Commentary

Fitch Risk and Performance

Monitor
Authors Summary
As a complement to the Fitch Risk and Performance Platform, FitchSolutions produces a
Mark Lindup
+44 20 7417-3553 weekly commentary utilizing data from Fitch’s Market Implied Rating (IR) and Credit
mark.lindup@fitchsolutions.com Default Swap (CDS) Pricing Service. This report provides an overview of this week’s
sector summaries, big movers, and market underperformers and outperformers. To
Jonathan Di Giambattista
+1 212 908-0273
receive highlights of the information on this page delivered directly to your inbox,
jonathan.digiambattista@fitchsolutions.com click here.
Contactsa
Sector Analysis
Americas  The global CDS spread index widened last week by an average of 1.34%, with nine
Jonathan Di Giambattista
+1 212 908-0273
out of 11 sectors widening, sovereigns and oil and gas being the exceptions.
jonathan.digiambattista@fitchsolutions.com
 The equity market this week continues to demonstrate the positive sentiment it
EMEA showed last week, albeit more conservatively, with the five-year Probability of
Catherine Downhill Default (PD) of each individual sector tightening and the overall index of all sectors
+44 20 7417-4222
catherine.downhill@fitchsolutions.com decreasing 1.58%.
a
For information on Fitch’s Risk and
 Financial institutions underperformed the broader market last week, as global CDS
Performance Platform. spreads widened by 2.4%. European financials led the way, widening 4.65%. Euro
zone banks are due to roll 440 billion worth of one-year euro loans from the ECB
Related Research this week into ECB three-month loans; the size of demand for the service will be a
key indicator of market liquidity.
 CDS Implied Ratings Model, June 13,
2007  The sovereign global CDS spread index tightened this week by 1.49%; however,
 Equity Implied Ratings and Probability
European sovereigns opposed the global trend, widening by 0.5%. European
of Default Model, June 13, 2007
 Study: CDS Implied Ratings vs. Spot sovereign spread movements were dominated by Ireland and Portugal, who widened
Implied Ratings 13.0% and 9.4%, respectively, and Greece and Spain, who tightened by 9.4% and
 FitchSolutions’ Probability of Default 6.3%, respectively.
Index, December 2008

Week-to-Week Movements in Market-Implied Ratings and CDS Spreads

Five-Year
The contents of this commentary are Five-Year CDS PD Index
the result of a periodic analysis of Sector Type CDS IR CDS IR (% Change) ARD (%) EIR EIR (% Change)
recent credit default swap (CDS) Basic Materials 3 10 2.72 1.72 105 26 (0.17)
market activity and results generated Consumer Goods 3 16 0.92 1.66 153 49 (2.68)
by Fitch's proprietary Market Implied Consumer Services 4 17 1.70 1.48 116 37 (2.34)
Ratings models. All data presented in Financials 20 18 2.24 4.79 15 2 
this report is derived from CDS prices
Healthcare 0 8 1.10 1.20 33 11 (1.44)
provided by Fitch’s CDS Pricing Service
Industrials 5 16 1.31 0.99 234 88 (1.56)
and Market Implied Ratings models.
Oil and Gas 0 8 (0.35) (1.37) 8 9 (0.90)
The contents of this commentary are
Sovereigns 0 2 (1.49) 2.04   
not indicative of the opinions,
Technology 2 6 1.46 (0.42) 84 43 (1.65)
commentaries, or analyses of Fitch
Ratings’ analysts and, therefore, are Telecommunications 1 3 0.66 4.61 6 2 (0.10)
separate and distinct from rating Utilities 3 6 1.16 0.57 17 5 (0.89)
analyst activity, actions, and opinions. Total/Average 41 110 1.34 2.07 771 272 (1.58)
All references to CDS pricing and CDS CDS  Credit default swap. IR  Implied rating. ARD  Average relative differential. EIR  Equity-implied rating.
market implied ratings are as of PD  Probability of default.
Sept. 24, 2010.

www.fitchsolutions.com September 28, 2010

 Relative Differential
By comparing an entity’s five-year spread with the median five-year spread of all
entities with the same CDS implied rating (CDS IR), the degree to which an entity is
outperforming (spread is tighter than the median) or underperforming (spread is
wide of the median) the marketplace can be measured. This is the relative
differential. By determining the average relative differential (ARD) for each sector,
FitchSolutions is able to observe systematic shifts in market sentiment.
Probability of Default Index
FitchSolutions’ Probability of Default (PD) Index is constructed as a daily average PD
weighted by each entity’s outstanding debt level and can be calculated on a
geographic market and industry level. The aforementioned PD Index covers global
corporate entities.

Highlighted Sectors of the Week

European financial CDS spreads moved the most of any sector last week, widening by
4.7%, with its spreads trading 7.8% above historical levels, implying the markets are
pricing in higher credit risk. The biggest spread wideners were Irish Life and Permanent
Group and the Bank of Ireland, moving out 26.5% and 20.5%, respectively. On Sept. 10
the Central Bank of Ireland told Irish life and Permanent Group they needed to raise
145 million euros in additional capital by the end of May 2011 to cover its worst-case
scenario for the Irish economy.
The table below shows the top 10 European financials with the greatest differences
between current and historical CDS spread levels as of Sept. 24 and therefore most
likely to experience a CDS-implied rating downgrade. Irish banks dominate the list,
partly on the back of rumors that the Irish government may be seeking to restructure
four billion euros worth of Anglo Irish Bank senior debt, which could result in losses for
the bondholders. Irish life and Permanent group is the most likely entity on the list in
terms of getting a CDS-implied rating downgrade, with its CDS spreads trading at twice
the median spread level of other entities in the same CDS-implied rating band.
For each entity, the CDS IR, weekly change in the CDS IR, relative differential, and the
gap between its CDS IR and agency rating are included. Based on historical analysis,
notch differentials between the CDS IR and agency rating are highly predictive of future
rating agency actions.

European Financials: Substantial Week-to-Week Spread Widening

CDS IR Relative Five-Year CDS Gap (CDS
Companies CDS IR Delta Differential (%) (% Change) IR/IDR)
Irish Life & Permanent Group BB 0 99.92 26.47 (2)
Espirito Santo Financial Group S.A. BB 0 69.21 0 (4)
Anglo Irish Bank Corporation PLC B 0 67.93 11.38 (7)
Cimpor Financial Operations BV BBB 0 64.47 (2.93) 
Bank of Ireland BB (1) 57.86 20.45 (6)
Allied Irish Banks PLC B+ 0 55.36 13.41 (7)
Deutsche Postbank AG AA+ 0 41.75 0 3
Unione Di Banche Italiane SCPA BBB 0 41.11 5.42 
ING Verzekeringen NV BBB 0 40.60 4.16 (3)
Banco Comercial Portugues SA BB (1) 34.70 17.22 (7)

2 Fitch Risk and Performance Monitor September 28, 2010

 Relative Performance of Select Entities: Europe/Africa
In the series of charts below, CDS spreads for certain entities of interest are plotted
against the regional benchmark, composed of median spot spreads for each CDS IR
category. Using this analysis enables FitchSolutions to determine which credits are
deviating from their historical trading levels and are outperforming or underperforming
the overall market.

Relative Performance of Selected Entities Above CDS IR ‘BB+’: Europe/Africa

(As of Sept. 24, 2010)
Median Spot Spreads by CDS IR Ireland (140%)
Portugal (93%) Cimpor Financial Operations BV (64%)
Cadbury Holdings Limited (-39%) Norway (-42%)
Cognis Gmbh (-62%)
500
450
400
CDS Spread (bps)

350
300
250
200
150
100
50
0
AAA AA+ AA AA– A+ A A– BBB+ BBB BBB–
CDS Implied Ratings

Relative Performance of Selected Entities Below CDS IR ‘BBB–’: Europe/Africa

(As of Sept. 24, 2010)
Median Spot Spreads by CDS IR Espirito Santo Financial Group SA (69%)
Anglo Irish Bank Corp. (68%) Irish Life & Permanent Group (100%)
International Power Plc (-45%) Anglogold Ashanti Ltd. (-77%)
Nordic Telephone Company Holdings APS (-38%)
1,200
1,000
CDS Spread (bps)

800
600
400
200
0
BB+ BB BB– B+ B B– C/CCC
CDS Implied Ratings

Fitch Risk and Performance Monitor September 28, 2010 3

 Relative Performance of Select Entities: North America/
Oceania

Relative Performance of Selected Entities Above CDS IR ‘BB+’: North America/

Oceania
Median Spot Spreads by CDS IR Block Finanial LLC (127%)
(As of Sept. 24, 2010)
H&R Block Inc. (130%) Sandisk Corporation (78%)
Ontario (Province of) (-63%) Wyeth LLC (-49%)
Associates First Capital Corp. (-42%)
500

400
CDS Spread (bps)

300

200

100

0
AAA AA+ AA AA– A+ A A– BBB+ BBB BBB–
CDS Implied Ratings

Relative Performance of Selected Entities Below CDS IR ‘BBB–’: North America/

Oceania
Median Spot Spreads by CDS IR Pactiv Corporation (100%)
(As of Sept. 24, 2010)
First Data Corporation (70%) NII Holdings Incorporated (176%)
Republic of Peru (-56%) Mirant North America LLC (-55%)
American General Group Inc. (-35%)
1,400
1,200
CDS Spread (bps)

1,000
800
600
400
200
0
BB+ BB BB– B+ B B– C/CCC
CDS Implied Ratings

Highlighted Entities
Europe/Africa North America/Oceania
Investment-Grade Below-Investment-Grade Investment-Grade Below-Investment-Grade
Ireland Anglo Irish Bank Corp. Block Financial LLC Pactiv Corporation
Portugal International Power Plc H&R Block Inc. First Data Corporation
Cimpor Financial Nordic Telephone Company
Operations BV Holdings APS Sandisk Corporation NII Holdings Incorporated
Cadbury Holdings Limited Espirito Santo Financial Ontario (Province of) Republic of Peru
Group SA
Norway Irish Life & Permanent Group Wyeth LLC Mirant North America LLC
Cognis Gmbh Anlogold Ashanti Ltd. Associates First Capital Corp. American General Group inc

4 Fitch Risk and Performance Monitor September 28, 2010

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Fitch Risk and Performance Monitor September 28, 2010 5