Transcript Slide 1
Deutsche Bank
The value in Credit Markets
Victor Shohet 2009 Outlook
US debt to GDP back to 1929 – A big pyramid scheme?
400% 350% 300% 250% Government GSE/Agency Financial ABS Household Corporate 200% 150% 100% 50% 0% 1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007 Source: Deutsche Bank, Federal Reserve, The Statistical History of the United States, From Colonial Times to the Present. By Ben Wattenberg Page – 1
Debt to GDP – International comparisons
Japan
1,600 Corporate Household/Non Profit 1,400 Government Financial 1,200 1,000 800 600 400 200 0 1979 1983 1987 1991 1995 1999 2003 2007
UK
500% 450% 400% 350% 300% 250% 200% 150% Govt Fins Non-Fins HouseHolds 100% 50% 0% 1987 1990 1993 1996 1999 2002 2005 2008 Source: Deutsche Bank, Japanese Ministry of Finance, Office of National Statistics Page – 2
Global 35-54yr Dependency Ratios
0.70
0.65
0.60
0.55
0.50
0.45
0.40
0.35
0.30
1950 1960 1970 1980 1990 2000 2010 US UK European 2020 2030 2040 Japan 2050 Source: Deutsche Bank, UN Population Division.
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Japanese 35-54yr Dependency Ratio vs. the Nikkei (left) and US 35 54yr Dependency Ratio vs. S&P 500 P/E Ratio (right)
45,000 40,000 Nikkei (LHS) 35-54yr Dependency Ratio (RHS) 0.80
0.75
35,000 30,000 25,000 0.70
0.65
20,000 15,000 10,000 0.60
0.55
5,000 0 1970 1977 1984 1991 1998 2005 0.50
50 45 40 35 30 P/E Ratio (LHS) 35-54yr Dependency Ratio (RHS) 25 20 15 10 5 0 1950 1965 1980 1995 2010 2025 2040 0.80
0.75
0.70
0.65
0.60
0.55
0.50
0.45
0.40
0.35
Source: Deutsche Bank, Irrational Exuberance (second edition) Robert Shiller, S&P, UN Population Division Page – 4
35-54yr Dependency Ratios for Different Global Regions
0.65
0.60
0.55
0.50
0.45
0.40
0.35
0.30
1950 Global 1960 North America & Europe (inc. UK) 1970 1980 1990 2000 BRIC 2010 2020 2030 2040 2050 Source: Deutsche Bank, UN Population Division.
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Real S&P price since 1900 – US equities now back to 1995/96 levels and close to the long-term trend
1,200 1,000 800 Actual Trend (1900-2008) Pre-Bubble Trend (1900-1994) 600 400 200 0 1900 1908 1916 1924 1932 1940 1948 1956 1964 1972 1980 1988 1996 2004 Source: Deutsche Bank, Bloomberg, Irrational Exuberance (second edition) (Robert Shiller) Page – 6
US profits and nominal GDP – US financials, a trillion dollar mean reversion?
3,500 3,000 2,500 2,000 1,500 1,000 Nominal GDP Financial Profits Non-Financial Profits 500 0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Source: Bureau of Economic Analysis Page – 7
Spreads now at levels last seen during the Great Depression but yields still someway of the highs
800 700 600 500 BBB Spread 400 300 200 100 0 1919 1933 1947 1961 1975 1989 2003 20 18 16 14 12 BBB Yield 10 8 6 4 2 0 1919 1933 1947 1961 1975 1989 2003 Source: Deutsche Bank, Bloomberg, Moody’s Page – 8
5yr cumulative default rates: implied vs. actual
iBoxx Euro iBoxx Dollar iBoxx Sterling High Yield iTraxx CDS CDX CDS Corporate Non-Financial Financial AA A BBB Corporate Non-Financial Financial AA A BBB Corporate Non-Financial Financial AA A BBB USD HY EUR HY Main Crossover Main HY
Average 5yr Spread Average Recovery
445 280
Spread Implied Default Rate
33% 22%
Zero Recovery
20% 13% 531 743 771 348 1,084 616 713 995 713 255 442 640 550 400 718 360 1,264 2,027 154 857 187 1,262 49% 20% 31% 44% 39% 30% 46% 28% 37% 47% 50% 26% 64% 44% 45% 60% 59% 79% 13% 48% 15% 62% 31% 12% 19% 28% 24% 18% 30% 17% 23% 31% 33% 16% 43% 27% 29% 40% 44% 63% 7% 34% 9% 46%
Actual Default Rate (since 1970) Worst
2.4% N/A
Average
0.9% N/A N/A 1.8% 2.6% 5.8% 2.4% N/A N/A 1.8% 2.6% 5.8% 2.4% N/A N/A 1.8% 2.6% 5.8% 31.0% 31.0% 2.4% 31.0% 2.4% 31.0% N/A 0.2% 0.6% 1.8% 0.9% N/A N/A 0.2% 0.6% 1.8% 0.9% N/A N/A 0.2% 0.6% 1.8% 19.3% 19.3% 0.9% 19.3% 0.9% 19.3% Source: Deutsche Bank. (Average recovery levels: IG 44%, HY 38%) Page – 9
Spreads required to compensate for default based on 5yr cumulative default rates by cohort (1 of 2)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Current Euro Current Dollar Current Sterling 2007 Tight Euro 2007 Tight Dollar 2007 Tight Sterling
AAA
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 135 156 182 17 48 52
46.9% Recovery Rate
0 0 0 0 0 0 0 0 0 2 282 344 429 28 54 60
AA
0 3 3 0 0 0 1 4 6 8 9 8 4 0 14 480 504 681 49 77 89
A
0 0 0 0 0
BBB
7 3 0 6 8 15 15 29 37 36 35 33 25 4 3 589 679 960 62 109 109 16 16 15 10 4 5 10 14 1 7 442 521 670 48 82 85
IG
2 2 1 2 2 90 105 158 184 144 82 78 81 39 45 1,356 761
BB
264 134 32 57 64 154 163
40.4% Recovery Rate B
676 567 417 272 228 232 246 365 529 590 547 493 256 135 114 1,958 1,195
CCC-C
815 649 818 330 573 845 1,255 1,192 1,230 1,467 1,550 1,265 825 486 4,962 2,529 261 229 468 408 180 211 304 414 474 466 434 305 185 135 1,743 1,275
SG
446 325 195 153 138 218 245 Source: Deutsche Bank.
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Spreads required to compensate for default based on 5yr cumulative default rates by cohort (2 of 2)
1983 1984 1985 1986 1987 1988 1989 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Source: Deutsche Bank.
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AAA
0 0 0 0 0 0 0 0 0 0 0 0 0 28 18 0 0 0 0 0
46.9% Recovery Rate AA
0 0 0 0 0 0 0 0 9 9 0 0 0 5 20 9 14 4 4 0
A
5 8 4 0 0 0 0 0 0 6 9 3 13 3 17 29 21 19 14 7
BBB
16 12 17 23 20 9 11 7 16 23 20 39 29 44 20 32 68 57 46 38
IG
10 9 10 11 10 4 4 3 7 12 11 15 15 16 19 23 28 23 18 12
BB
99 50 38 42 53 52 50 38 58 77 106 150 250 183 246 251 281 317 324 340
40.4% Recovery Rate B
376 52 101 53 103 135 53 208 317 241 424 433 389 416 406 490 549 627 643 707
CCC-C SG
197 77 67 61 65 69 56 66 97 99 164 186 299 286 304 328 370 424 443 490
Dispersion of spread performance
Tier
Senior Sub Senior LT2 UT2 T1 Sub
Sector
All Corporates All Non-Fin Basic Materials Consumer Goods Consumer Services Health Care Industrials Oil & Gas Technology Telecommunications Utilities Basic Materials Consumer Goods Industrials Utilities All Financials Financials Financials Financials Financials Financials Note: All calculations based on index asset swap spread levels.
Source: Deutsche Bank Page – 12
Market Value Weighted Asset Swap Spread 03-Dec-08 Current
347 294 366 238 340 305 301 254 363 185 334 400 337 299 192 642 651 655 513 393 277 399 711 991 712 273 146 282 293 287 207 173 703 785 719 587 492 289 695 914 1,476 1,043
Change
19 -56 -39 -51 -90 -39 -51 -107 -51 -92 -20 61 134 64 74 99 12 296 203 484 331
Largest Widening Single Bond Performance Largest Tightening
2,464 354 -588 -588 354 110 -404 -204 170 31 254 75 -29 97 75 159 134 73 112 2,464 1,575 1,793 1,609 2,464 1,739 -271 -137 -251 -588 -83 -265 -242 18 134 59 36 -519 -519 -151 -90 -50 -78
Average
88 -55 -67 -48 -80 -41 -43 -156 -50 -83 -17 74 134 66 74 222 39 360 310 523 398
CDS to Bond Basis – The opportunity on a pro-forma portfolio of Investment Grade bonds
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