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ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER
IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com.
Market Focus
Global Strategy
Long Shadows: The Sequel
“There can be no doubt that besides the regular types of the circulating medium
….there exist still other forms of media of exchange which occasionally or
permanently do the service of money.
Now while for certain practical purposes we are accustomed to distinguish these
forms of media of exchange from money proper as being mere substitutes for
money, it is clear that, other things equal, any increase or decrease of these
money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper…”.
Friedrich Hayek, Prices and Production 1931 - 1935.
We update our estimates and analysis of the “shadow money stock” in the US.
Direct bank lending only accounts for about half of total private credit, which
means that incorporating shadow money and credit into traditional analysis is
absolutely essential in assessing inflation and deflation risks.
We draw four main conclusions:
First, there is absolutely NO evidence that the unprecedented increase in public
deficits and the Fed’s balance sheet has yet created an inflationary overhang of excess liquidity. The effective money stock (M2 plus shadow money) has
grown only 2.5% p.a. since February 2007.
Second, restoring funding liquidity to the financial system was the right thing to
do, and has almost certainly prevented a deflationary disaster.
Third, just as the devastating wholesale funding run on the shadow banking
system prefigured a collapse in commercial bank willingness to lend, it is now
leading the way in restoring credit availability to markets and the economy.
Effective money growth has accelerated in the last six months.
Fourth, huge volatility in the oil price over the past 18 months has led to much
larger swings in the effective money stock measured in real terms. Equity
prices and production have mirrored those swings quite closely. Going forward,
we expect somewhat slower real growth in effective money.
Special Note: on Tuesday 1st December, Jonathan Wilmot will be a guest editor
on FT Alphaville, the opinion and news blog of the Financial Times. Our posts
will appear simultaneously on the global strategy blog page.
30 November 2009Fixed Income Research
http://www.credit-suisse.com/researchandanalytics
Contributors
Jonathan Wilmot
+44 20 7888 3807
James Sweeney
+1 212 538 4648
Matthias Klein
+1 212 325 1790
Aimi Plant
+44 20 7888 7054
Wenzhe Zhao
+44 20 7883 8189
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30 November 2009
Market Focus 2
The Dark Side of the Moon
In May, we showed that a rising public debt and a bigger Fed balance sheet were
substituting for a collapse in private debt, lending, and leverage. We presented a
framework for quantifying this and estimated that the huge expansion of the monetary
base and of public debt (public shadow money) had merely offset a sharp contraction of
private shadow money.
This broad conclusion remains true today: our measure of the US effective money stock,
which includes bank deposits (M2) plus public and private shadow money, is up 6.8%
since Q1 2007, just before the financial crisis began. For comparison, nominal GDP has
risen 3.4% over the same period (Exhibits 1 & 2 below). All of this modest excess growth
of money reflects the 3.7% growth in effective money since April.
Restoring funding liquidity has allowed private shadow money to rebound by about $1
trillion over the past six months. (Recall that it plunged some $3.6 trillion during the crisis.)
Public shadow money is up just $150bn since April, after soaring $3 trillion in the crisis.
Further credit healing should allow public shadow money growth to slow further, or even
contract as the private balance sheet begins to function again.
If we are correct, extreme opinions about both inflation and deflation are simply not
supported by the facts, and stem from not understanding how the modern financialsystem really works, and so looking at incomplete measures of money and credit.
The error involves too much focus on commercial bank assets and deposits, which no
longer dominate either credit flows or liquid, money like assets. Like the dark side of the
moon, shadow money is hard to see. But just because we can’t always see it does not
mean we should ignore it.
No scientist would make such an elementary error as ignoring the gravitational pull of
invisible things, and nor should participants in financial markets. Unfortunately, a great
deal of bad analysis and potentially bad investment decisions are currently flowing from
making exactly this kind of mistake.
Understanding what is happening to shadow money and credit is therefore of profound
importance to us all.
Exhibit 1: Total Effective Money Stock and Nominal GDP
10000
15000
20000
25000
30000
35000
Feb-07 Jul-08 Nov-08 Apr-09 Oct-09
1.7
1.75
1.8
1.85
1.9
1.95
2
2.05
2.1
2.15Effective Money
Nominal GDP
Ratio of Effective Money to Nominal GDP
$ Bn
Source: Credit Suisse
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30 November 2009
Market Focus 3
Fixing a Deflationary Hole
Last spring, we described the collapse of private shadow money, which includes non-
agency RMBS, CMBS, investment grade corporate bonds, high yield bonds, and other
ABS. We calculated shadow money for each type of debt by multiplying an estimate of the
current market value by one minus the prevailing repo market haircut.
For example, we calculated that the outstanding investment grade bond stock had a
market value of $5811bn and a median repo haircut of 25%, so it represented shadowmoney of $4359bn ($5811 * (1 – 25%)).
Exhibit 2:US Effective Money (Public versus Private)
Billion $
10000
11000
12000
13000
14000
15000
16000
17000
Feb-07 Jul-08 Nov-08 Apr-09 Oct-09
Private Effective Money = Inside Money + Private Fundable Debt
Public Effective Money = Outside Money + Government-backed Debt
Source: Credit Suisse
Exhibit 3: Cumulative Change in Money Stocks
Trillion $
-5
-4
-3
-2
-1
0
1
2
3
4
5
Feb-07 Jul-08 Nov-08 Apr-09 Oct-09
Public Effective Money
Inside Money (Bank Deposits minus Reserves)
Private Shadow Money
Source: Credit Suisse
Private shadow money fell from $9.5tr to $5.9tr between early 2007 and last April. How
big was this $3.6tr fall? Colossal: roughly 40% of the broad M2 money stock, which is
around $8.4tr, and nearly 15% of the effective money stock. And initially at least bigger
than the public sector response, leading to a slight fall in effective money.
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30 November 2009
Market Focus 4
Falling debt prices, negative net issuance, and sharply rising repo haircuts caused the
reduction. Before the crisis, these securities were so easy to borrow against that their
owners almost didn't need cash. It is in this sense that we say these bonds were "money,"
and this is why the collapse of the moneyness of collateral generally posed such gigantic
risks to the financial system.
As Hayek (and others) knew many years ago, it is not a great logical leap to call private
debt instruments money. Most of the M2 money stock is "inside money," bank debt todepositors, not claims on the government. Milton Freidman himself focused on the M2
money stock in his most famous work, acknowledging the obvious fact that private sector
debt could be money (see Exhibit 4). Our framework takes account of that in a world with
shadow banks, and where collateral itself can mimic money.
The bank share of household credit has fallen from 79% in 1973 to 30.4% today. (See
Exhibit 5.) The M2 money stock therefore once backed around three quarters of
household debt, where now the fraction is nearer a third. Shadow banks have filled the
breach. Just as we view credit assets as a whole without ignoring non-bank assets, we
should be looking at liabilities – money – in a unified way too.
Exhibit 4: US Money Supply
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08
M2
Monetary Base
Outside Money = Monetary Base
Inside Money = M2 - Monetary Base
$Bn
Source: Credit Suisse, Datastream
Exhibit 5: US Bank Share of Credit Outstanding
0%
20%
40%
60%
80%
100%
Mar-52 Mar-62 Mar-72 Mar-82 Mar-92 Mar-02
Bank Share of Household Mortgage Credit
Bank Share of Consumer Credit
Bank Share of Total Household Credit Market
Source: Credit Suisse, Haver Analytics
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30 November 2009
Market Focus 5
Our analysis suggests that aggregate credit has begun to recover from the crisis. This is
clear either from the asset (total debt) side or the liability (funding or money) side.
The return of credit began with the improvement in money markets and was clearly helped
by explicit and implicit involvement of governments in unsecured lending markets. Exhibit
6 below shows the TED and LIBOR/OIS spreads have returned to normal levels quickly.
The $1tr rebound in private shadow money since April has been driven by a reversal of all
three factors that caused the collapse. First, prices of debt securities have risen sharply(see Exhibit 7), especially for lower corporate debt, and spreads have collapsed.
Second, issuance of private sector debt has picked up for corporate bonds and some
asset-backed securities. (See Exhibits 10-12.)
Third, and importantly, repo market haircuts have started to come down. Although
demand for financing risky debt purchases is not yet high – perhaps unsurprising with
spreads still generally elevated – the availability of leverage and cash against collateral
has sharply and rapidly recovered. This mimics the behaviour of call money rates backed
by equity collateral after 19th century banking panics.
Exhibit 6: Funding Liquidity Indicator
(Ted Spread + Libor-OIS, Log Std Dev)
-3
-2
-1
0
1
2
3
4
5
6
7
8
86 88 90 92 94 96 98 00 02 04 06 08 Source: Credit Suisse
Exhibit 7: Leverage Loan and High Yield Price Indices
60
65
70
75
80
85
90
95
100
10/17/07 3/12/08 7/22/08 11/25/08 4/7/09 8/13/09
CDX HY IndexPrice
LCDX Price
Source: Credit Suisse
Meanwhile, public shadow money (treasuries, agencies, and agency MBS) growth has
slowed. It has risen by just $150bn since April, compared with a $3tr increase between
early 2007 and this April, reflecting the huge fiscal stimulus and the growth of the RMBS
market as a proportion of total new mortgage issuance. Of course, that earlier growth in
public shadow money represented a concerted effort by the public sector to fill the gaping
hole opened by the collapse of private debt markets.
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30 November 2009
Market Focus 6
The recent small increase in public shadow money is due to offsetting underlying factors.
The treasury bond stock has increased and there have been small declines in public debt
haircuts. However, the agency bond stock has declined and outstanding agency
mortgages also have declined, reflecting weak demand for new mortgages. We subtract
the Fed's purchases of MBS, treasuries and agencies from public shadow money because
quantitative easing is a substitution of outside (base) money for shadow money, not a net
creation of new liquid assets.
It is good news that shadow money is recovering and the recovery is being done by the
private sector, not governments. Of course, low cash rates and government intervention
in some markets have been essential to stabilise the system, but if economic growth
returns, these public sector crutches are unlikely to be necessary for long. Private credit
markets will increasingly be able to stand on their own.
Credit Healing Led By Shadow Banks
Chairman Bernanke acknowledged recently that credit was beginning to flow again in
parts of the economy.
"Interbank and other short-term funding markets are functioning more normally; interest
rate spreads on mortgages, corporate bonds, and other credit products have narrowed significantly; stock prices have rebounded; and some securitization markets have resumed
operation. In particular, borrowers with access to public equity and bond markets,
including most large firms, now generally are able to obtain credit without great difficulty.
Other borrowers, such as state and local governments, have experienced improvement in
their credit access as well ."
Of course, it would be quite wrong to suggest that this improvement in securitised lending
to better quality borrowers reflects a full credit recovery. It is, however, likely to
“foreshadow” a more general improvement in credit conditions.
For now aggregate credit demand remains weak, even as supply starts to improve. Even
within the shadow banking nexus, total repo market activity has not recovered significantly
in volume terms. Who needs significant leverage when yields on risky assets are still
somewhat elevated? Competition to finance hedge funds has however clearly beenreflected in better repo terms recently, meaning that potential leverage could increase as
and if economic conditions improve further.
More obviously, credit is not flowing (for both demand-side and supply-side reasons) to
commercial real estate, non-agency mortgage lending, and small business lending.
Of course, most commercial mortgages and small business loans, and some non-agency
(jumbo) mortgages are not securitized, and so this partly reflects the commercial banks’
current extreme caution with their balance sheets. The primary reason for this, in our view,
continues to be banks' concern about the value of real estate collateral (see Exhibit 11),
which have now overshot their long-term trends on the downside by just as much or more
than they overshot on the upside before.
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30 November 2009
Market Focus 7
Exhibit 8: Average Existing House Prices
6.2
6.4
6.6
6.8
7.0
7.2
7.4
7.6
Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08
Real Average Existing House Price (log scale)
Real Case-Shiller Composite Index (log scale)
Real OFHEO/FHFA House Price Index (log scale)
Trend = 1.5% per
annum
Source: Credit Suisse
Exhibit 9: US Bank Assets: Loans and Leases
6000
6200
6400
6600
6800
7000
7200
7400
1/5/07 7/5/07 1/5/08 7/5/08 1/5/09 7/5/09
Source: Credit Suisse
Indeed, if you look at average existing house prices in real terms, they recently bottomed
out some 5 standard deviations below their 40-year trend. Nothing remotely like the
recent crash has occurred before, reflecting the much greater proportion of foreclosures
and forced sales when securitised loans go bad.
It will take time to chew through the backlog of potential foreclosures, and many analysts,
including commercial bank economists, think this supply overhang will lead to renewed
price falls. Against that there is increasing awareness that renting the house back to
troubled borrowers is often a better solution for both lender and borrower than foreclosure,and affordability has never been higher.
For our purposes, however, the key point is that traditional commercial bank lending –
even to small businesses - will only recover properly if and when house prices rebound
more decisively. That in turn will take a combination of time to work through the bad
mortgage pool with improving income growth and job prospects as other parts of the credit
system start functioning again.
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30 November 2009
Market Focus 8
Exhibit 10: Auto Loan and Credit Card ABS Issuance
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009
Auto Loan ABS
Credit Card ABS
Source: Credit Suisse, SIFMA
Exhibit 11: US Investment Grade Issuance
0
50
100
150
200
250
300
350
Q1-2001 Q1-2002 Q1-2003 Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008 Q1-2009 Q1-2010
Oct/Nov pace
$bnUS IG
Source: Credit Suisse
Exhibit 12: US High Yield Bond Issuance
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
8/26/05 2/26/06 8/26/06 2/26/07 8/26/07 2/26/08 8/26/08 2/26/09 8/26/09
High Yield Issuance ($mn, 4WMA)
Source: Credit Suisse
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30 November 2009
Market Focus 9
The charts above illustrate that this is happening, and rather faster than most people
expected. There are other hopeful signs too. Private equity activity is showing signs of
picking up. A wave of mergers is expected. IPO activity has increased sharply in the past
few months and strong private debt issuance has meant larger companies have made
significant progress in terming out their debts, and indeed are paying down less ”reliable”
bank loans. In many cases, large companies also seem to be financing their smaller
suppliers directly, and non-bank pools of capital are seeking opportunities where banks
remain reluctant to lend.
The emergence of a bigger ABS market for repackaged small business loans would
certainly help the process. SBA loans with government insurance are already a major
market, but we would like to see securitization used more thoroughly in this sector. If
banks remain structurally unable or unwilling to do this lending, then shadow banks should
step in, perhaps with some government assistance.
Meanwhile, we consistently hear from institutional investors struggling with low nominal
yields that they would like to buy newly issued ABS securities, if only the volume were
there. To begin with, the securitised markets had needed Fed or government help to
recover, but that no longer seems to be the case.
If risk averse banks are unable to absorb new credit supply, it should surprise no one if
new shadow bank debt (asset backed securities) is issued to fund an increase of lendingto these sectors. That means more mortgage, credit card, and instalment loan-backed
ABS. Improved financing for all these types of debt bolsters demand and creates
moneyness in the new securities.
A further increase in the effective money stock, especially if it occurs via an expansion of
private shadow money, would be very beneficial for growth and would help lead the
economy to more normal levels of growth.
There are thus parallel money and credit universes currently. One includes mostly
securities and has rebounded sharply. The other includes mostly loans and has not.
Depending on one's perspective, credit markets might now look depressed, recovering, or
schizophrenic.
But the bottom line is actually very straightforward: it is the shadow banking system that isleading the recovery in credit supply to markets and the economy. And the further this
goes, the more likely that house prices will recover and the more conventional forms of
bank lending will recover also.
Bubble Talk and Regulatory Risks
This means, in effect, that the very system that collapsed before with such devastating
consequences is now the main hope for recovery!
That is both deeply confusing and a source of concern to many people. The common
political mantra is that Main Street needs to be protected from the greed of Wall Street.
While that may have had some truth to it before, it is not the issue now. The next wave of
securitization will be better priced and better rated than the old, and the collateral behind
those loans is for the most part cheap or very cheap, rather than expensive. Faulty
assumptions are much less likely next time around. And euphoric lending conditions, of
the type we saw in 2006/7, seem many years away at least.
Of course, there are those who contest this: the air is thick with talk of new bubbles and
the ”unjustified” recovery in the stock market. Most of this chatter is misconceived in our
view: indeed talk of bubbles is itself becoming a bit of a bubble.
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30 November 2009
Market Focus 10
None of the metrics we have always looked at to identify major overshoots in assets prices
indicate that house prices, credit, or equities are expensive. Quite the opposite in fact,
especially for house prices, as noted above.
Simple as they are (they mostly rely on looking at outsized deviations from long-term
trends) these indicators flashed strong warning signals for equities in 1999/2000, and for
both housing and credit in 2006/7.
The grain of truth in the bubble discussion has to do with the possibility of overvaluing far distant cash flows when the appropriate discount rate is very low. For example, where
expected long-term earnings growth for a technology stock, or for emerging equities is way
above long-term bond yields (think China where the government has just issued a 50-year
bond with a nominal yield of 4.3%), simple arithmetic pushes towards extremely high
valuations, which will be highly vulnerable either to a small downward revision to expected
earnings growth, or a modest increase in the discount rate.
So while it may be true that low interest rates and bond yields create an underlying
tendency for bubble valuations to arise, there seems to us to be absolutely no clear
evidence that this has already happened for the most important asset classes in the US.
Nor that it is likely any time soon.
A rather greater threat to the markets and the economy right now, in our opinion, is that
the political climate and partial understanding of how the financial really works could lead
to well intentioned but harmful regulation or new legislation.
One example is a proposal recently introduced to Congress to limit the government’s
exposure to the guarantees of any financial institution or bank that should fail in the future.
The idea is that any lender to that institution or bank would have to take the first 20% of
any loss, with the government liable for the remaining 80%.
While this may seem sensible and prudent at first sight, the way the legislation seems to
be drafted suggests that repo transactions would be included under this general provision.
So the legislation could be interpreted as mandating a 20 percentage point increase in
haircuts on virtually all private repo transactions! That could have a devastating effect on
the recovery in funding liquidity, and the ability of the shadow banking system to function
as a conduit for credit.Or to put it differently, it would be the equivalent of slashing the shadow money stock at
the stroke of the pen, and in principle could restart the debt deflation spiral.
At the limit, therefore, this kind of legislation might just be the modern day equivalent of the
Smoot-Hawley Act in 1930, or the Fed’s 1931 decision to hike interest rates to defend the
dollar in the midst of the depression.
Fortunately we think there is enough understanding of the issues at stake in Washington
to make it very unlikely that the proposal will pass, but it does illustrate the potential
dangers of not understanding the shadow money story.
Revisiting the Pigou Effect
Finally, it is worth saying something about the effect of oil prices on the shadow money
story. Arthur Pigou (1877-1959) was a friend and mentor of Keynes, but also a fierce
intellectual critic of his General Theory . Though primarily a disciple of Alfred Marshall and
welfare economist, he is best known among macro-economists for his “classical” argument
against Keynes’s idea of the possibility of persistent under-employment.
The idea was that with unemployed resources, prices would fall and the real value of
money balances would rise, leading to higher spending and thus eventually to a recovery
in employment and income. (Curiously enough, a version of the Pigou effect plays an
important role in providing a solution to the problem of price level indeterminacy in some
modern New Keynesian models!)
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30 November 2009
Market Focus 11
Because oil prices have been so volatile in recent years, so has headline inflation, veering
between five percent and minus 2 percent within the space of eighteen months.
The timing of these swings, moreover, means that the swing in the effective money stock,
when measured in real terms, was considerably larger than the swing in the nominal
effective money stock.
In effect, the Pigou effect actually deepened the deflationary shock to effective money in
the run-up to the crisis, and has led to a sharper rebound since. From February 2007 toNovember 2009, the real effective money stock fell by 10% - but since last November, has
rebounded by somewhat more, helped by the sharp fall in inflation, to stand just above its
pre-crisis level. The chart below plots the real effective money stock against the S&P 500,
but could equally have been plotted against industrial production or real GDP with very
similar results.
Exhibit 13: Real Effective Money vs. S&P 500
120
122
124
126
128
130
132134
136
138
140
Feb-07 Jul-08 Nov-08 Apr-09 Oct-09
600
700
800
900
1000
1100
1200
1300
1400
1500Real Effective Money
S&P 500 (RHS)
Source: Credit Suisse
The good news is that the real effective money stock has so far recovered more fully thaneither the equity market or production and GDP, suggesting some room for catch-up. The
potentially less good news for asset markets is that the rebound in oil prices and headline
inflation will soon be slowing down the recovery in real money balances, as indeed will a
gradual move towards winding down QE. Equally, however, should the Saudis decide to
increase oil production in an effort to cap prices, and even bring them down a little, that
may be just as important at the margin in supporting further recovery in consumer
spending and real incomes as what the Fed does.
From now on, we will be closely monitoring the effective money stock in both nominal and
real terms. Any serious approach to inflation and deflation demands nothing less.
We thank Carl Lantz of the US Interest Rates Strategy Team for his continued contributions.
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30 November 2009
Market Focus 12
Exhibit 14: US Public Credit Market Debt Issuance- Annual
0
500
1000
1500
2000
2500
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
YTD
0
500
1000
1500
2000
2500
3000
3500
4000
4500Treasuries
Agencies
Agency MBS
' '
$ Bn
Source: Credit Suisse, SIFMA
Exhibit 15: US Private Credit Market Debt Issuance -Annual
0
200
400
600
800
1000
1200
1999 2001 2003 2005 2007 2009YTD
0
500
1000
1500
2000
2500
3000Corporate DebtConvertible DebtABSNon-Agency MBSTotal Debt, RHS
$Bn $Bn
Source: Credit Suisse, SIFMA
Exhibit 16: US private Credit Market Debt Issuance - Monthly
0
20
40
60
80
100
120
140
160
180
200
J a n - 0 8
F e b - 0 8
M a r - 0 8
A p r - 0 8
M a y - 0 8
J u n - 0 8
J u l - 0 8
A u g - 0 8
S e p - 0 8
O c t - 0 8
N o v - 0 8
D e c - 0 8
J a n - 0 9
F e b - 0 9
M a r - 0 9
A p r - 0 9
M a y - 0 9
J u n - 0 9
J u l - 0 9
A u g - 0 9
S e p - 0 9
O c t - 0 9
Total Monthly US Private Credit Market
Debt Issuance
(Includes Corp Bonds, Convertibles, MBS,
ABS)
Source: Credit Suisse, SIFMA
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FIXED INCOME GLOBAL STRATEGY RESEARCH
Jonathan Wilmot, Managing Director
Chief Global Strategist
+44 20 7888 3807
Bunt Ghosh, Managing Director
Global Head of Fixed Income Research
+44 20 7888 3042
LONDON One Cabot Square, London E14 4QJ, United Kingdom
Paul McGinnie, Director
44 20 7883 6481
Aimi Plant, Associate
44 20 7888 7054
Wenzhe Zhao, Associate
44 20 7883 8189
NEW YORK 11 Madison Avenue, New York, NY 10010
James Sweeney, Director 1 212 538 4648 [email protected]
Matthias Klein, Associate1 212 325 [email protected]
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Disclosure Appendix
Analyst CertificationJonathan Wilmot, James Sweeney, Matthias Klein, Aimi Plant and Wenzhe Zhao each certify, with respect to the companies or securities that he or sheanalyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) nopart of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Important DisclosuresCredit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer toCredit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse’s policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market thatmay have a material impact on the research views or opinions stated herein.The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse's totalrevenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions.Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report. At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report. As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report.For important disclosure information on securities recommended in this report, please visit the website at https://firesearchdisclosure.credit-suisse.com or call +1-212-538-7625.For the history of any relative value trade ideas suggested by the Fixed Income research department as well as fundamental recommendations provided bythe Emerging Markets Sovereign Strategy Group over the previous 12 months, please view the document at http://research-and-analytics.csfb.com/docpopup.asp?ctbdocid=330703_1_en . Credit Suisse clients with access to the Locus website may refer to http://www.credit-
suisse.com/locus .For the history of recommendations provided by Technical Analysis, please visit the website at http://www.credit-suisse.com/techanalysis.Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used,by any taxpayer for the purposes of avoiding any penalties.
Emerging Markets Bond Recommendation DefinitionsBuy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate.Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate.
Corporate Bond Fundamental Recommendation DefinitionsBuy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector.Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and areundervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. Thesebonds may possess price risk in a volatile environment.Market Perform: Indicates a bond that is expected to return average performance in its sector.Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may
be stable credits that, we believe, are overvalued or rich relative to the sector.Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector.Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including aninvestment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.Not Rated: Credit Suisse Global Credit Research or Global Leveraged Finance Research covers the issuer but currently does not offer an investment viewon the subject issue.Not Covered: Neither Credit Suisse Global Credit Research nor Global Leveraged Finance Research covers the issuer or offers an investment view on theissuer or any securities related to it. Any communication from Research on securities or companies that Credit Suisse does not cover is a reasonable, non-material deduction based on an analysis of publicly available information.
Corporate Bond Risk Category DefinitionsIn addition to the recommendation, each issue may have a risk category indicating that it is an appropriate holding for an "average" high yield investor,designated as Market, or that it has a higher or lower risk profile, designated as Speculative and Conservative, respectively.
Credit Suisse Credit Rating Definitions
Credit Suisse may assign rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company's creditworthinessand are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB, B) is dependent on our assessment of an issuer's ability tomeet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low – with Highbeing the strongest sub-category rating: High AAA, Mid AAA, Low AAA – obligor's capacity to meet its financial commitments is extremely strong; HighAA, Mid AA, Low AA – obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A – obligor's capacity to meet its financialcommitments is strong; High BBB, Mid BBB, Low BBB – obligor's capacity to meet its financial commitments is adequate, but adverseeconomic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB – obligationshave speculative characteristics and are subject to substantial credit risk; High B, Mid B, Low B – obligor's capacity to meet its financial commitments isvery weak and highly vulnerable to adverse economic, operating, and financial circumstances; High CCC, Mid CCC, Low CCC – obligor's capacity to meetits financial commitments is extremely weak and is dependent on favorable economic, operating, and financial circumstances. Credit Suisse's rating opinionsdo not necessarily correlate with those of the rating agencies.
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