credit vie · 2012. 6. 6. · 2 global credit research covered bonds credit view - im cédulas 10...

Global Credit Research Covered Bonds

Credit View February 9, 2007

IM CÉDULAS 10

© Bayerische Hypo- und Vereinsbank AG, CA IB International Markets AG, UniCredit Banca Mobiliare S.p.A. See last pages for disclaimer.

I N T E RM O N EY T I T U L I ZAC I Ó N

Intermoney Titulización is 30% owned by its directors and employees and 70% by CIMD which, in turn, is held 42.95% by its directors and employees and 57.05% by financial institutions (25.49% ICAP, 8.01% BBVASM, 9.99% Caja San Fernando, 5.06% BPESP, 8.5% Cajamar).

Meanwhile, IMCEDI has completed nine transactions. It usually employs entities stemming from all three pillars of the Spanish banking system: corporate banks, savings banks and cooperative credit institutions. One year ago, along with its sixth transaction (official IM Cédulas M1), Intermoney introduced an innovation in the Cédulas market.

IMCEDI 10 will comprise four savings banks and three commercial banks, with one commercial bank being held 49.78% by another savings bank. The largest participant is Caja Murcia with a total loan book of 8.97 bn and an outstanding amount of Cédulas (after IMCEDI 10) of EUR 2.24 bn.

Banco Guipuzcoano (BGZOSM, -/-/A-p) is a new name in the Cédulas market. The bank is situated in San Sebastian, Basque Country and issues its inaugural Cédula together with the upcoming Intermoney transaction. As of December 2005, it reported total assets of EUR 7.2 bn – roughly 38% (EUR 2.74 bn) con-sisted of mortgage loans.

Loans granted to builders etc. in the regions Andalucía (24.3%), Cataluña (23.9%) and Murcia (20.8%) together comprise more than two thirds of the ag-gregate mortgage book of the participating entities. Adding Comunidad Valenci-ana (9.9%) and Iles Baleares (7%) almost completes the participants' aggregate portfolio. The remaining exposure draws a scattered picture throughout almost all other Spanish comunidades autónomas.

P A R T I C I P A N T S I N I M C E D I 1 0

Total Mort-gage Book

Eligible Mortgage Book

Out-standing Cédulas*

Contribu-tion to IMCEDI 10

Share in IMCEDI 10

OC

Caja Murcia (S) 8.97 7.11 1.94 0.3 23.08% 300%

Banca March (C) 3.81 2.41 1 0.25 19.23% 205%

Caixa Manresa (S)

2.98 2.35 1.1 0.2 15.38% 129%

Banco Guipuz-coano (C)

2.78 1.37 0.2 15.38% 1290%

Caja San Fer-nando (S)

5.54 3.32 1.81 0.15 11.54% 182%

Banco Gallego (C)*

1.21 0.97 0.59 0.1 7.69% 75%

Caixa Girona (S) 3.62 1.72 1.15 0.1 7.69% 190%

Total 28.91 19.25 7.59 1.3 100% 369%

Amounts in EUR bn (S) indicates savings bank; (C) indicates commercial bank * Held 49.78% by Caixanova (S) ** max 90% of the eligible mortgage book can be refinanced through Cédulas

Source: Global Research (HVB)

Contents Market Overview ___________ 2 Multi-Seller Technology _____ 6 Intermoney Overview _______ 7 IMCEDI 10 Characteristics____ 9 Spread Performance of IMCEDI vs. Peers __________________ 12 Appendix _________________ 13 Reform of the Cédulas law _ 13 Withholding tax situation in Spain_____________________ 14 The condition of the housing market ___________________ 15 Overview Spanish Legal Framework _______________ 19

Author Florian Hillenbrand +49 89 378-12961 [email protected] Bloomberg HVBR Internet www.hvb.de/valuepilot

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Credit View - IM Cédulas 10 February 9, 2007

Bayerische Hypo- und Vereinsbank AG, CA IB International Markets AG, UniCredit Banca Mobiliare S.p.A. See last pages for disclaimer.

MARKET OVERVIEW

First mortgage loan in Spain in the 1860s

The first mortgage loan in Spain was granted at the beginning of the 1860s and was followed by the introduction of the Spanish mortgage law in 1869. The track record of this product speaks for its reliability. No Cédula has ever defaulted. Although the German Pfandbrief market is considered the oldest and most im-portant covered bond market, the market for Spanish covered bonds meanwhile clearly catches up and in terms of yearly contribution to the Jumbo covered bond market plays the leading role.

Introduction of the euro trig-gered strong growth…

Over the years, the Spanish Mortgage Law has been revised several times. The first revision took place as part of the regulation of the Spanish mortgage market through the law 2/1981 of March 25, 1981 and the Royal Decree 685/1982 of March 17, 1981. On the back of Spain's accession to the EU in 1985 and the in-troduction of the euro in 1999, Spanish banks were increasingly seeking to fund their rapidly growing mortgage loan business in a cost-efficient way.

… reflected in the introduction of Jumbo Cédulas

Until 1999, substantial retail customer deposits were a source of low-cost fund-ing. But the increasing attractiveness of mutual funds, as well as the desire of some banks to reduce refinancing risk by broadening their investor base, led to rising interest in covered bonds. By combining the legal framework for Cédulas Hipotecarias (CHs) and the concept of German Jumbo Pfandbriefe, the Spanish Jumbo market appeared within the European covered bond arena in 1999. Ar-gentaria was first to tap the market on March 30, 1999, issuing a EUR 1 bn 10Y paper paying 4.375% in interest.

Many supportive factors The young market was supported by Law 20/1998 of July 1, 1998 and the RD 845/1999 of May 21, 1999, assuring a 10% risk weighting according to Article 22(4) of the UCITS directive. The appearance of this new product was not only supported by regulatory forces but also by rating agencies. All three major agen-cies issued methodologies at that time and all three introduced a similar ap-proach. Based on the fact that Cédulas do not benefit from a ring-fencing of the collateral, the agencies employed a notching approach.

Multi-Seller structures were introduced in 2001

A quantum leap in refinancing Spanish mortgage loans occupied when the tech-nology of the CDO was amalgamated with Cédulas refinancing in April 2001. By creating Multi-Seller Cédulas (MCs), Ahorro Corporación Financiera not only created a new asset class but also helped promote Cédulas refinancing in gen-eral. The basic idea behind Multi-Seller Cédulas is repackaging a large amount of identical stand-alone Cédulas into a large quasi-CDO. The quality of the collat-eral Cédulas is enhanced by liquidity facilities, mitigating risk endangering the timeliness of payments – the main target for criticism associated with Spanish Cédulas. For its first Multi-Seller structure, Ahorro Corporacion Financiera em-ployed identical Cédulas of 15 Spanish Savings Banks (Cajas) together amount-ing to EUR 2,048 mn issued as AyT Cédulas Cajas.

66 banks issue Cédulas Two years after AyT introduced the Multi-Seller concept, two more issuers ap-peared with Titulización de Activos, S.G.F.T., S.A (CEDTDA) and Intermoney Titulización S.G.F.T. (IMCEDI) – nevertheless, both do not have the clear focus as AYTCED has in the cajas sector. Meanwhile, 57 Cajas and Bancos participated in one or more of these structures. Together with the eleven issuers of stand-alone Cédulas, currently 66 financial institutions issue Spanish covered bonds (Caja Madrid and Caixa Catalunya are both stand-alone issuers and contributors to Multi-Seller structures). No other covered bond legislation has ever come close to such a variety of issuers.

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M I L E S T O N E S O F T H E S P A N I S H C É D U L A S M A R K E T

1869 Introduction of Cédulas Hipotecarias.

Q1 1981 Mortgage market law (Ley del Mercado Hipotecario) was amended in order to promote the development of the mortgage market (Law 2/1981 of March 25, 1981; RD 685/1982 of March 17, 1981).

Q1 1999 Law 20/1998 of July 1, 1998 and Royal Decree 845/1999 of May 21, 1999 apply a 10% risk weighting to Cédulas. Thus, EU-directive UCITS 22 (4) was implemented into na-tional law.

Q1 1999 Moody’s introduces rating methodology for Cédulas: upward notching of up to two notches above issuer rating.

Q1 1999 S&P announces rating criteria for Cédulas: Cédulas Hipotecarias can be rated up to two notches above the respective senior rating of the issuer.

Q1 1999 Fitch publishes rating methodology: Cédulas can be rated up to three notches above issuer rating.

Q1 1999 Argentaria Caja Postal y Banco Hipotecario de Espana (today’s BBVA) issues first Jumbo style Cédula Hipotecaria.

Q2 2001 Ahorro Corporacion (AYTCED) introduces Multi Cédulas structure. The first Multi Cédula was the AYTCED 5.25 04/2011.

Q4 2002 Introduction of the law for Cédulas Territoriales.

Q1 2003 Banco de Crédito Local (BANCLE) issues first Cédula Territorial.

Q2 2003 New Spanish insolvency law clarifies preferential claim of covered bond investors and ensures that they will continue to receive interest and principal during a potential liqui-dation process. In addition, the application of the so-called retroactivity rule was lim-ited to cases of fraudulent activities. The retroactivity rule considered any transaction which was made between the date of retroactivity (specified by a Spanish court) and the date of declaration of bankruptcy as void.

Q3 2003 Aggregate Outstanding Market Volume exceeds EUR 50 bn.

Q4 2003 Ahorro Corporation (AYTCED) issues the first Multi Cédulas backed by Cédulas Territo-riales.

Q1 2005 February 2005 so far was the record month in terms of gross supply - EUR 7 bn. Con-sequently, Q1 2005 was the record quarter generating EUR 21.1 bn of gross Cédulas supply. Furthermore, on February 3, CAJAMM was first to issue a 20 year Cédulas.

Q1 2005 On February 7, the Spanish Ministry of Finance clarifies that stand-alone Cédulas will be exempt from a potential withholding tax for non-EU residents. Non-Spanish EU resi-dents have been exempt from withholding tax since 2003.

Q1 2005 Aggregate Outstanding Market Volume exceeds EUR 100 bn.

Q2 2005 Law 5/2005 stipulates that single-seller Cédulas are exempt from CNMV approval prior to launch. This means that tapping the market will be possible in a more flexible way.

Q2 2005 S&P revises rating methodology for Cédulas, providing stand-alone Cédulas access to the AAA rating class.

Q4 2005 Law 23/2005 extends the withholding tax exemption of EU and non EU-residents to investments in securitization funds and listed companies. This includes Multi-Seller Cédulas structures.

Q4 2005 IMCEDI is the first issuer to employ a revolving Multi-Seller structure. CNMV approval will become substantially less time consuming thanks to a Master FTA.

Q4 2005 AYTCED establishes an issuance program employing the vast majority of the Spanish Savings Banks. The program amounts to EUR 200 bn and allows issue maturing until 2055

H2 2006 CAIXAB and BBVASM perform their debut transactions in the Cédulas Territoriales market. The number of Jumbo Cédulas Territoriales issuers rises to four (BANCLE, SANTAN, CAIXAB and BBVASM)

H2 2006 Moody's bit by bit implements its covered bond rating methodology on Cédulas: the rating Agency is confident enough to subsequently provide each issuer with an Aaa rating for its Cédulas – SANTAN and BANEST are the last issuer for whom the adjust-ment is not implemented yet.

Q3 2006 Cédulas gross issuance reaches EUR 60 bn - -the highest gross issuance of a single covered bond market since 2001.

Q4 2006 AYTCED introduces the flexible issuance program. Its main target is to smoothen the issuance process over a longer period of time in order to avoid market disruptions.


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Cédulas gross issuance volume ranks No. 1 in the covered bond segment

As mentioned in the table above, the growth rate of the Cédulas market was im-pressive. It is obvious that Multi-Seller structures more and more turn out to be the key driving force. The increase in issuance of this asset class helped push the Cédulas sector as a whole to the top of the list of new issuance for all Covered Bonds. By year-end 2006, yearly Cédulas issuance reached a new peak with close to EUR 66 bn.

I M P R E S S I V E M A R K E T G R O W T H … … H A P P E N I N G I N I S S U A N C E W A V E S

0

50

100

150

200

250

Jan-99

Aug-99

Mar-00

Oct-00

May-01

Dec-01

Jul-02

Feb-03

Sep-03

Apr-04

Nov-04

Jun-05

Jan-06

Aug-06

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

3.2Total volume of outstanding Jumbo Cédulas Territoriales in bn EUR (LS)Total volume of outstanding Jumbo Multi Cédulas in bn EUR (LS)Total volume of outstanding Jumbo Cédulas Hipotecarias in bn EUR (LS)Average size of Jumbo Spanish Covered Bonds in bn EUR (RS)

0.00.51.5

0.01.5

3.0

0.0

3.52.5

3.5

6.0

3.0

12.3

7.5

2.0

9.1

15.7

5.74.8

9.7

21.1

5.56.0

14.1

26.1

20.2

7.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2000 2001 2002 2003 2004 2005 2006

Net quarterly supply of Cédulas in EUR bn


Seasonality in issuance puts pressure on spreads

Similar to the Pfandbrief market, primary Cédulas market activity showed sig-nificant seasonality. H1 and in particular Q1 is usually high season in this re-gard. This usually tends to put pressure on spreads – one reason why Spanish issuers identify ways to smoothen the issuance process.

C O M P E T I T I V E S T R E N G T H S A N D W E A K N E S S E S O F S P A N I S H C O V E R E D B O N D L A W

Strengths Weaknesses

Mandatory overcollateralization Lack of bankruptcy remote cover register ex-poses CH investors to the credit risk of the issuer

Claims against all mortgage loans outstanding, resulting in a huge de-facto overcollateralization.

Lack of matching requirements


The first legislation to stipulate mandatory overcollateraliza-tion

The Spanish mortgage market law stipulates the highest extent of mandatory overcollateralization for covered bonds. An important structural feature, going beyond legislation in other European countries, lies in the fact that CH investors do not only have a priority claim on eligible mortgages, but on the entire mort-gage book of the CH issuer. Also, according to the law, the volume of outstanding CHs "shall not exceed 90% of the amount of the non-amortized capital of the mortgage loans in the portfolio of the institution that can be used as cover". In order to strengthen the principle of mandatory overcollateralization, the law stipulates rules for a stress scenario, as it obliges the issuer to restore overcol-lateralization in case the 90% limit is exceeded. Thus, the baseline overcollater-alization of 11% would only be the minimum barrier in case the mortgage port-folio of an issuer would consist 100% of eligible mortgages. In reality, the mort-gage portfolio of a CH issuer is much bigger than the pool of eligible mortgage loans.

Intrinsic overcollateralization enhances creditor protection

The substantial overcollateralization of SCBs helps mitigate potential credit, in-terest rate and liquidity risks. The minimum level of 11% is rather generous,

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particularly if one takes into account that, depending on the property type, there are LTV barriers on a single loan basis. Within the Spanish framework, the LTV-ratio should not exceed 70% of the appraisal value based on the valuation crite-ria set by the Spanish Ministry of Economy and Finance. This barrier is mainly valid for commercial mortgage loans. In the case of residential loans, the LTV barrier has been increased to 80%. It is important to note that in the past, LTV levels tended to decrease in time on the back of a buoyant Spanish housing mar-ket.

Lack of bankruptcy remote cover register exposes CH in-vestors to the credit profile of the issuer

Looking at the weaker aspects of the Spanish legislation, the most evident struc-tural weakness lies in the fact that within the Spanish covered bond framework there is no possibility to ring-fence the cover assets in a separate company. In this context, the new Spanish Ley Concursal brought significant improvements. Now payments from the mortgage portfolio will first be passed to a cover asset administrator who is in charge to satisfy the claims of Cédulas investors. This waterfall principle virtually enhances the seniority of covered bond holders com-pared to senior bond holders. Nevertheless, there is no segregation of cover as-sets from the balance sheet and, hence, some set-off risk remains, which might cause slight delays in payments – which is mitigated by a liquidity line usually providing two years of interest payments on the loss given default.

Lack of matching requirements is less relevant

Another frequently mentioned structural weakness of the Spanish framework is the lack of any regulation with respect to interest rate and liquidity risk. There are no requirements within the law to match interest rates and maturities. Thus, interest income from the cover assets might potentially not cover interest owed to CH holders at all times. It is important to understand that the lack of respec-tive rules is not very relevant, as in any case it is very unlikely that CHs and their underlying assets will be separately managed. The only aspect where the lack of respective rules has some relevance is the possibility that resulting interest rate risk might increase the volatility of the present value of the asset pool and thus create uncertainty with respect to recovery prospects. In our view, this is miti-gated by the existence of substantial overcollateralization.

E X P L I C I T A N D I M P L I C I T O C E M P L O Y M E N T O F T H E I S S U E N C E L I M I T S H O U L D L E V E L O F F A T A R O U N D 6 5 %

0

50

100

150

200

250

300

350

400

450

500

Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1Issuance Limit for Cédulas (A: Outstanding Mortgages**x 0.6 x 0.9)Outstanding Jumbo Cédulas* (B)

B/A-ratio (right scale)


100%

60-65% 58-54%

ca.25%

30%

Total Mort-gage

Mortgage Loans assumed eligible CH Issuance

Limit9 90% of eligible

Outstanding Cédulas

Employment of Limit: 44.7%

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MULTI-SELLER TECHNOLOGY

MCs reflect high quality of underlying assets

With respect to the different issuers of SCBs, investors should clearly differenti-ate between Cédulas Hipotecarias, Cédulas Territoriales and Multi Cédulas. While CHs and CTs are issued by a bank and backed by the mortgage or the public loan book of this bank, MCs are issued by a fund (F.T.A. - Fondo de Titulización de Activos) and backed by regular Cédulas, which, in turn, were is-sued by single bancos or cajas. However, at the end of the day, the asset portfo-lios of the Spanish banks participating in the respective structure back the MCs. From a credit quality standpoint, MCs not only have the advantage of a signifi-cant geographical and issuer diversification, they also have the advantage of be-ing protected against bankruptcy of any participating issuer, as there is a liquid-ity facility consisting of either a separate pool of assets or a liquidity line at a short-term prime rated credit institution. Consequently, rating agencies assign ratings on the back of a structured finance approach and not on the back of a fundamental approach as is the case for CHs or CTs. Thus, with respect to the structure of the risk transfer, MCs reflect more properly the high quality of un-derlying assets than CHs or stand-alone CTs.

B A S I C M U L T I C É D U L A S T R U C T U R E

CollateralPurchasefrom Sale ofNotes

InterestandPrincipal

InterestandPrincipal

Proceedsfrom Saleof Notes

Portfolio ofCédulas

issued by ndifferent

banks

EUR #.## bn

Notes

EUR #.## bn

Fondo deTitulizacionde Activos

(Fundregulated bythe CNMV)

ManagementCompany

(P-1/A1+/F1+):Liquidity Provider,

SwapCounterparty

Intermediary /

Custodian

CH1

CH2

CH3

CH x

CH n-2

CH n-1

CH n

Reserve Fundor


S T R E N G T H S A N D W E A K N E S S E S O F T H E C É D U L A S M A R K E T

Stand-Alone Cédulas Multi-Seller Cédulas

Strengths Challenges Strengths Challenges

Significant overcollateralization both mandatory (CH: 11%, CT: 42%), structural (ca. 100%) and voluntary CH/CT: >>100%)

Collateral is not segregated from the issuing company

High geographical and issuer diversification

Complex structure

Strong average credit quality of the issuers (AA- - AA) and im-pressive profitability levels. All bigger banks currently are issu-ers or are planning to issue Cédulas.

Legal framework does not provide criteria to ensure that cash flows from the collateral are sufficiently protected from various adverse scenarios

Structure is bankruptcy re-mote from issuers of Cédulas. Liquidity facilities assure timeliness of payments (Li-quidity facility usually equals two years’ interest payments on expected loss).

Investors need credit limits for each issue

Improvements of insolvency law assures the seniority of Cédulas investors being safeguarded by an insolvency administrator

Prime ratings by all agencies speak for a homogeneously high quality market and as-sure a broad investor base (remember investors’ limita-tions to certain rating classes)

Economic importance and reli-able history of the product Cédulas


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Massive overcollateralization As previously stated, we specifically want to stress the massive overcollateraliza-tion which is the issuers’ answer to the missing segregation of the collateral. The mandatory overcollateralization defined by law is at 11% for CH and 43% for CTs. A structural portion of the overcollateralization derives from the fact that the eligible portion of a bank’s loan book is highly likely to be below 100% while the entire loan book (eligible and non-eligible assets) act as collateral. Finally, the “voluntary” part of the overcollateralization stems from the fact that full is-suance potential is not yet fully used. Furthermore, both the high OC levels and the good credit quality together with the currently strong profitability levels of the issuers to a large extent mitigate the missing asset-liability-management regulations.

INTERMONEY OVERVIEW

Ownership structure of Inter-money

Intermoney Titulización is 30% owned by its directors and employees and 70% by CIMD which, in turn, is held 42.95% by its directors and employees and 57.05% by financial institutions (25.49% ICAP, 8.01% BBVASM, 9.99% Caja San Fernando, 5.06% BPESP, 8.5% Cajamar). Meanwhile, IMCEDI has completed nine transactions. It usually employs entities stemming from all three pillars of the Spanish banking system: corporate banks, savings banks and cooperative credit institutions. One year ago, along with its sixth transaction (official IM Cédulas M1), Intermoney introduced an innovation in the Cédulas market.

Also an issuance program in place

The structure is all about a Master-Fondo de Titulización, allowing Intermoney and the seven participants to issue a maximum of 15 issuances with a cumula-tive maximum amount of EUR 20 bn until Dec 31, 2009. The transaction will be supported by a common liquidity line.

Liquidity reserve In case of default of a Cédulas issuer, the Spanish legal framework does not al-low investors to directly satisfy their claims through the collateralized assets. Though being represented by a solicitor solely taking care of Cédulas holders interests, investors have to await the outcome of the insolvency procedure. To avoid any delay in payment and therefore to obtain AAA ratings, Cédulas issuers put a reserve fund in place. It covers two years of interest payments (i) on the expected loss (Volume x probability of default PD) during the life of the multi-Cédula structure.

Size of Liquidity Reserve = Volume of Cédulas transaction × PD × i × 2

T R A N S A C T I O N S T R U C T U R E

Source: HVB Global Markets Research; Company Data

IMCEDI has 9 Fondos in opera- Currently, IMCEDI has nine Fondos in operation. Two of them, IM CED.1/-

Collateral Purchase from Sale of Notes

Interest andPrincipal

Interest andPrincipal

Proceeds from Sale of Notes

Portfolio of Cédulas

issued by 7 different

banks EUR 1.3 bn

Notes

EUR 1.3 bn

IM Cédulas 10 (Fund

regulated by the CNMV)

InterMoney Titulización

SGFT: Management

Company

IXIS CIB (P-1/A1+/F1+) Liquidity Provider,

InterMoney Valores SV:

Intermediary, Custodian

CH1

CH2

CH3

CH4

CH5

CH6

CH7

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tion CEDGBP 1 and CEDGBP 2 exclusively employed members of the Grupo Banco Popular. The other Fondos repackaged Cédulas issued by independently operat-ing Cajas (savings banks), bancos cooperativos (cooperative banks) and bancos commerciales (commercial banks).

Caja Laboral is the most promi-nent participant

The most prominent participant in Intermoney Transactions is Caja Laboral Popular, a cooperative bank. It participated in six out of seven possible struc-tures (Caja Laboral Popular is not a member of Grupo Banco Popular) each time with noticeable amounts together amounting to EUR 2.525 bn. Cajamar (EUR 1.7 bn), Banco de Valencia (EUR 1.1 bn) and Banca March (EUR 1 bn) each ap-peared four times. Until now, excluding Grupo Banco Popular members, 20 dif-ferent financial institutions have been involved by Intermoney.

P A R T I C I P A N T S I N I N T E R M O N E Y T R A N S A C T I O N S B E F O R E I M C E D I 1 0

IM CED.1 IM CED.2 IM CED.3 IM CED.4 IM CED.5 IM CED.M1 IM CED.7 CEDGBP 2* IM CED.9

B. Andalucía 800 1,175

B. Castilla 275 550

B. Crédito Balear 225 175

B. Galicia 250 375

B. Vasconia 150 300

B. Popular Hip. 300 300

B Popular-e.com 125

B. March 250 250 250 250

B. de Valencia 400 100 500 100

B. Espirito Santo 150 80 75

B. Gallego 105

B. Pastor 200

C. Girona 50

C. Manresa 80 100

C. Penedes 175 200

C. Tarragona 50

C. Terrassa 150 100 100

C. Cantabria 500 100 50

C. Espana 150 150

C. Laboral Popular 500 200 500 500 525 300

C. Murcia 150

C. San Fernando 125 275

C. Segovia 100

Cajamar 500 200 500 500

IPAR Kutxa 100 100

C. Canarias 50 50 100

Sa Nostra 100

*IM CED.1 is considered to be CEDGBP 1 Source: Global Research (HVB)

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IMCEDI 10 CHARACTERISTICS

IMCEDI 10 brings along a lot of well known names, but also…

IMCEDI 10 will employ four savings banks and three commercial banks, with one commercial bank being held 49.78% by another savings bank. The largest participant is Caja Murcia with a total loan book of 8.97 bn and an outstanding amount of Cédulas (after IMCEDI 10) of EUR 2.24 bn. Banca March is an already well-known name in Intermoney transactions. The Palma de Mallorca-based commercial bank has already participated in four other IMCEDI transactions. IMCEDI is its only covered funding device: Banca March's entire EUR 1.2 bn (af-ter IMCEDI 10) covered funding has entirely been performed through Inter-money transactions. Caixa Manresa is one of the really frequent names in Multi-Cédulas: it already participated in many AYTCED transactions as well as in CEDTDAs. IMCEDI 10 will be the third appearance in Intermoney transactions – the first since March 2005. Virtually the same is true for Caja San Fernando, which participated in seven AyT's, one TdA and now for the third time in IM-CEDI. Banco Gallego, the Santiago de Compostela-based commercial bank, is held 49.78% by Caixa Nova and participated in every stand-alone TdA transac-tion but the first. While it did not participate in the TdA issuance program it did in Intermoney's Master program. On a stand-alone basis, this is the first time Gallego joins an Intermoney portfolio. However, Caixa Girona is a classical AyT participant. The Catalan-based savings bank is participant in nearly each and every AyT transaction and joins Intermoney for the second time.

P A R T I C I P A N T S A T I M C E D I 1 0

Total Mort-gage Book

Eligible Mortgage Book

Share of eligible loans

Out-standing Cédulas*

Contribution to IMCEDI 10

Share in IMCEDI 10

Utilization of Issuance limit**

OC

Caja Murcia (S) 8.97 7.11 79.26% 1.94 0.3 23.08% 32% 300%

Banca March (C) 3.81 2.41 63.25% 1 0.25 19.23% 52% 205%

Caixa Manresa (S) 2.98 2.35 78.86% 1.1 0.2 15.38% 55% 129%

Banco Guipuzcoano (C)

2.78 1.37 49.28% 0.2 15.38% 15% 1290%

Caja San Fernando (S)

5.54 3.32 59.93% 1.81 0.15 11.54% 59% 182%

Banco Gallego (C)* 1.21 0.97 80.17% 0.59 0.1 7.69% 71% 75%

Caixa Girona (S) 3.62 1.72 47.51% 1.15 0.1 7.69% 73% 190%

Total 28.91 19.25 66.9% 7.59 1.3 100% 46% 369%

Amounts in EUR bn (S) indicates savings bank; (C) indicates commercial bank * Held 49.78% by Caixanova (S) ** max 90% of the eligible mortgage book can be refinanced through Cédulas Source: Global Research (HVB)

… Banco Guipuzcoano – a new name in Spain

Last but not least, there is Banco Guipuzcoano (BGZOSM, -/-/A-p). The bank is situated in San Sebastian, Basque Country and performs its inaugural Cédulas issuance together with the upcoming Intermoney transaction. As of December 2005 it reported total assets of EUR 7.2 bn – roughly 38% (EUR 2.74 bn) con-sisted of mortgage loans. The total loan book amounted to EUR 5.1 bn. Although the bank is situated in the Basque Country, the largest lending exposure is to the Region of Madrid (EUR 1.1 bn), followed by Levante, Guipúzcoa and Vizcaya with each roughly EUR 730 bn.

Andalucía, Murcia and Cata-luña are key regions…

The latter leads us to the regional distribution of the total collateral pool of IM-CEDI 10. Loans granted to builders etc. in the regions Andalucía (24.3%), Cata-luña (23.9%) and Murcia (20.8%) together comprise more than two thirds of the aggregate mortgage book of the participating entities. Adding Comunidad Valen-ciana (9.9%) and Islas Baleares (7%) almost completes the participants aggregate

10




portfolio. The remaining exposure draws a scattered picture throughout almost all other Spanish comunidades autónomas. The regions entirely missing are Ex-tremadura, Cantabria and Asturias. What makes this structure special compared to other Multi-Cédulas outstanding is the fact that Madrid exposure, which is usually quite high, is very limited in this transaction turning IMCEDI 10 to a nice diversification device.

R E G I O N S I N V O L V E D I N I M C E D I 1 0

Source: HVB Global Markets Research; Company Data

… and add diversification and stability to the collateral

In terms of mortgage markets, the composition is sound. As can be seen in the annex, Murcia already had a relatively significant correction and currently de-velops in line with other comunidades. Backed by the strong tourism, Cataluña and of course Islas Baleares showed relatively stable house prices as well as An-dalucía.

A P A R T M E N T S A N D D E T A C H E D D E F I N E T H E P O O L … … W H I C H C O N S I S T S M A I N L Y O F S M A L L E R S I Z E D L O A N S

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Residential Other Promoter Commercial Office

Banco GuipuzcoanoCaixa GironaBanco GallegoCaja San FernandoCaixa ManresaBanca MarchCaja Murcia

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

< 25k 25k -50k

50k -75k

75k -100k

100k -125k

125k -150k

150k -175k

175k -200k

200k -225k

225k -250k

250k -275k

>275k

Banco GuipuzcoanoCaixa GironaBanco GallegoCaja San FernandoCaixa ManresaBanca MarchCaja Murcia

average loan size

Y-Axis: aggregate loan amounts Y-Axis: number of loans Source: Global Research (HVB)

Residential loans comprise the largest share

As usual, the main part of the aggregate mortgage book stems from residential lending, with almost 10.000 mortgaged objects each, detached or semi-detached houses as well as apartments, the other segments of offices, classical commer-cials, building promoters and other lending is clearly outnumbered. Loan sizes are significantly skewed to the right, with more than 130.000 loans amounting

Pais Vasco2.1%

Murcia20.8%

Islas Baleares7%

Com. Valenciana9.9%

Madrid3.9%

Castilla y León0.3%

Cataluña23.9%

Andalucía24.3% Islas Canarias

3.8%

Asturias0.01%

Castilla la Mancha 1.1%

La Rioja0.5%

Galicia2%

11




to less than EUR 50.000.

R E M A I N I N G L I V E S O F T H E U N D E R L Y I N G L O A N S … … A N D T H E I R L T V R A T I O S

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

>36 36 - 60

60 - 96

96 -120

120 -156

156 -180

180 -216

216 -240

240 -276

276 -300

300 -336

336 -360

>360

Caja Murcia Banca March Caixa ManresaCaja San Fernando Banco Gallego Caixa GironaBanco Guipuzcoano

-

200

400

600

800

1,000

1,200

<2525

-30

30-3

535

-40

40-4

545

-50

50-5

555

-60

60-6

565

-70

70-7

575

-80

>80

without d

ata

Caixa ManresaCaja San FernandoBanco GallegoCaixa GironaBanca MarchCaja MurciaBanco Guipuzcoano

Y-axis: aggregate loan amounts Y-axis: aggregate loan amount Source: Company Data, Global Research (HVB) Dashed columns indicate average LTV

LTVs significantly below legal minimum

The distribution of remaining lives of the underlying mortgage loans is relatively even with two peaks, one at the rather favorable short end and, to a somewhat lower extent, on the longer end of the range. The distribution of LTV ratios might peak in the >80% area, however, the average LTVs are still significantly below that level. This is particularly true for Banca March and Caja Murcia – the largest contributors to IMCEDI 10.

IMCEDI 10 is a good diversifica-tion device

All in all, the aggregate pool might be a little less granular than at comparable transactions, however, we like the characteristic as it is a sound diversification to existing transactions (i) due to concentrations in regions that are elsewhere slightly underrepresented (Murcia) as well as (ii) high concentration in compara-bly better supported comunidades (Cataluña, Andalucía).

12




SPREAD PERFORMANCE OF IMCEDI VS. PEERS

lack of supply in Multi-Cédulas …

Overall, Cédulas performed quite well in recent weeks and months. We believe that this is an effect strongly supported by the relatively low primary market ac-tivity out of Spain. While in Jan 2006 an impressive EUR 19 bn in new Cédulas were brought to the market, the entire Jumbo covered bond supply in Jan 2006 amounted to only EUR 16 bn, thereof only three issues amounting to EUR 5 bn from Spain. All three issues were Cédulas Hipotecarias. Hence, especially Multi-Cédulas were able to benefit spread-wise from the lack of supply.

… was supportive for spreads Since late November, we have seen a tightening of around 3-4 bp in the longer Multi-Cédulas coming down from around 12 bp to the swaps +7-9 bp area. IM-CEDI performed in line with its peers and currently trade at the rather richer end.

S T R O N G P E R F O R M A N C E O F M U L T I - C É D U L A S I N V E S T O R S E N J O Y E D P E R F O R M A N C E A N D S T I L L B E N E F I T F R O M R O L L - D O W N

0

2

4

6

8

10

12

14

Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06

bp

IMCEDI 3.5% 06/20 IMCEDI 4% 03/21AYTCED 4% 03/21 AYTCED 3.75% 12/22AYTCED 4.25% 10/23 CEDTDA 4.125% 04/21CEDTDA 3.875% 05/25

IMCEDI 3.5% 06/20

IMCEDI 4% 03/21

IMCEDI 3.5% 12/15

IMCEDI 4.25% 06/16

IMCEDI 3.75% 03/15

IMCEDI 4% 11/14

IMCEDI 4.25% 02/14

0

2

4

6

8

10

12

0 2 4 6 8 10 12

mDur

bp

02/07/0708/07/06


Favorable development of IMCEDI's credit curve

The credit curve of IMCEDI also developed in a rather favorable way. The overall curve tightened, but the steepness of the curve remained constant. Hence, inves-tors benefited from the performance while still enjoying a strong roll-down ef-fect.

13




APPENDIX

REFORM OF THE CÉDULAS LAW

Tesoro published proposal Since October 27, 2006, a draft version for an amendment to the Spanish law on the mortgage market is available on the website of the Spanish finance ministry http://www.tesoro.es for public hearing.

Introduction of cover register is crucial

Key points of the legal amendment concerning Cédulas Hipotecarias:

– The LTV for mortgage loans granted NOT for the purpose of building, renovat-ing or buying residential real estate will be lowered to 60% from 70%.

– The regional scope for mortgage loans will be broadened from solely Spanish mortgages to loans guaranteed by real estate within the EU.

– Loans with an LTV above 80% but below 95% are eligible provided there is an additional bank guarantee or a loan insurance in place.

– The method of how to assess the mortgage lending value, in particular the lending value of non-Spanish EU mortgages.

– The proposal also allows for amortizing, callable, etc. Cédulas or Bonos Hipo-tecarios as long as the special features are reflected in the documentation.

– Spanish issuers have to keep a register for mortgage loans employed as col-lateral for Cédulas. This register will also include substitute cover as defined in another article.

– Article 14 of the proposal implements certain aspects of the Spanish insol-vency regulation into the Cédulas law, allowing for a clearer segregation of the collateral.

– The substitute collateral for Cédulas Hipotecarias is capped at 5% of the total outstanding principal. For Bonos Hipotecarios, this level is 10%.

– As substitute cover can act:

– Fixed rate assets of the Spanish government, of the Instituto de Crédito Official (ICO) and of other EU governments.

– Furthermore, fixed rate assets publicly traded on an official secondary market or a regulated market provided the assets are rated equivalent to the Spanish government.

– Other low-risk or high-liquid asset which have to be further defined.

Definitely heading in the right direction

We think this first proposal is heading in the right direction. While certain regu-lations are just targeted to align the Cédulas law with the CRD, other aspects clearly tackle existing disadvantages of the Spanish legal framework compared to other covered bond structures. In this respect, we point out the establishment of a register and the implementation of certain aspects of the insolvency regula-tion within the Cédulas framework, which, if worked out properly, mitigate the current missing clear segregation of the collateral in the case of insolvency.

More flexible primary market action

Furthermore, we like the increased flexibility for the issuance of Cédulas and Bonos Hipotecarios as this could open the door for the development of a sub-Jumbo segment. We already pointed out that a diversification of issuance for-mats could be spread supportive for Cédulas.

Still room for improvement… We acknowledge that this is only a first draft version. However, in order to catch up to state of the art European covered bond technology, certain feature are still

14




missing: when defining a cover register, it is also necessary to include regula-tions for ALM such as inclusion of derivatives etc. – something that was not nec-essary until now. Furthermore, it remains unclear to us why one should argue in favor of a 5% limit for substitute cover as even the CRD allows for 15%. Another unusual aspect is the fact that assets rated equivalent to the Spanish state are eligible for substitute collateral, when even rating agencies confirm that ratings are not cross-asset-class comparable. One key aspect especially investors would applaud is a regulation comparable to the German §28 disclosures. Currently, it is quite tedious to collect cover pool data of Spanish issuers.

… but it could be a basis for a groundbreaking development

The list could be extended but we again point out that this is just a first proposal and the direction is undoubtedly right. Now it is up to the Spanish issuers and other parties involved in the hearing to make the improvements groundbreak-ing.

WITHHOLDING TAX SITUATION IN SPAIN

Our impression is that the current newsflow concerning the Spanish withholding tax situation has brought some confusion to the market and in particular to new investors in Cédulas. Effective from January 1, 2007, the applicable withholding tax rate has been raised from 15% to 18%. However, non-residents of Spain that are not residents of a tax-haven country or territory under Spanish law and do not hold the securities through an intermediary resident in such tax-haven coun-try or territory investing in Corporate bonds subject to law 19/2003 and 23/2005 (this includes Cédulas and Multi-Cédulas structures) can achieve a reduction of the withholding tax rate to 0%.

Countries considered tax havens under Spanish legislation and thus preventing investors from a tax refund or relief at source are the following:

C O U N T R I E S C O N S I D E R E D T A X H A V E N S U N D E R S P A N I S H L E G I S L A T I O N

Andorra Gibraltar Montserrat

Anguilla Granada Nauru

Antigua and Barbuda Guernsey and Jersey Islands Netherlands Antilles

Aruba Hong Kong Oman

Bahamas Isle of Man Panama

Bahrain Jamaica Salomon Islands

Barbados Jordan San Marino

Bermudas Lebanon Seychelles

British Virgin Islands Liberia Singapore

Brunei Liechtenstein St. Lucia

Cayman Islands Luxembourg* St. Vincent and the Grenadines

Cook Islands Macao Trinidad and Tobago

Cyprus Malta Turks and Caicos Islands

Dominican Republic Mariana Islands U.S. Virgin Islands

Falkland Islands Mauritius United Arab Emirates

Fiji Monaco Vanuatu

*only holding companies Source: Clearstream, Global Research (HVB)

15




THE CONDITION OF THE HOUSING MARKET

Housing boom goes on In 2006, the boom in the Spanish housing market continued, although we see a decline in appreciation rates. According to the Ministerio de Vivienda (Ministery of Real Estate), the average nominal house price per square me-ter rose at an annual rate of 9.8% y-o-y in September 2006. However, monthly y-o-y house price appreciation rates declined for eight consecutive quarters and showed only one increase in the last eleven quarters.

No sharp decline of house prices in sight

Hence, according to the most current figures, a sharp decline in house prices is still not in sight. After falling 1.2% points from Q1 2006 (+12%) to Q2 2006 (10.8%), the y-o-y house price appreciation in Spain further slowed down and reached 9.8% in Q3 2006 and thus fell back to single digits for the first time since Q2 2001.

Development in Madrid paves the way

In the past quarters, the development of house prices in the Comunidad de Ma-drid was always one step ahead of all the other comunidades. The development observed in Madrid was mostly experienced in the other regions with a time lag of 1-3 quarters, depending on the degree of rurality. Compared to Q2 2006 (+7.5%), Madrid’s house price appreciation continued to cool off as well, but at an almost negligible pace. The appreciation was reported at 7.2%. Hence, it seems like the soft landing is reaching its phase of approaching ground.

Highly populated comunidades with higher historical price volatility

Within the group of higher populated Comunidades, Valencia and Murcia showed a development similar to that of Madrid. Catalunya always plays an ex-ceptional role as it benefits from a large tourist market plus it contains Barce-lona – one of, if not the most booming city in Spain. During the house price boom, Catalunyan real estate remained rather calm. Prices were not impacted by increases in other regions while they also seem to be resisting the current slowdown better than average. The same holds true for Islas Canarias. The third heavy tourism related Comunidad is Islas Baleares. House prices shot through the roof in the late 1990's, however, since around 2002, the house price devel-opment joined the stability also observed in Catalunya and the Canarias.

Castilla-La Mancha and Andalucía were the most booming region among the lower populated regions, while Navarra, Castilla y León and Extremadura were at the rather calmer end – rather calmer in Spain meaning appreciation rates of around 8-10% p.a.

Q U A R T E R L Y Y - O - Y A P P R E C I A T I O N I N H I G H … … A N D I N L O W P O P . D E N S I T Y C O M U N I D A D E S

-10

-5

0

5

10

15

20

25

30

35

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Asturias Baleares CanariasCantabria Catalunja Com. ValencianaMadrid Región de Murcia País Vasco

-10

-5

0

5

10

15

20

25

30

35

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Andalucia Aragón Castilla y LéonCastilla la Mancha Extremadura GaliciaNavarra La Rioja

Please note that a horizontal movement indicates constant rates of growth. High population density > 100 inh./km2 Source: Ministerio de Vivienda, Global Research (HVB)

Prices still rising at a noticeable pace

All in all, Spanish house prices are still rising and they rise at a significant pace.

16




Nevertheless, appreciation rates clearly and sustainably decreased since 2003 – per se a rather calming sign as Spain still benefits from a strong and healthy – although construction related - labor market and a stable demographic devel-opment. In this respect, the over-valuation of the Spanish housing market – which was already lower than in other European countries – decreased once more:

Three factors determining property prices

From a theoretical viewpoint, fluctuations in property prices on a fundamental basis, i.e. without liquidity issues, are determined by three factors: the macro-economic environment, demographic changes and the institutional environment like national or local taxes, etc. The two most important macroeconomic drivers for house prices are disposable income and interest rates:

1. The higher the disposable income, the more private households can afford to buy a house or a flat, i.e. the higher residential property prices. 2. The higher the increase in mortgage rates, the higher the interest rate-burden of borrowers. Consequently, rising interest rates should exert a dampening effect on construction activity and therefore on property prices. 3. Demographic changes could also be an important factor for the housing market. Of special interest here is the growth of the population aged 25 to 44, which is a prime house-buying group. In Germany, this specific part of the population declined 8% since the mid-90s, whereas it increased by more than 21% in Spain.

Real estate market is overval-ued – but calming down

According to our model, the Spanish market is currently (Q3 2006) overvalued by 1.7%, which translates into 0.20 standard deviations. This is well within what – from a statistical standpoint – can be considered within the normal bandwidth. From a statistical point of view, given a normally distributed variable, a mis-evaluation of more than two standard deviations (in this case ±8.7%) would be considered as a sign of a somewhat “unnatural” development and an impending and significant correction. This has been asserted twice.

O V E R V A L U A T I O N O F S P A N I S H R E A L E S T A T E D E C L I N E S B U T M A R K E T R E M A I N S V U L N E R A B L E

-8

-6

-4

-2

0

2

4

6

8

10

12

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

overvalued

"unnaturally" overvalued

2 standard deviations


Spanish mortgage market re-mains vulnerable

Nevertheless, the Spanish mortgage market remains vulnerable – mainly due to two reasons. First, household debt as a percentage of disposable income is com-parably high, however, this is a situation shared with others. Second, as a con-sequence of a more than 10-year era of steadily declining interest rates, Spain shows an extraordinarily high share of variable interest rate loans. Almost 90% of all Spanish mortgages pay floating rate interest.

Members per household ratio – According to Instituto Nacional de Esdadistico, as of Dec. 2005, about 84% of all

0

10

20

30

40

50

60

70

80

90

100

0 20 40 60 80 100 120 140 160 180 200

Belgium

Germany

Greece

Spain

France

IrelandItaly

Austria

Portugal

Household debt, in % of disposable income

Variable interest rate loans,

in % of mortgage debt Vulnerability

17




a supportive element in the Spanish housing market

Spanish citizens did not have to pay rent to a landlord. Taking into account peo-ple in subsidized lodging, the figure even rises to around 89%. Looking at the number of people per household clarifies this in a way that most people share space with relatives. In fact, about 56% of all inhabitants of Spain live in house-holds of four or more persons. In addition, about 17% of all inhabitants in Spain live in households where 3 or more members have a regular income. This is re-flected in the development of population densities in major Spanish cities. We conclude that due to the big number of flat- or house-sharing communities, there is strong potential pent-up demand in the Spanish housing market which, in case of a slowdown in real estate markets, supports a soft landing.

House price volatility important especially for MC analysis

An additional way of assessing the risk involved in various mortgage loan portfo-lios – which is overly important when analyzing the risk associated with MCs - is the volatility of house prices in different regions. The calculation of the standard deviation of y-o-y house price changes for different Spanish regions shows the following picture:

H O U S E P R I C E V O L A T I L I T Y B Y R E G I O N

0

1

2

3

4

5

6

Murci

a

Mad

rid

Castil

la la

Man

cha

Galicia

Andalucia

Castil

la y L

éon

Com. V

alencia

na

Espan

a

La R

ioja

Catal

unja

País

Vasco

Canta

bria

Extre

mad

ura

Balea

res

Aragón

Navar

ra

Asturia

s

Canar

ias

Volatility calculated as standard deviation from the mean of the last two years. Source: Ministerio de Vivienda, Ministerio de Economía y Hacienda, Global Research (HVB)

Volatilities lower in rural areas The volatility landscape is rather smooth with many Comunidades being in the region of the average Spanish house price volatility. Only the Comunidades of Madrid and Murcia, which, as we have already pointed out, showed tremendous appreciation rates (graph on page 14) show significantly higher volatilities. The three tourist industry related comunidades of Islas Canarias, Islas Baleares and – to a lower degree – Catalunya all rank among the less volatile regions. Never-theless, with Navarra, Aragón and Extremadura, the lower volatile end of the range is dominated by rather rural comunidades.

Conclusion In our view, the immediate risk for a downturn is very limited. Since the evolvement of a common European capital market and the convergence of inter-est rates, Spain saw a tremendous decline in the cost of refinancing. From a level way above 10% in the early 1990s, nominal interest rates dropped to around 3%-5%, bringing down real interest rates close to zero. Within the same period, the number of mortgage loans granted by Spanish banks as well as the average size of loans increased significantly. As a sudden interest rate spike in the medium term is not in sight, the danger of a sudden increase in the price for refinancing should be rather low. In addition, Spanish banks’ willingness and

18




ability to grant loans does not seem to be declining. Banco Santander, BBVASM, Banco Popular and Banesto together with the large Cajas are big players in the Spanish mortgage market and all look adequately capitalized and their net inter-est margins are high enough to push profitable business. Furthermore, the sig-nificantly lower risk weightings for residential mortgage loan portfolios associ-ated with Basel II will be another supportive factor – mortgage receivables will benefit most from the revision of risk weightings.

We remain prepared for a soft landing

Indeed, we expect a “soft landing” rather than a significant and harsh correction of the currently slight overvaluation. Around end-2005, a slowdown in price de-velopment started in Madrid. Meanwhile, we see parallel movements of house prices growing at diminishing rates in other Comunidades Autonomas like Cata-luña (Barcelona) and Andalucía (Sevilla). Even in Comunidades where prices developed below-average, for example Castilla y León (León, Valladolid, Sala-manca) or Galicia (A Coruña, Vigo), we currently see a sideward movement. In this context, the slowdown of the price development changed from accelerated to more or less constant growth rates.

19




OVERVIEW SPANISH LEGAL FRAMEWORK

Name of Debt Instrument(s) Cédulas Hipotecarias (CH), Cédulas Territoriales (CT)

Legislation Law of March 25, 1981 (CH) and Law of Novem-ber 22, 2002 (CT)

Special Banking Principle No; any Spanish bank with eligible assets

Restrictions on business activities Not applicable

Asset allocation Cover assets remain on balance sheet; there is no registration; eligible and non-eligible mortgage loans serve as cover; since September 2004, the risk of Cédulas investors to become senior unse-cured creditors due to the application of the so-called “retroactivity rule”, has been removed.

Inclusion of Hedge Positions Not applicable, since there is no separation of cover assets

Substitute collateral Not applicable, since there is no separation of cover assets

Restrictions on inclusion of commercial mort-gage loans in the cover pool

No

Geographical scope for public assets Any country is allowed, but only public loans from EEA countries (incl. sub-sovereigns and public-sector companies) are eligible for collat-eral

Geographical scope for mortgage assets Any country is allowed, but only Spanish mort-gage loans are eligible for collateral

LTV barrier residential 80%

LTV barrier commercial 70%

Basis for valuation = mortgage lending value No; "valor de tasación" ("estimated value" = market value)

Valuation check The examination of property valuations is part of the specific surveillance

Special supervision Yes; Banco de Espana (Spanish Central Bank)

Protection against mismatching Coverage by nominal value

Protection against credit risk -

Protection against operative risk Neither a back-up servicer nor a cover pool ad-ministrator are stipulated; investors might derive comfort from the fact that there is a broad num-ber of Cédulas issuers

Mandatory overcollateralization 11% (CH) / 43% (CT)

Voluntary overcollateralization is protected Yes

Bankruptcy remoteness of the issuer No; only Multi Cédulas provide independence from parents through a reserve fund and issuer diversification

Outstanding covered bonds to regulatory capi-tal

-

In the event of insolvency 1st claim is on all mortgages (CH) / public loans and credits (CT) in favor of the issuer

External support mechanisms In the event of insufficient proceeds from the pool assets to cover their claim, Cédulas inves-tors rank pari passu with senior debt holders

Moody's rating policy Up to 2 notches for CHs and up to 3 notches for CTs; Moody's applies its approach for structured covered bonds for Multi Cédulas, which allows for a strong independence from the issuer rat-ings

Risk Weighting 10%-20%

Fulfills UCITS 22(4)? Yes

Source: HVB Global Markets Research



Bayerische Hypo- und Vereinsbank AG, CA IB International Markets AG, UniCredit Banca Mobiliare S.p.A.

DISCLAIMER This analysis was prepared by Mr.Hillenbrand (Analyst, HVB), and was published the first time on February 9, 2006.

Responsibility for its preparation lies with:

a) Bayerische Hypo- und Vereinsbank AG, Am Tucherpark 16, 80538 Munich, Germany, Responsibility for its distribution pursuant to §34b WpHG: Bayerische Hypo- und Vereinsbank AG, Am Tucherpark 16, 80538 Munich, Germany. Regulatory authority: "BaFin" - Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany.

b) UniCredit Banca Mobiliare S.p.A. , Via Tommaso Grossi, 10, 20121 Milano, Italy Regulatory authority: “Banca d’Italia”, via Nazionale, 91 – 00184 Roma, Italy Recommendation rules: "Consob Rule n. 11971/1999, art. 69-quinquies and Consob Comm. n. DME/6027054 28th March 2006

Notices required by BAFIN: Important notices acc. § 4/ 4; 4 Fin AnV: Company Date Product Recomm. Company Date Product Recomm.

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Other important notices: Key 1a: Bayerische Hypo- und Vereinsbank AG and/or a company affiliated with it pursuant to § 15 AktienG (German Stock Corporation Act) owns at

least 5% of the capital stock of the company.

Key 1b: The analyzed company owns at least 5% of the capital stock of Bayerische Hypo- und Vereinsbank AG and/or a company affiliated with it pursuant to § 15 AktienG (German Stock Corporation Act).

Key 2: Bayerische Hypo- und Vereinsbank AG and/or a company affiliated with it pursuant to § 15 AktG (German Stock Corporation Act) belonged to a syndicate that has acquired securities of the analyzed company within the twelve months preceding publication.

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Company Key

I

Significant financial interest: Bayerische Hypo- und Vereinsbank AG and companies affiliated with it regularly trade shares of the analyzed company. Analyses may refer to one or several companies and to the securities issued by them. The author’s remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly. In some cases, the analyzed issuers have actively supplied information for this analysis. To prevent or remedy conflicts of interest, Bayerische Hypo- und Vereinsbank AG has established the organizational arrangements required from a legal and supervi-sory aspect, adherence to which is monitored by its Compliance department.

The prices used in the analysis are the closing prices of the Xetra system or the closing prices of official trading on the Frankfurt Stock Exchange or the closing prices on the relevant local stock exchanges. In the case of unlisted stocks, the average market prices based on various major broker sources (OTC market) are used.

Our recommendations are based on information available to the general public that we consider to be reliable but for the completeness and accuracy of which we assume no liability. We reserve the right to modify the views expressed herein at any time and without notice. Moreover, we reserve the right not to update this information or to discontinue it altogether without notice. The investment possibilities discussed in this report may not be suitable for certain investors depending on their specific investment objectives and time horizon or in the context of their overall financial situation. In particular the risks associated with an investment in the securities or the financial instruments under discussion are not explained in its entirety. This information is given without any warranty on an “as is” basis and should not be regarded as a substitute for obtaining individual advice. Please contact your bank’s investment advisor for individual explanations and advice. Provision of this information shall not be construed as constituting an offer to enter into a consulting agreement.

You will find an overview of the breakdown in absolute and relative terms of our investment ratings on our website www.hvb.de under the heading “Disclaimer.”

Our investment ratings are in principle judgments relative to an index as a benchmark. Our ratings are as follows:

Issuer level: Marketweight: We recommend to have the same portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR HY index for sub-investment grade names) Overweight: We recommend to have a higher portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR HY index for sub-investment grade names) Underweight: We recommend to have a lower portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR HY index for sub-investment grade names)

Instrument level: Core hold: We recommend to hold the respective instrument for investors who already have exposure. Sell: We recommend to sell the respective instrument for investors who already have exposure. Buy: We recommend to buy the respective instrument for investors who already have exposure.

Note on the bases of valuation for interest-bearing securities: Trading recommendations for fixed-interest securities mostly focus on the credit spread (yield difference between the fixed-interest security and the rele-vant government bond or swap rate) and on the rating views and methodologies of recognized agencies (S&P, Moody’s, Fitch). Depending on the type of investor, investment ratings may refer to a short period or to a 6 to 9-month horizon.

Please note that the provision of securities services may be subject to restrictions in certain jurisdictions. You are required to acquaint yourself with local laws and restrictions on the usage and the availability of any services described herein. The information is not intended for distribution to or use by any person or entity in any jurisdiction where such distribution would be contrary to the applicable law or provisions.

Notices required by CONSOB: Analyst Declaration




The analyst/the analysts involved in the preparation of this document is/are not the beneficial owners of the securities mentioned in this document.

All estimates and opinions included in the report represent the independent judgment of the analysts as of the date of the issue. It does not represent the views or opinions of the management of UBM or any other company in or affiliated to the groups of which they form part. It is possible that indi-viduals employed by UBM, or any other such company or affiliate may disagree with the opinions in this report.

Important Disclosure This document has been prepared in parts by UniCredit Banca Mobiliare SpA (“UBM”), authorized by Bank of Italy to provide financial services. UBM belongs to UniCredito Italiano Group; the related legal persons of UBM are the holding UniCredito Italiano (“UCI”) and the other Italian banks belong-ing to UCI (“the Group”).

General Disclosure

This document is being distributed on a irregular basis by electronic and ordinary mail to professional investors and may not be redistributed, repro-duced or published in whole or in part. This document is for information purposes only and is not intended as an offer or solicitation of an offer to sell or to buy any financial instrument. Recipients should conduct their own investigation and analysis of the companies and securities referred to in this document and make their own investment decisions without undue reliance on its contents.

Information, opinions, estimates and forecasts contained herein have been obtained from, or are based upon, public sources such as press and branch publications, financial statements, current and periodic reports, as well as meetings and telephone conversations with company representa-tives believed by UBM to be reliable. However, no representation of warranty, express or implied, is made, and no responsibility or liability is ac-cepted by UBM, or any of their directors, officers, employees or shareholders for loss or damage of whatsoever nature in any way relating to reliance upon this Information.

Information, which is not reflected in this document, may therefore be available to persons connected to UBM.

Coverage policy and frequency of reports and updates The companies are covered at least once a year, usually in occasion of the quarterly earning releases or the presentation of a new industrial plan and any time that the recommendation changes. Each analyst is assigned a group of companies belonging to the same sector. Some sectors (like banks), where the number of companies under coverage is particularly high, are covered by more than one analyst.

Valuation methodology The methodologies used for the valuation of the credit quality (i.e. rating) evolution of a company are similar to those adopted by the main interna-tional rating agencies (S&P, Moody’s and Fitch). The final aim of these methodologies i s to estimate the probability of default of the issuer and the recovery value of its financial liabilities. The analysis is composed of different phases: 1) the business profile assessment, aimed at estimating the volatility of future cash flows and, hence, the level of risk of the company’s asset; 2) the financial profile analysis, aimed at estimating the company’s financial equilibrium and its ability of facing its liabilities redemptions and charges with the cash flow generation; 3) the liquidity analysis, aimed at estimating the company’s ability of facing its short-term debt with its liquid or easily cashable assets. For a better definition of a company’s credit profile, its current and expected credit metrics (financial ratios measuring the company’s credit quality) are compared with the peers’. Similar credit metrics levels and expected evolution should correspond to a similar rating.

Our recommendations on eurobonds focus on our forecasted future movement of the credit spreads, that is to say the difference between the yield to maturity of the security and a risk free rate (swap or government bond rate) referable to the same maturity. The key driver of this movement is the evolution of the company’s rating. A comparative method is adopted: different securities having the same maturities, issued by companies that oper-ate in the same sectors, with the same rating level and outlook should pay a similar credit spread. The advantage of the comparative method is that it incorporates the current market assessment of the value of the company’s peers. The weakness of the comparative method is the risk that the valua-tion benchmark may be mispriced. In addition to the rating evolution, other factors act on the future direction of credit spreads: the dynamics of gov-ernment bonds interest rates; the liquidity of the system; the issuance of new Eurobonds; the offer of other alternative assets; investors’ risk appetite and other factors, different from the rating, that might change the demand-offer conditions. Together with the rating level and outlook, these additional factors are always considered, depending on their importance, when a recommendation on a Eurobond is given.

Key to Investment Rankings Our investment ratings are in principle judgments relative to an index as a benchmark. Our ratings are as follows:

Issuer level:

Marketweight: We recommend to have the same portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR HY index for sub-investment grade names) Overweight: We recommend to have a higher portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR HY index for sub-investment grade names) Underweight: We recommend to have a lower portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR HY index for sub-investment grade names)

Instrument level:

Core hold: We recommend to hold the respective instrument for investors who already have exposure. Sell: We recommend to sell the respective instrument for investors who already have exposure. Buy: We recommend to buy the respective instrument for investors who already have exposure.

Organizational and Administrative Arrangements to avoid and prevent conflicts of interest Conflicts of interest arising between the activities in which UBM engages, are managed by legal and physical and non-physical barriers (collectively referred to as “Chinese walls” designed to restrict the flow of information between one area/department of UBM and another. In particular, Investment Banking units, including corporate finance, capital market activities, financial advisory and other capital raising activities, are segregated by physical and non-physical boundaries from Trading units and Sales Units, as well as the equity research department. Within the Group, the fund management and corporate, retail and private banking arms operate through different legal entities, which reinforces the containment of information between entities. Disclosure of publicly available conflicts of interest and other material interests is made in the research. Analysts are supervised and man-aged on a day-to-day basis by line managers who do not have responsibility for Investment Banking activities, including corporate finance activities, or other activities other than the fixed income and macro economic research. The remuneration of the analyst(s) responsible for covering the securi-ties in this report is not tied to investment banking transactions or services performed by UBM or by the Group.

Distribution in other countries This document may not be distributed in Canada or Australia.

Notice to U.K. residents: This report is intended for clients of Bayerische Hypo- und Vereinsbank AG and UniCredit Banca Mobiliare S.p.A. who are market counterparties or inter-mediate customers (both as defined by the “FSA”, the Financial Services Authority) and is not intended for use by any other person, in particular, private customers as defined by the FSA Rules. This report is not to be construed as a solicitation to buy or an offer to sell any securities. The information in this publication is based on carefully selected sources believed to be reliable, but we do not make any representation with respect to its completeness or accu-racy. All opinions expressed in this report reflect our assessment at this time and are subject to change without notice.

We and/or other members of Bayerische Hypo- und Vereinsbank Group may take a long or short position and buy or sell securities mentioned in this publication. We and/or members of Bayerische Hypo- und Vereinsbank Group may act as investment bankers and/or commercial bankers for issuers of securities mentioned, be represented on the board of such issuers and/or act as “market makers” for such securities. The Bank and its affiliates may also, from time to time, have a consulting relationship with a company mentioned in this report.

The investment opportunities discussed in this report may be unsuitable for certain investors depending on their specific investment objectives and financial position. Investors are recommended to obtain the advice of their banker/broker about investments prior to entering into them.




This document has been approved for distribution in UK by UBM London, regulated by the FSA for the conduct of Investment Business in the UK. Bayerische Hypo- und Vereinsbank AG London branch is regulated by FSA for the conduct of designated investment business in the UK. The UBM London Conflicts Man-agement Policy is available upon request.

Notice to U.S. residents: This report is intended solely for persons who qualify as "major US institutional investors" (as defined in Rule 15a-6 under the U.S. Securities Ex-change Act of 1934, as amended) as such term has been interpreted by the U.S. Securities and Exchange Commission. Each U.S. recipient of this report represents and agrees, by virtue of its acceptance thereof, that it is such a "major U.S. institutional investor" and that it understands the risks involved in executing transactions in such securities. Any U.S. recipient of this report that wishes to discuss or receive additional information regard-ing any security or issuer mentioned herein must contact a registered representative of HVB Capital Markets, Inc. (“HVB Capital”).

Any transaction by U.S. persons (other than a registered U.S. broker-dealer or bank acting in a broker-dealer capacity) must be effected with or through HVB Capital Markets.

The securities of non-U.S. issuers referred to in this report may not be registered for sale in the U.S. or subject to U.S. reporting and/or other re-quirements. Available information regarding such non-U.S. issuers may be limited, and such non-U.S. issuers may not be subject to the same audit-ing and reporting standards as U.S. issuers.

The information contained in this report is intended solely for certain "major U.S. institutional investors", and may not be used or relied upon by any other person for any purpose. Such information is provided for informational purposes only and does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as amended, or under any other U.S. federal or state securities laws, rules or regulations. The investment opportunities discussed in this report may be unsuitable for certain investors depending on their specific investment objectives, risk toler-ance and financial position.

In jurisdictions where HVB Capital is not registered or licensed to trade in securities, commodities or other financial products, transactions may be executed only in accordance with applicable law and legislation, which may vary from jurisdiction to jurisdiction and which may require that a transac-tion be made in accordance with applicable exemptions from registration or licensing requirements.

The information in this publication is based on carefully selected sources believed to be reliable, but HVB Capital does not make any representation with respect to its completeness or accuracy. All opinions expressed herein reflect HVB Capital's judgment at the original time of publication, without regard to the date on which you may receive such information, and are subject to change without notice.

HVB Capital may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. These publications reflect the different assumptions, views and analytical methods of the analysts who prepared them. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is provided in relation to future performance.

HVB Capital and any company affiliated with it may, with respect to any securities discussed herein: (a) take a long or short position and buy or sell such securities; (b) act as investment and/or commercial bankers for issuers of such securities; (c) act as market makers for such securities; (d) serve on the board of any issuer of such securities; and (e) act as paid consultant or advisor to any issuer.

The information contained herein may include forward-looking statements within the meaning of U.S. federal securities laws that are subject to risks and uncertainties. Factors that could cause a company’s actual results and financial condition to differ from expectations include, without limitation: political uncertainty, changes in general economic conditions that adversely affect the level of demand for the company’s products or services, changes foreign exchange markets, changes in international and domestic financial markets and in the competitive environment, and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement.




CONTACTS

GLOBAL RESEARCH* Thorsten Weinelt, CFA, Global Head of Research & Chief Strategist (HVB) +49 89 378-15110 [email protected]

GLOBAL CREDIT RESEARCH Luis Maglanoc, CFA, Head (HVB) +49 89 378-12708 [email protected]

Credit Strategy & Structured Credit

Dr. Jochen Felsenheimer, Head (HVB) +49 89 378-18188 [email protected]

Dr. Philip Gisdakis (HVB) Quantitative Credit Strategy +49 89 378-13228 [email protected]

Dr. Marco Krohn (HVB) Structured Credit +49 89 378-12250 [email protected]

Gianna Julia Wisser (HVB) +49 89 378-13229 [email protected]

Financials Credit Research

Luis Maglanoc, CFA, Head (HVB) Banks +49 89 378-12708 [email protected]

Franz Rudolf, CEFA, Deputy Head (HVB) Covered Bonds +49 89 378-12449 [email protected]

Andrea Crepaz (HVB) Insurance, Banks +49 89 378-11432 [email protected]

Florian Hillenbrand (HVB) Covered Bonds +49 89 378-12961 [email protected]

Alexander Plenk, CFA (HVB) Banks +49 89 378-12429 [email protected]

Valentina Stadler (HVB) Sub-Sovereigns & Agencies +49 89 378-16296 [email protected]

Corporate Credit Research

Dr. Felix Fischer, CFA, Co-Head (HVB) General Industries, Construction & Materials, Tobacco +49 89 378-15449 [email protected]

Dr. Sven Kreitmair, CFA, Co-Head (HVB) Automobiles & Parts, Industrial G&S, Aerospace & Defense +49 89 378-13246 [email protected]

Jana Arndt, CFA (HVB) Basic Resources, Travel & Leisure, Packaging +49 89 378-13211 [email protected]

Alejandra Diez (UBM) Utilities +39 02 8862-2036 [email protected]

Stephan Haber (HVB) Telecoms, Media, Technology +49 89 378-15192 [email protected]

Carmen Hummel (HVB) Food & Beverage, Personal & Household Goods, Retail +49 89 378-12252 [email protected]

Christian Kleindienst (HVB) Utilities, Oil & Gas +49 89 378-12650 [email protected]

Jochen Schlachter (HVB) Chemicals, Healthcare +49 89 378-13212 [email protected]

Publication Address

Bayerische Hypo- und Vereinsbank AG Global Research Arabellastrasse 12 D-81925 Munich

Tel. +49 89 378-12759 Fax. +49 89 378-16237

Bloomberg

HVCA Internet

www.hvbmarkets.de *Global Research is the joint research department of Bayerische Hypo- und Vereinsbank AG (HVB), CA IB International Markets AG (CAIB), and UniCredit Banca Mobiliare S.p.A (UBM).

credit vie · 2012. 6. 6. · 2 global credit research covered bonds credit view - im cédulas 10...

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