics, Barclays Capital. For more details regarding the revised forecasts, please the Market Strategy Americas dated June 3, 2011.

While peripherals ended the week tighter, they have been widening since March, given fears of Greek restructuring
Peripheral and Core European Sovereign CDS (bp)
700 Peripherals, especially Greece, Ireland and Portugal, have widened since 600 March even as the core has tightened 500 400 300 200 100 0 Oct-09 Feb-10 Peripheral Jun-10 Oct-10 Core (rhs) Feb-11 20 Jun-11 100 80 60 40

Greek Sovereign Bond Maturity Profile (bn)

40 35 30 25 20 15 10 5 0 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2057
Reprofiling is an option being floated to extend near-term maturities

Estimated Greece Sovereign Cash Flow Profile (bn)

30 25 20 15 10 5 0 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Public Sector Financing Need EU/IMF Disbursements
___________________________ Source: Bloomberg, Barclays Capital.

Key Near Term Events

BarCap Economics Commentary: EUs approach on the matter [Greece] will only become clearer by the time the findings of the EUIMF-ECB technical mission to Athens are known in detail and the IMF review report is being presented (which we think is going to be in midJune) This Week: Greece updated parliamentary budget negotiations Mid-June: Final IMF review report on Greece expected June 20, 2011: Euro group meeting June 20, 2011: ECOFIN meeting June 23/24, 2011: EU council meeting Early July: Next round of funding to be released

Financing gap (to be met with cash, asset sales, private market financing)

Our view is that a hard restructuring is not imminent, and is more likely to occur sometime in 2012 or 2013
Potential Greek Restructuring/Reprofiling Scenarios and Implications for Bonds and CDS
1 - Near term voluntary exchanges (no trigger likely), muddle along for medium term CDS Trigger (Y/N) Likely CDS Recovery Likely CTD Bond Recovery N N/A ~40-50 2 - Near term voluntary exchange, mandatory hard restructuring 2012 or 2013 (CDS trigger likely at hard restructuring) CDS Trigger (Y/N) Likely CDS Recovery Likely CTD Bond Recovery Y - at "hard" restructuring ~25-35, w/ tail risks low (due to holdouts) and ~25-35 w/ tail risk low on holdouts high (due to restructured cap structure) 3 - Near-term mandatory reprofiling and/or coercive exchange (CDS trigger likely in near term), muddle along for medium term CDS Trigger (Y/N) Likely CDS Recovery Likely CTD Bond Recovery Y - in near term ~40-50 ~40-50 4 - Near-term mandatory reprofiling and/or coercive exchange (CDS trigger likely in near term), mandatory hard restructuring in 2012/2013 (another CDS trigger) CDS Trigger (Y/N) Likely CDS Recovery Likely CTD Bond Recovery Y - at both events ~40-50 on near term event, 25-35 at "hard" ~40-50 in near term, ~25-35 at "hard" event w/ restructuring w/ same tail risks mentioned above tail risk low on holdouts 5 - Near term disruptive haircuts (CDS trigger likely), done with restructuring CDS Trigger (Y/N) Likely CDS Recovery Y - in near term ~25-35, w/ tail risks low (due to holdouts) and high (due to restructured cap structure) Likely CTD Bond Recovery ~25-35 w/ tail risk low on holdouts Likelihood Low/Med Likelihood Med/High

Likelihood Low/Med

Likelihood Low/Med

Likelihood Low

6 - Nothing in near term, hard restructuring in 2012 or 2013 (CDS trigger then) CDS Trigger (Y/N) Likely CDS Recovery Likely CTD Bond Recovery Y - at "hard" restructuring ~25-35, w/ tail risks low (due to holdouts) and ~25-35 w/ tail risk low on holdouts high (due to restructured cap structure) 7 - Nothing in near or medium term, muddle along (no CDS triggers) CDS Trigger (Y/N) Likely CDS Recovery N N/A Likely CTD Bond Recovery ~50-60

Likelihood Med/High

Likelihood Low

___________________________ Source: Barclays Capital. Please see the cross-asset research article Implications of Greece Restructuring for Banks and CDS dated June 3, 2011.

Despite the relatively stronger rally in the junior parts of the cap structure, European insurance hybrids offer some compelling opportunities
European Financial Total Ret (bp), YTD thru 5/31
600 600

European Financial Z-spreads, as of 5/31

Sub*
500 400 300

Sub
500 400 300

Senior
200 100 0 Banks Insur Banks Insur 200 100 0 Banks

Senior

Insur

Banks

Insur

Attractive Opportunities in Old Tier 2 Market

To first call date First call date INTNED 6.25 '21 AVLN 5.75 '21 OLDMUT 4.5 '17 STALIF 6.375 '22 LGEN 4 '25 To maturity

Cross Currency Relative Value

Zurich (Overweight): Swap out of 5.75% 23s or 4.5% 25s , into $6.5 67s, $5.875 62s, or $6.5 67s

Price

Yield 14.67% 4.00% 6.28% 4.69% 5.87%

Z-spread 1,305 230 458 277 330

Yield 5.23% 5.39% 4.13% 5.63% 5.99%

Z-spread 194 210 137 228 241

Sep-11 97.13 Nov-11 100.75 Jan-12 98.88 Jul-12 101.75 Jun-15 93.50

AXA (Overweight): Swap out of $ perpetuals into 5.777% or 6.211% Dateds: Swap out of $8.6% 30s or 7.125% 20s, into 5.25% 40s

___________________________ Source: Barclays Capital. *Insurance Index has 1y longer duration than banks. For details, see European insurance opportunities European Credit Alpha, June 3, 2011.

On a global level, with significant regulatory and fundamental changes in financials, we highlight a few themes and pair trades based on each
Global Bank Themes and Recommended Pair Trades
Theme 1. Rising interest rates 2. Super-equivalent capital ratios 3. Dependence on wholesale funding 4. Regulatory approach to "too big to fail" 5. Exposure to European sovereign debt crisis 6. Diminished profitability 7. Capital structure reengineering 8. Uneven recovery in housing markets 9. Credit ratings momentum 10. Currency arbitrage Pair Trade Buy U.S. Bancorp 4.125% of 2021 at T+100bp and sell Bank of China 5.55% of 2020 at T+207bp or buy Hana Bank 5y CDS at 128bp Sell Credit Suisse 5y CDS at 102bp and buy JPMorgan 5y CDS at 75bp Buy Bank of Nova Scotia 4.375% of 2021 at T+100bp and sell Lloyds Banking Group 5.375% of 2019 at DBR+233bp or sell Commonwealth Bank of Australia 3.25% of 2016 at T+127 Sell Societe Generale 5y CDS at 136bp or ICICI 5y CDS at 223bp and buy Wells Fargo 5y CDS at 82bp Buy HSBC 3.875% of 2016 at OBL+121bp and sell Credit Agricole 3.625% of 2016 at OBL+135bp Buy Banco Itau 5.75% of 2021 at T+275bp and sell Intesa San Paolo 4.125% of 2020 at DBR+172bp Buy Credit Suisse 7.875% of 2041 (CoCo) at $104 and sell Wells Fargo 8.625% of 2068 hybrid at $26.9 Buy BPCE 2013 floaters at L+69bp and sell Lloyds Banking Group 2013 floaters at L+100bp Buy Banco Bradesco 4.125% of 2016 at T+237bp and sell National Australia Bank 4.375% of 2020 at T+148bp Buy Bank of America EUR 7% of 2016 at z+173bp and sell Bank of America USD 3.7% of 2015 at z+139bp

2: Diff. in Expected Implementation of Basel III

Expected Basel III Implementation in US Expected Basel III Implementation in Switzerland 0% Tier 1 Common
600

7: Lower Tier 2 Debt vs. CoCos, OAS (bp)

500 400 300 200

1.5%

7.0% Common

2.0% 0.5% 3.0%

10.0% Common

3.0%

6.0%

100 0 CS USD CS USD 5.4% 2020 7.875% 2041 LT2 LLOYDS USD 6.5% 2020 CoCo LLOYDS USD 7.875% 2020

5%

10% Tier 2

15%

20%

Tier 1 Non Common

SIFI Buffer

___________________________ Source: BIS, Barclays Capital. For details, see Global Banks: Themes and Trades, by Jonathan Glionna, Jeroen Julius, Krishna Hegde, Miguel Crivelli, Conor Pigott, and Miguel Angel Hernandez, May 31, 2011.

10

In the US, supply in the HY market set a new record last month as issuers continued to take advantage of low all-in yields
HY Monthly Gross Supply ($bn)
100%
45

Monthly HY Supply by Use of Proceeds

80% 60% 40%
2011 breakdown has thus far been similar to that in 2010

Issuance ($43bn) hit a new monthly record in May

40

35

20%
30

0% 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 M&A Refi Bonds Refi Loans GCP/CAPEX Other

25

Monthly HY Total and Excess Returns (%)

20

4
15

3 2

10

1 0

(1) (2)
Jan-08 Nov-08 Sep-09 Jul-10 May-11

0 Mar-07

Jun-10

Aug-10

Oct-10 Total Return

Dec-10

Feb-11

Apr-11

Excess Return

___________________________ Source: Barclays Capital.

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Given the low levels of yields, we continue to view the upside as limited relative to other asset classes such as equities
US HY YTW (%)
10 9
SPX

HY OAS and S&P500

1,600

Even as spreads have widened of late, all-in yields are still close to all-time lows

Recent HY/Equity relationship suggests lesser upside for HY once the sell-off ends

8 7 6 Jan-10

1,400

1,200

May-10

Sep-10

Jan-11

May-11

HY Index Price and Call Constraints

105 104 103 102 101 100 Nov-10 20% Jan-11 Index price
___________________________ Source: Bloomberg, Barclays Capital.

1,000 50%

40%

800

30% 600 0 500 Jul 07Aug 08 Dec 10Mar 11 1000 1500 HY Index OAS (bp) 2000 Jan 10Nov 10 2500

Mar-11

May-11

% trading above next call

Sept 08Dec 09 Apr 11Present

12

That being said, there continue to be specific opportunities in the space; potential early tender candidates are one such opportunity
HY Principal Redemption Sources (2008 11)
100% 80% 60% 40% 20% 0% 2008 True Tender Open Mktt Purchase 2009 Tender-to-Call Maturity 2010 Call Other 2011

Tender Offers in 2011

Count Average Tender Price Avg Pre-Ann Trading Price Dollar Premium to Trading Price Percent Premium to Trading Price Average Next Call Price Dollar Premium to Call Price Percent Premium to Call Price Average Days to Next Call Average Participation Rate <90d to Call >90d to Call 47 33 102.92 113.31 102.17 110.19 0.75 3.12 0.73% 2.83% 102.76 0.16 0.15% 39 81.15% 104.96 7.39 7.04% 240 72.47% All 80 108.45 106.44 2.01 1.89% 103.47 2.50 2.41% 160 79.28%

HY True Tender Offer Candidates

Cusip 090613AD 161175AG 256669AG 351647AA 50178TAA 750753AC 832248AU 880779AW Ticker BMET CHTR DG FOXACQ LYO RA SFD TEX Issuer BIOMET INC CHARTER COMM OPT LLC DOLLAR GENERAL CORP FOX ACQUISITION SUB LLC LBI ESCROW CORP RAILAMERICA INC SMITHFIELD FOODS INC TEREX CORP Price 110.75 110.25 114.25 112.63 112.25 110.00 116.63 116.00 Coupon 10.375 10.875 11.875 13.375 8.000 9.250 10.000 10.875 Maturity 10/15/17 10/15/17 7/15/17 7/15/16 11/1/17 7/1/17 7/15/14 6/1/16 OAS 503 632 368 678 300 470 341 435 Index Rating B3 BA2 B2 CAA2 BA1 B1 BA2 BA3 Next Call Date 10/12/12 3/15/12 7/15/12 7/15/12 5/1/13 7/1/13 n/a 6/1/13 Next Call Price 105.19 105.44 105.94 106.69 106.00 104.63 na/ 105.44

___________________________ Source: Barclays Capital. Please see Potential Upside in Call-Protected Tenders in the US Credit Alpha, June 3, 2011.

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In CLOs, a potential source of outperformance can be found from possible early redemptions
Early redemptions of CLOs by controlling equity holders are on the rise
Redemptions are a positive for discounted senior note holders, since they will be taken out at par plus accrued The main drivers of recent redemptions are improved NAVs and OC cushions, as well as reduced equity returns in older vintage CLOs Higher OC levels mean more residual proceeds to equity upon liquidation Older vintage CLOs that are past their reinvestment periods begin amortizing senior debt layers, thereby worsening the economics of the equity. The inability to re-invest in higher spread assets exacerbates this effect Older vintage deals that have begun amortizing appear to be ideal candidates to be called Loan collateral released from liquidated CLOs should be easily absorbed given the rising demand from primary CLOs and mutual funds For deals approaching the end of reinvestment/non-call period, secondary equity valuations may trend towards their NAV at a faster pace in response to these early calls

CLOs that have been called early, or are slated to be

Deal Name Avalon Capital III Carlyle High Yield Partners IV Carlyle High Yield 2008-1 Castle Hill CLO III Manager Invesco Carlyle Carlyle Sankaty Vintage 2003 2002 2008 2003 Senior OC Level Prior Call 122% 202% 149% 183%

___________________________ Source: Creditflux, Debtwire, Barclays Capital For details, see Redemption," US Credit Alpha, May 19, 2011.

14

Finally, with the rally in rates since early February, leveraged loans have underperformed, but continue to see historically high inflows
Total Returns Across IG, HY, Lev Loans (bp)
600 500 400 300 200 100 0 (100) (200) IG 12/31 - 2/8 HY 2/8 - 6/3 Lev Loan
1.0 1.5

Loan Participation Fund Flows ($bn, 4wk ma)

2.5

Since the YTD peak in UST yields on 2/8, Lev Loan returns have significantly lagged those of IG and HY

While flows have slowed from early Feb levels, they remain at historically high levels
2.0

Total inflows 2010: $16.8bn YTD 2011: $23.2bn

HY Loan Index Monthly Returns

3% 2% 1%
0.0 0.5

0% -1% -2% -3% Jan-10 May-10 Sep-10 Jan-11 May-11

Weekly Flow Change (all reporters) 4-Week MA

Last month was the first month of negative returns since June 10

-0.5 Jan-10

May-10

Sep-10

Jan-11

May-11

___________________________ Source: Bloomberg, Barclays Capital. 1. Hybrids defined as Tier 1 and Upper Tier 2 securities in the Cap Sec USD Index with maturity > 5y.

15

In Summary
Last week, credit spreads were wider for the second consecutive week, with CDS and HY underperforming. Cash benefited from the move lower in rates, as total returns for the IG index were positive Macro data were weak, with both ISM Manufacturing and nonfarm payrolls coming in well below expectations. In light of the weak data, our Economics and Rates teams have revised their GDP and UST yield forecasts lower Greece remains in the headlines, as investors continue to weigh the possibility of restructuring or reprofiling. Our view is that a near-term hard restructuring is not imminent, and is not likely to occur until 2012/2013 With significant regulatory and fundamental changes in the financial sector, we recommend investors take a global approach when evaluating potential bank trades While we continue to view the appreciation potential in HY as being limited, one potential source of upside can be found in early tender candidates. Similarly, within CLOs, a potential source of outperformance can be found from possible early redemptions

16

Analysts Certifications and Important Disclosures

Analyst Certification(s) We, Brad Rogoff, Praveen Korapaty and Jigar Patel hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to https://ecommerce.barcap.com/research/cgi-bin/all/disclosuresSearch.pl or call 212-526-1072. Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays Capital may have a conflict of interest that could affect the objectivity of this report. Any reference to Barclays Capital includes its affiliates. Barclays Capital and / or an affiliate thereof (the firm) regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). The firm's proprietary trading accounts may have either a long and / or short position in such securities and / or derivative instruments, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, the firms fixed income research analysts regularly interact with its trading desk personnel to determine current prices of fixed income securities. The firm's fixed income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income Division and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investing clients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays Capital trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise.

17

Disclaimer
This publication has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. It is provided to our clients for information purposes only, and Barclays Capital makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays Capital will not treat unauthorized recipients of this report as its clients. Prices shown are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. 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Disclaimer (contd)
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