Euro HY Xover 2008-09-17 Unicredit

Euro High Yield & Crossovers September 17, 2008 European High Yield

Global Credit Research

Bayerische Hypo- und Vereinsbank AG ● UniCredit CAIB Group page 1 See last pages for disclaimer.

Run to the Hills… With the twenty-first issue of our HYCO publication, we cease coverage of Ahold, Fiat and Bayer's hybrid, which were upgraded to investment grade as well as Gildemeister, which was called. Adding to our coverage, we welcome fallen angel Stora Enso to our universe.

● Macro Outlook with double whammy scenario: On the one hand, rising risk aversion has hit companies on the refinancing side. On the other hand, we still have y-o-y higher energy and raw material costs, and finally, a measurable slowdown in economic activity.

● Debt-Equity Linkage: The debt-equity correlation indicates that current valuations are still moderate compared to peak levels during the 2002/03 crisis. The ML EUR HY index currently trades slightly below 700 bp, while the peak level in October 2002 was almost 1100 bp. Hence, there is still some way to go until markets are in comparable stress.

● Credit Quality: Entering the famous third leg of the credit crisis, credit quality will further deteriorate. Since mid-2007, downgrades have been already outnumbering upgrades. Moreover, the momentum of deteriorating credit quality points to the downside. We expect the credit quality cycle will not reach bottom before Q1 2010!

GLOBAL HY DEFAULT RATES AND FORECASTS

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Source: Moody's, S&P, UniCredit Global Research

● Supply: Investors fear that a flood of new issues could hit markets in the coming weeks. However, these issues are obviously not expected to come from the high yield side, but in particular from financial institutions and investment grade companies. However, new HY investment opportunities may evolve from fallen angels.

● Changes to our recommendation list: We replace the Bayer and Südzucker perpetuals with Grohe and Peri while we keep our buy recommendations for Cognis (sen.), Fresenius, HECKKO, ISS, SGL Carbon, Lottomatica (Perp.), TDCDC, Unity Media and Wind.

Contents Recommended List _______________________ 2Portfolio Allocation________________________ 3Performance Analysis _____________________ 3Story of the Month ________________________ 4HY Credit Drivers_________________________ 5Automotive____________________________ 10

A.T.U (SELL) _________________________ 12Dürr (HOLD)__________________________ 18Europcar (BUY FRN/SELL Sub) __________ 25Ford (SELL) __________________________ 33General Motors (SELL) _________________ 40GMAC (SELL) ________________________ 46

Chemicals ____________________________ 50LyondellBasell (SELL) __________________ 51Cognis (BUY) _________________________ 58EVONIK (Degussa) (SELL) ______________ 66Ineos (SELL) _________________________ 72Rhodia (BUY)_________________________ 79

Consumer_____________________________ 86ESCADA AG (HOLD)___________________ 87Head (SELL) _________________________ 93Hornbach (BUY)_______________________ 99

General Industries_____________________ 105Bombardier (BUY) ____________________ 107Ceva Logistics (SELL) _________________ 115El Paso Corp. (HOLD) _________________ 123Fresenius SE (BUY)___________________ 130Grohe (Buy FRN/Hold Sub) _____________ 138Heckler & Koch (BUY) _________________ 146ISS (BUY) __________________________ 152Logwin (previously Thiel Logistik) (SELL) __ 159Peri (BUY) __________________________ 165SGL Carbon (BUY) ___________________ 171

Paper and Packaging __________________ 178Gerresheimer (HOLD) _________________ 180Lecta (SELL) ________________________ 187M-real (SELL)________________________ 195Norske Skog (SELL) __________________ 202Stora Enso (SELL) ____________________ 208

TMT_________________________________ 214Alcatel-Lucent (SELL) _________________ 220Kabel Deutschland GmbH (BUY)_________ 227Nielsen/VNU (BUY) ___________________ 235NTCH / TDC (BUY) ___________________ 242NXP B.V. (SELL) _____________________ 249ONO (SELL)_________________________ 257Seat Pagine (SELL) ___________________ 265Truvo/WDAC (SELL) __________________ 272Unitymedia GmbH (BUY) _______________ 279Versatel (SELL) ______________________ 288Virgin Media (HOLD) __________________ 294Wind Hellas (SELL) ___________________ 302Wind Telecomunicazioni SpA (BUY) ______ 311

High Yield Corporate Hybrids ___________ 318Lottomatica (BUY) ____________________ 319Michelin (SELL) ______________________ 322Südzucker (BUY) _____________________ 325Wienerberger (SELL) __________________ 328

Authors Corporate Credit Research Team Bloomberg / Internet UCCR / www.globalresearch.unicreditmib.eu

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Euro High Yield & Crossovers

September 17, 2008 Global Credit Research

Bayerische Hypo- und Vereinsbank AG ● UniCredit CAIB Group page 2

RECOMMENDED LIST (SEPTEMBER 2008)

Company Name Sector Rating Coupon Maturity Ask price Z-spread Yield AnalystBombardier Industrials Ba2/BB/BB- 7.250% 11/16 98 302 7.72 ArndtCognis Chemicals B1/B/BB- FRN 09/13 90 451 9.48 SchlachterFresenius Industrials Ba2/BB/BB 5.500% 01/16 83 411 8.86 SchlachterGrohe Industrials B2/B/-- FRN 01/14 87.5 598 10.94 SchlachterHeckler & Koch Industrials B2/B-/-- 9.250% 07/11 102.5 307 7.89 KreitmairHornbach Consumer Ba3/BB-/-- 6.125% 11/14 96 239 7.05 HummelISS Industrials Caa1/B-/-- 8.875% 05/16 87 689 11.79 ArndtLottomatica (Perp.) Consumer Ba3/BB/-- 8.250% 03/66 86 645 11.06 HummelPeri Industrials Ba1/BBB-/-- 5.625% 12/11 97.5 194 6.60 ArndtSGL Carbon Industrials Ba1/BBB-/-- FRN 05/15 92 279 7.75 ArndtTDC TMT B2/B/B+ 8.250% 05/16 92.75 501 9.84 HaberUnity Media TMT Caa2/CCC+ 8.750% 02/15 94.25 545 10.23 HaberVNU TMT Caa1/CCC+/CCC+ 11.125% 08/16 60.5 955 14.63 KreitmairWind SpA TMT B2/B-/BB 9.750% 12/15 99 537 10.19 Haber

Incl.: Grohe, Peri; Excl.: Suedzucker (Perp.), Bayer (Perp.)

ANNUAL CREDIT STATISTICS & ESTIMATES ON RECOMMENDED LIST

Company Name EBITDA (rep.) Net Debt/EBITDA (adj.) EBITDA / Net interest cover (rep.) 2007 2008e 2009e 2007 2008e 2009e 2007 2008e 2009eBombardier (in USD mn) 1,252 1,913 2,010 1.7x 0.8x 0.7x 4.2x 22.8x 118.2xCognis 360 341 n.a. 5.5x 5.1x n.a. 2.0x 2.3x n.a.Fresenius 2,029 2,063 2,517 2.9x 4.1x 3.4x 4.4x 4.3x 4.0xGrohe 10 159 175 100x 6.8x 6.1x 1.8x 1.8x 2.0xHeckler & Koch 20 29 29 2.1x 3.0x 3.1x 5.3x 3.9x 3.6xHornbach 142 181 n.a. 4.0x 3.9x n.a. 7.0x 6.5x n.a.ISS (in DKK mn) 4,484 4,943 5,513 5.7x 5.6x 5.5x 2.0x 2.0x 2.1xLottomatica (Perp.) 677 n.a. n.a. 3.7 n.a. n.a. 3.3x n.a. n.a.Peri 356 362 395 1.7x 2.0x 2.1x 11.5x 10.4x 10.4xSGL Carbon 304 354 391 1.5x 1.5x 1.5x 8.9x 9.1x 9.8xTDC (in DKK mn) 12,427 12,676 12,929 2.7x 2.2x 2.2x 4.4x 4.2x 4.0xUnity Media 291 416 421 5.4x 3.6x 3.5x 2.0x 5.0x 3.3xVNU 873 978 1,089 7.3x 7.2x 6.9x 1.4x 1.5x 1.7xWind SpA 1,811 1,876 1,940 5.2x 4.9x 4.7x 3.5x 4.2x 4.3x

ABSOLUTE & RELATIVE PERFORMANCE OF OUR RECOMMENDED LIST FROM APRIL 28, 2008 TO SEPTEMBER 16, 2008

Company Name Bid Price 09/16 Price 04/29 TR since April. Price Gain Accrued Gain Rel. Perf.**ML EUR HY (Constrained) 128.27 120.385 -6.15% UniCredit Portfolio* -2.92% -5.86% 2.94% 3.23%Bombardier 96.00 101.25 -2.38% -5.19% 2.80% 3.76%Bayer (Perp.) 82.75 89.00 -5.09% -7.02% 1.93% 1.06%Cognis 88.00 89.50 0.97% -1.68% 2.64% 7.11%Fresenius 81.00 97.00 -14.37% -16.49% 2.12% -8.22%Heckler & Koch 101.50 97.50 7.68% 4.10% 3.57% 13.82%Hornbach 94.00 94.00 2.37% 0.00% 2.37% 8.51%ISS 85.00 98.00 -9.84% -13.27% 3.43% -3.69%Lottomatica (Perp.) 84.00 95.00 -8.39% -11.58% 3.19% -2.24%SGL Carbon 90.00 91.00 1.25% -1.10% 2.34% 7.39%Südzucker (Perp.) 72.00 75.00 -1.97% -4.00% 2.03% 4.18%TDC 91.75 98.00 -3.19% -6.38% 3.19% 2.96%Unity Media 92.25 95.00 0.49% -2.89% 3.38% 6.63%VNU 59.50 66.00 -5.50% -9.85% 4.35% 0.64%Wind SpA 98.00 105.00 -2.90% -6.67% 3.77% 3.25%

* We use ask prices for new included issues and bid prices for bonds, which we already carry in our portfolio.

** Excess return in % versus the ML Euro High Yield Constrained Index; the portfolio includes our recommended list, with all bonds being equally weighted.

Source for all tables above: Bloomberg; Merrill Lynch indices, UniCredit Global Research

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Portfolio Allocation The last few months have been characterized by huge spread swings

Systematic spread risk experienced huge swings since our last HYCO publication inApril 2008. After the iTraxx Crossover peaked at 635 bp in mid-March, credit markets entered into a two month long tightening trend, which brought credit indices back tothe 400 bp area. However, from mid-May on, spreads started to widen and especially the crossover underperformed the investment grade indices reaching levels above 550 bp in August 2008. This translates into roughly 85% of the peak level from March 2008.The iTraxx Main, on the other hand, peaked in March at around 160 bp and traded at around 100 bp in summer, which translates into only 60% of the peak level. At the same time, cash high yield bond spreads tightened from March peaks at 640 bp to 450 bpand widened to 700 bp at the beginning of September. However, due to the Lehmandefault, the crossover even shot to 670 bp on an intraday level, while the iTraxx Main traded at 155 bp. Given our view that the credit crisis will eventually spill over to the real economy, we remain cautious on our portfolio selection and we prefer moredefensive names, such as Heckler & Koch.

We prefer a defensive portfolio In the current phase of the crisis, name picking plays a crucial part in the strategic portfolio allocation rather than pure sector plays. In order to facilitate this name picking, we significantlyreduced our "hold" recommendations from 19 to 5, in order to give investors a clear guidance for a defensive portfolio. Hence, avoiding credit bombs is as important as it was in 2002. Moreover, due to the ongoing risk of decoupling between the cash and CDS market, hedgingcash portfolios with the iTraxx Crossover can be a complicated task. Consequently, we implement a defensive allocation in our recommended list, underweighting high beta names incyclical industries such as industrials and paper & packaging. We explicitly like names withstrong fundamentals, preferably in non-cyclical industries with stable or positive rating developments and, clearly, no liquidity concerns or potential covenant breaches.Nevertheless, our bottom-up view remains the dominating parameter for performancegeneration strategies. Alpha-picking remains an appropriate strategy during times when spillover effects rather than rational valuation of single credits are the name of the game.

We include Grohe and Peri and remove Suedzucker (perp) and Bayer (perp)

Compared to our recommended list in April, we changed two positions in our single name pick list. We keep Bombardier, Cognis, Fresenius, Heckler & Koch, Hornbach, ISS, Lottomatica(perp), SGL Carbon, TDC, Unity Media, VNU and Wind on our pick list, while we add Grohe and Peri. The Suedzucker (perp) and the Bayer (perp) were removed from our list.

Performance Analysis Since April 28, the benchmark return (ML Euro HY constraint index) was down by about

6.15%, due to the massive recent spread widening. Due to our more defensive portfolio, we outperformed the benchmark on average by 3.23%.

Our portfolio generated a negative price return of -5.86% since April, which was only partly offset by an accrued gain of 2.94%, leading to a total return of -2.92%. Since May 2003, however, we outperformed the benchmark by 10.15%. The best performing recommendation was Heckler & Koch with a benchmark related performance of 13.8%, followed by Hornbach with 8.5%, SGL Carbon with +7.9% and Cognis with +7.1%. On the underperforming side Fresenius was the major loser (-8.2% benchmark-related performance), followed by ISS (-3.7%)and the Lottomatica perp (-2.2%).

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Story of the Month

Crossovers, Fallen Angels and Distressed Credits Rising dispersion in high yield credit quality …

The recent developments in credit markets shook up the high yield and crossoversuniverse. The iTraxx Crossover, for example, includes roughly ten names that trade on an upfront basis (NXP, LyondellBasell, ONO, Truvo, Hellas, Ineos, FCE Bank, Seat Pagine Gialle, Norske Skogindustrier and Grohe), which translates into a spread above the 800-1,000 bp area (a typical definition for a distressed credit). Furthermore, in linewith the current state of the credit cycle, fallen angels start to become a major topic forhigh yield investors. The most well-known names are: ITV (junked August/September2008), Stora Enso (junked April/July 2008), DSG (junked in May/June 2008), UPM(junked at Fitch in July 2008) and Pernod-Ricard (junked April/July 2008). But there isalso a number of crossover names that are still fully investment grade, but tradedangerously close to high yield levels (5Y CDS > 300 bp): CIR (BBB-wn), Kingfisher (Baa3n/BBB-n/BBB-n), British Airways (Baa3n/BBB-n), Rentokil (--/BBB-s), Marks & Spencer (Baa2wn/BBBn/BBB+n), Next (Baa2s/BBBs/BBBs) and Heidelberg Cement (Baa3n/BBBs/BBB-n).

… due to an increasing number of fallen angels

As a consequence of this development (weak names were hammered into distressed levels, while a rising number of fallen angels and crossovers enter the arena), dispersion isincreasing in the high yield universe. However, especially the rising number of fallen angels will keep high yield portfolio managers busy over the next few quarters, as this developmentwill offset the dull primary market activity. But not only the junked names, but also those that are at the brink of a downgrade could be interesting, as they could still allow for defensive portfolio allocations in an environment where rising default rates will force many of the weakhigh yield credits to their knees.

Investment idea on distressed names

But also the distressed credits might allow for interesting investment strategies. Selling protection in the ten most distressed names (see below) creates an upfront payment of 240%of the individual exposure. For a 10-name basket of EUR 1 mn each this translates into EUR 2.4 mn. This means that – ignoring the 500 bp coupon – the investor can withstand about 4 defaults with a 40% recovery rate, which makes it a kind of mezzanine tranche. This tradeclearly depends very much on the recovery rate, the default correlation, but also on the timingof the default. Due to the 500 bp coupon, later defaults will be beneficial for the investor.

TEN MOST DISTRESSED NAMES IN THE ITRAXX CROSSOVER S9

Average spread of distressed names versus the iTraxx Crossover Company CDS Ticker 5Y Spread Upfront Pmt

NXP CT404642 1875 31.46%

LyondellBasell CT351709 1790 30.31%

Ono CT358298 1775 30.07%

Truvo CT352849 1565 26.77%

Hellas Telecom CT701890 1545 26.41%

Ineos CT358901 1500 25.59%

FCE Bank CFMCR1E5 1300 21.78%

Seat Pagine CPGI1E5 1150 18.71%

Norske Skog CT780259 1075 16.88%

Grohe CGRO1E5 965 14.16%

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Source: Bloomberg, UniCredit Global Research

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HY Credit Drivers

Macro Outlook: The "R" Word is no longer taboo The risk of a technical recession in the eurozone is rising

The environment for high yield credits is becoming increasingly unfriendly, as they areconfronted with a double whammy scenario. On the one side, the rising risk aversion which starts to feel more like a credit crunch hits the companies on the refinancing side. On the other side, there are increasing energy and raw material costs, and finally,a measurable slowdown in economic activity. After having contracted in Q2, EMU GDPshould barely grow in the third quarter. Business surveys suggest that the underlying growth momentum has practically come to a halt, and the risk of a technical recessionis rising. Our economists have lowered their GDP forecast for H2 and now expect only 0.1% q-o-q growth both in Q3 and Q4. GDP should be up 1.3% in 2008 and 0.8% in 2009.A resumption of trend growth is expected no earlier than 2010. Weakness is becoming increasingly broad based, leaving the eurozone with no growth engine. Sluggish consumption and exports are bound to take a severe toll on investment, also hit by the construction slowdown. Nevertheless, the newly updated ECB staff forecasts depict amore benign picture than our baseline scenario. We suspect the central bank will have to downgrade further its GDP outlook in three months' time.

Bleak outlook However, more worrying than the fact that Q2 GDP dipped into negative territory is thatbusiness surveys have continued deteriorating so far in the third quarter, suggesting that underlying growth momentum is now flirting with stagnation. After several months ofsurprisingly good resilience, it looks like the real economy has eventually capitulated to the lagged effects of tighter financial conditions and the energy shock, with the slowdowninvolving all demand components and sectors. Manufacturing activity is sinking like a stoneand there is no reason to expect an improvement anytime soon. Risks to these projections remain to the downside. In 2009, one can expect a modest recovery at a pace which is abouthalf the area’s potential, but the weaker speed of entrance implies that the full-year average dips to 0.8%. Our economists remain convinced that a return to around-trend quarterly rates will be a matter of 2010 at the earliest, provided that the exchange rate continues to weakenand the refi rate is cut starting next spring, which they predict. Moreover, the export slowdown has begun, and will probably intensify in coming months as global growth continues to ease and the lagged effect of euro appreciation feeds through – the peak in the trade weightedeuro was hit in April, while the currency’s moves tend to have their largest impact on GDPgrowth after about three quarters.

Single country level Due to the August plunge in the Ifo expectations component, our forecast is for a technical recession in Germany, where a 0.1% GDP contraction is expected in Q3 and a flat reading in Q4 (yearly average: 1.5% in 2008 and 0.6% in 2009). For France, the forecast is 0.9% annualized growth in H2 (which implies 1.1% for 2008 as a whole, and 1.0% for 2009), whilein Italy our economists envisage complete stagnation in the second half of 2008, with risingrisks of recession (GDP growth should be up 0.1% this year and 0.3% the next).

Recent easing in oil price and EUR are not signs of immediate relief

In our view, the recent drop in the oil price and euro weakness are not signs of immediate relief, but highlight just the fact that the crisis already has eroded economic fundamentals globally, and, as can be seen at the large drop in the EUR, especially in Euroland. It is clearthat the fact that the oil price returned to more normal levels is supportive. Nevertheless, weshould not ignore that the current oil price of around USD 100 p/b simply means that we are trading in the area of March 2008 levels. This is still way above the 2007 levels, which werealready seen as a burden for economic growth. Moreover, the same is true for the EUR.

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Debt-Equity Linkage: The real HY investment cycle The S&P500 marked its high as late as October 2007

During the last 15 months of the crisis, the debt-equity linkage was under debate. A single question highlights this: when did the S&P500 mark its high in 2007? Right, October 9, more than three months after the credit crisis surfaced. It took until the beginning of 2008 before equity markets experienced a more drastic sell-off. However, as our analysis shows, the HY debt-equity cycle was intact during the whole crisis.

Nevertheless, the debt equity linkage is in principle intact for HY credits

For our analysis, we refer to the ML EUR High Yield index (asset-swap spreads) and the DJ Stoxx Mid 200 midcap index. In the right chart below, we show the time series of both indices since the end of the 90s (note that the stock index levels are given in reverse order in order tohighlight the correlation), while in the right chart below, we highlight the corresponding scatterplot. In the latter, we show a data point for each pair of closing levels – the HY index spread and the stock index level. Both charts nicely demonstrate the debt-equity linkage. As can be seen in the right chart below, there is in general a negative linkage between both indices:when the stock index surges, credit spreads tighten, and vice versa. However, the linkage isnot a straight line, but resembles more an ellipsoid. This is due to the fact that there are timeswhen this classical dependency pattern reverses, which is typically the case when theinvestment cycle turns – from boom to bust, but also in the other direction. What is especiallyinteresting is that during the latest turning, the duration of the fundamental decoupling wasvery short. As a consequence, the peak at the lower right end of the right chart below is quite sharp. The similar chart for investment grade spreads and large cap stocks has a much more obtuse angle. This however, is typical difference between HY and investment grade credits.For the former, credit and stock investors act much more in concert than for investment grade companies, because typically both investors suffer strongly when the economy turns sour.

Moreover, the correlation indicates that current valuations – in stock, as well as in creditmarkets – are still moderate compared to peak levels during the last crisis. Merrill Lynch EURHY index currently trades slightly below 700 bp, while the peak level in October 2002 was atalmost 1100 bp. Hence, there is still some way to go until markets are in a comparable stress as in the aftermath of the bursting of the new economy bubble. However, when keeping inmind how much leverage was applied in buyout transactions in the run-up to the credit crisis, there is no reason why the impact of the current crisis on HY spreads should be significantly lower than during 2002. In case a more severe recession will hit the US and Euroland, anaverage HY spread north of 1000 bp should not be much of a surprise.

LINKAGE BETWEEN EURO HIGH YIELD SPREADS AND MID-CAP STOCKS

The time series… …versus the scatter plot

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Credit Quality: The escalator is descending Rating drift… Entering the famous third leg of the crisis, single-name default risk will become the

major topic. As can be seen by the rating drift (left chart below), the credit quality is deteriorating. In mid-2007, this figure dropped into negative terrain, which means thatdowngrades are outnumbering upgrades. Moreover, the momentum points to the downside and, compared to the peak level in the 2002/03 downturn, there is still some way to go. We expect the quality cycle will not reach a bottom before Q1 2010!

…and expected default rates are pointing in negative direction

In line with the deterioration of credit fundamentals, rating agencies expect the default rate to pick up substantially. In the base case scenario, the global speculative grade default rate isexpected to increase from 2.45% to 6.3% in one year, while in the pessimistic case it couldeven reach levels above 10%. Moreover, even the optimistic expectation of almost 5% doesnot appear to be too positive. However, inspecting the list of real defaults (see table below)there are still no major companies, with ResCap being the main exception. However, we stick to our view that there will not only be an increase in the number of defaults, but also in thevisibility of the defaulted companies.

CORPORATE RATING DRIFT GLOBAL HY DEFAULT RATES AND FORECASTS

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Twelve Months Ending

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GlobalDirectionUSDirectionEuropeDirection

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Source: Moody's; S&P; UniCredit Global Research

RECENT DEFAULTS REPORTED BY MOODY'S

Company

Default Event

Default Amount

Specific Industry

Domicile

At Default

1-Yr Prior

Default Type

Jun-08 Six Flags Distressed exchange USD 31 Hotel, Gaming, & Leisure US Caa2 Caa1 Bond Herbst Gaming Missed interest pmt USD 170 Hotel, Gaming, & Leisure US C B2 Bond Residential Capital Distressed exchange USD 8,618 FIRE: Real Estate US Ca Baa3 BondJul-08 ACIH Missed interest pmt USD 174 Capital Equipment Caa3 Caa1 Bond Ainsworth Lumber Distressed exchange USD 824 Forest Products & Paper Canada Caa3 B2 Bond Belvedere Chapter 11 USD 729 Beverage, Food, & Tobacco France Caa2 B3 Bond Pierre Foods Missed interest pmt USD 125 Beverage, Food, & Tobacco US C B2 Bond SemGroup Finance Chapter 11 USD 600 Energy: Oil & Gas US Caa3 B1 Bond SemGroup LP Chapter 11 USD 600 Energy: Oil & Gas US Caa3 B1 BondAug-08 Hines Horticulture Chapter 11 USD 175 Consumer goods: non-durable US WR Caa2 Bond Hines Nurseries Chapter 11 USD 175 Consumer goods: non-durable US WR Caa2 Bond Mrs. Fields Famous Brands Prepackaged Chap 11 USD 196 Hotel, Gaming, & Leisure US Ca Caa2 Bond Portola Packaging Prepackaged Chap 11 USD 180 Containers, Packaging, & Glass US Ca Caa2 Bond WCI Communities Chapter 11 USD 650 Construction & Building US Ca Caa1 Bond

Source: Moody's; UniCredit Global Research

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Market Valuation: The third leg is still ahead of us Recession – the ultimate threat in a credit crisis, especially for high yield credits

Do we see light at the end of the tunnel or is the worst still ahead of us? Many times during this crisis there were voices that the worst of the crisis could already be behindus. However, it is clear that the underlying drivers of a real credit crisis are so complicated that spreads typically do not move in a straight line from the beginning tothe peak and then back again, but rather follow a bumpy path of ups and downs.However, a quite basic economic analysis shows us that the first developments in a credit crisis are characterized by more technical factors, while the real economic impact takes some time. Nevertheless, the infection of the real economy is the ultimatethreat of a credit crisis, which will, in the end, especially hit weaker credits.

The theory In general, a banking and credit crisis shows the following course: the first leg is a kind ofliquidity squeeze (summer 2007), triggering a first wave of spread widening. The second leginvolves accelerating write-downs and credit losses (starting in spring 2008) and the third leg will be a macro economic deterioration. This would be a prototype of a credit crisis, while inpractice there is an overlap between those stylized legs: liquidity is still a concern, we are inthe middle of the subprime mess, while the macro deterioration already has begun.

A PROTOTYPE OF A CREDIT CRISIS

Spread

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2nd leg: credit losses

3rd leg: macro deterioration

Are we here?

Spread

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2nd leg: credit losses

3rd leg: macro deterioration

Are we here?

Source: UniCredit Global Research

The past What we know from previous crises is the following: 1. The third leg is the worst. 2. The macro-economic downturn could trigger knock-on effects leading to a vicious cycle. 3. Financial shares plunged up to 90%. 4. A prolonged downturn-scenario is not only a theoretical possibility (best example: the Japanese stock market). 5. The higher the leveragein the market (e.g., via derivatives), the more shaky the adjustment path towards a new equilibrium. What is definitely different in this crisis vs. previous ones is the combination ofnew technology, the use of innovative vehicles, and record leverage in the credit universe.

The future Where are we right now? We can stress some indicators which should provide us with apretty good idea of how far we are from a new stable equilibrium: Debt-asset indicators for US households, the real estate yield compared to borrowing costs in distressed housing markets,money market indicators, etc. However, the over/undershooting phenomenon itself does notallow us to differentiate between a stable and a temporary equilibrium! Returning tofundamentals, we think that write-downs in the banking industry will accompany us for a while. The next step should be rising default rates, which will be a topic at the latest in 2009, but alsoin 2010. During the last crisis, we have seen the spread peak (10/2002) just three monthsahead of the default peak (12M trailing; 1/2003)! That said, the crisis might take much longer than anticipated by many. This is, at least, a valid worst-case assumption.

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Supply & Demand Side Investors fear that a flood of new issues could hit markets in the upcoming weeks.

However, these issues are obviously not expected to come from the high yield side, but in particular from financial institutions and investment grade corporates. Thereason for the anticipated increasing primary market activity is that most other fundingmarkets for banks – in particular ABS – are not available. Hence, banks are tapping the senior unsecured bond markets in order to fund their business. However, this has twoimplications for High Yield credits: 1. it will absorb a lot of investors' cash, and 2. it will trigger a repricing of all credit curves.

HY supply virtually dropped to zero

Issuance activity of high yield issuers has been more than dull this year (with the exception of emerging markets corporates). So far, there have been EUR high yield bonds from FCE Bank(August and September), Sensata, (July) and Strabag (June), while there has been a GBPbond from ITV in July. In total, this amounts to USD 1.5 bn. Moreover, Fresenius is planning to issue overall USD 1.3 bn equivalent in bonds, thereof approximately EUR 200 mn in Eurobonds. Against this background, we do not expect high yield primary market activity topick up significantly in the remainder of the year. The most crucial reasons for the absence ofactivity in the HY primary market are the following: First of all, the significant drop in the LBO market led to reduced funding needs in the absence of new deals. Second, the high fundingcosts due to extremely wide spread levels in the cash and synthetic universe preventedparticularly companies with a poor credit quality from tapping the market as it was simply tooexpensive. And last but not least, the changed risk perception of investors caused a flight toquality that led to even wider requested spreads for HY bonds, even for good-quality issuers due to the increased risk aversion of investors.

PRIMARY MARKET ACTIVITY IN THE HY SEGMENT

Global HY debt issuance in the last few years… …and split up by regions

0

50,000

100,000

150,000

200,000

250,000

2003 2004 2005 2006 2007 2008

in U

SD

mn

Total Year only H1

0

50,000

100,000

150,000

200,000

250,000

2003 2004 2005 2006 2007 2008 (YtD)

in U

SD

mn

North America (US & Canada) Europe Rest of the World


Demand for HY bonds will further decline

Moreover, on the demand side, one needs to take into account the upcoming huge supply of distressed assets as a result of the credit crisis. This will absorb much of the funds that are typically available for higher yielding assets. Moreover, other more technical factors will weigh on demand for pure high yield bonds, such as the still elevated appetite for competingproducts like Schuldscheine and syndicated loans.

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

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Automotive Decline in 2008 sales outlook for autos, especially for the US

With regard to the sales outlook for 2008, we expect a decline in European and US car sales. YTD August 2008, US car sales declined by 11.4% and sales in Europe to June 2008 were down by 2.0%. In the US, the Big 3 Detroit automakers lost market share to Honda, Nissan, VW/Audi and Mercedes in this period. In Europe, Toyota, Honda and GM lost market share to BMW, Mazda and Renault in YTD August 2008.

US: FORD AND GM LOSING YTD 2008 EUROPE: BMW, MAZDA WINNING MARKET SHARE

Chrysler

BMW/Mini

Hyundai/Kia

Mazda

Honda

Mercedes

Toyota/Lexus

Nissan

Ford

GM/Saab

Mitsubishi

Other VW/Audi

0

5

10

15

20

25

-30 -25 -20 -15 -10 -5 0 5YTD 08/08 y-o-y unit change in %

YTD

08/

08 y

-o-y

mar

ket s

hare

in % U.S. total vehicle sales

Mazda

RenaultFiat

VW

Honda

PSA

GM

Hyundai/KiaToyota/Lexus

Ford

Others Daimler BMW

0

5

10

15

20

25

-20 -15 -10 -5 0 5 10YTD 08/08 y-o-y unit change in %

YTD

08/

08 m

arke

t sha

re in

%

EU 25 + EFTA new passenger car registrations

Source: ACEA, UniCredit Global Research

Incentive levels of European OEMs rose in the US

In June and July 2008, GM significantly increased its incentives to stem the salesdecline. The incentive levels at Japanese and Korean OEMs continue to be the lowest.

GM INCREASED ITS INCENTIVES IN JUNE & JULY CHRYSLER'S INVENTORY ALMOST AT 110 DAYS AS OF AUG. 1

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08

Ince

ntiv

e le

vels

in U

SD

Chrysler Group Ford GMEuropean South Korea Japan Big3

50

60

70

80

90

100

110

Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08

No.

of d

ays

need

ed to

sel

l all

inve

ntor

y ve

hicl

es

base

d on

pre

viou

s m

onth

's d

aily

sel

ling

rate

GM Chrysler Ford

Source: Automotive News Data Center, Edmunds.com, UniCredit Global Research

NAFTA production is expected to decrease in 2008

A CAGR of 3.9% for global light vehicle production in the period FY 2008-2010 is expected, fueled by the high-growth regions Eastern Europe, Asia and Middle East. Auto production in 2008 in the NAFTA region should decrease by 6.8% y-o-y to 14.0 mn vehicles. In Western Europe, production in 2008 is expected to decline by 2.6% and to decrease further by 2.7% in 2009.

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GLOBAL OEM LIGHT VEHICLE PRODUCTION AND GROWTH FORECAST (IN UNITS)

North America: 2008 2009 2010 North America: 2008 2009 2010 CAGRGM (+Daewoo/Isuzu) 3,662,317 4,117,759 4,314,407 GM (+Daewoo/Isuzu) -12.8% 12.4% 4.8% 0.9%Ford (+Mazda) 2,643,629 2,677,474 2,759,065 Ford (+Mazda) -6.7% 1.3% 3.0% -0.9%Chrysler 2,117,371 2,151,587 2,137,222 Chrysler -14.4% 1.6% -0.7% -4.8%Renault-Nissan 1,071,854 1,023,668 1,056,234 Renault-Nissan -10.7% -4.5% 3.2% -4.2%VW 427,583 467,783 469,934 VW 5.5% 9.4% 0.5% 5.1%Europe (West+East): Europe (West+East): VW 4,143,775 4,117,613 4,461,227 VW 3.7% -0.6% 8.3% 3.7%PSA 2,818,266 2,820,264 2,880,466 PSA 1.4% 0.1% 2.1% 1.2%Renault-Nissan 3,686,796 3,696,484 3,815,937 Renault-Nissan 5.8% 0.3% 3.2% 3.1%Ford (+Mazda) 2,397,946 2,358,430 2,452,027 Ford (+Mazda) 0.4% -1.6% 4.0% 0.9%GM (+Daewoo/Isuzu) 2,378,740 2,344,800 2,454,875 GM (+Daewoo/Isuzu) 5.2% -1.4% 4.7% 2.8%Fiat (+Ferrari/Maserati) 1,870,852 1,827,624 1,950,338 Fiat (+Ferrari/Maserati) 3.6% -2.3% 6.7% 2.6%Daimler 1,372,483 1,313,463 1,301,393 Daimler 2.0% -4.3% -0.9% -1.1%Global: Global: World 72,177,195 74,709,728 78,868,837 World 2.7% 3.5% 5.6% 3.9%North America 14,002,281 14,682,811 15,339,529 NAFTA -6.8% 4.9% 4.5% 0.7%Western Europe 15,708,177 15,291,481 15,767,747 Western Europe -2.6% -2.7% 3.1% -0.7%Asia 29,687,470 31,280,559 33,094,219 Asia 6.7% 5.4% 5.8% 6.0%Eastern Europe 7,079,066 7,386,763 8,203,290 Eastern Europe 18.4% 4.3% 11.1% 11.1%Middle East 1,018,849 1,163,200 1,290,284 Middle East -8.9% 14.2% 10.9% 4.9%

Source: J.D.Power-LMC Global car forecast Q2 2008, UniCredit Global Research

Difficult auto earnings outlook After a significant increase in industrial metals and oil prices over the last few quarters,there has been a correction on commodity and currency markets since September, mainly on cyclical concerns. Nevertheless, the current still higher oil price level than in the past and cyclical concerns will continue to cut demand for gas-guzzling SUVs that are mostly important for the Big 3. The lower production of auto OEMs, high raw material prices, moreexpensive funding levels of financial services business, lower used vehicle prices and higherdelinquency rates all contribute to a muted earnings environment for OEMs, auto suppliers and auto finance arms of OEMs like Ford Credit or GMAC.

REVERSING TREND IN Q3: RAW MATERIAL PRICES DOWN FROM THEIR HIGHS AND STRONGER USD VS. EUR/JPY

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08

Spo

t pric

e in

US

D/m

etric

ton

0

200

400

600

800

1,000

1,200

LME Cash Market Price Aluminum High-GradeLME Cash Market Price Aluminum AlloyMetal Bulletin Steel Exports Cold Rolled Coil (RS)Metal Bulletin Steel Exports Hot Rolled Coil (RS)

0.60.70.80.91.01.11.21.31.41.51.61.71.8

Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08102030405060708090100110120130140150

USEU Curncy USJY Curncy EUJY Curncy EUCRBRDT Index (RS)


Dr. Sven Kreitmair, CFA (HVB) +49 89 378-13246 [email protected]

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A.T.U (SELL) Investment rationale We change our recommendation for the ATUGRP 10/01/14 floater bond to sell from

hold. Although the bond price dropped already to the 40s, we believe that a covenant breachwith 2008 results or in the quarters thereafter is more likely after disappointing H1 2008results and the likelihood for another covenant waiver and a potential necessary equityinjection has decreased in the current capital market environment.

The company stated that as a result of weaker-than-expected sales in H1 2008 (like-for-like-growth: -8.7%), its EBITDA is EUR 11.5 mn lower than forecasted in the projection submittedto banks. Therefore, we believe that it is increasingly difficult to reach the 2008 EBITDA targetof EUR 85 mn (before one-off items) without a positive impact of the winter business startingin November. This was confirmed as the CFO said at the Q2 conference call that an EBITDAbelow EUR 80 mn in FY 2008 is not unlikely as the LTM H1 2008 EBITDA was EUR 70 mn(before one-off costs). The company's LTM net debt/EBITDA at H1 2008 was 8.3x whereasits 2008 covenant is 8.1x.

Although the company earlier stated that 2/3 of its weak performance was caused internallyand only 1/3 was caused externally, there is heavy execution risk regarding the ultimatesuccess of the company's new business strategy given the significantly changed earnings environment over the last few years. We believe that the increasingly negative like-for-like growth rate (2006: -1.5%, 2007: -3.4%, H1 2008: -8.7%) and the weakening profitability margins will most likely not be easy to be resolved as there are doubts if A.T.U's current growth and diversification strategy will be enough to tackle the changed earningsenvironment.

We believe that in a worst-case scenario and should another covenant breach beforeseeable, potential buyers for A.T.U's distressed assets could be for example VW (toexpand its Stop & Go chain) or Chinese OEMs (distribution channel to sell cars).Nevertheless, we do not believe that the recovery value for bondholders in a Chapter 11procedure will be very high given that most assets (stores, distribution centers) are off-balance sheet financed with operating lease debt. Moody's assigned a LGD5 rating implying aLoss-Given-Default of 89%, meaning a recovery value of 11% for bondholders.

Recent developments On July 8, the company announced that CFO Mueller will leave A.T.U on September 30and Sebastian Ebel, recently appointed Head of Category Management and Controlling,will take over his responsibilities. In August, the press speculated about a personnel reduction by around 1,000 employees. A.T.U's IR confirmed to us that as of September, aworkforce reduction of 1,400 was already executed.

Latest results recap On August 18, the company presented H1 results with a total output declining by 4.8%(Q2: -2.0%) to EUR 623.4 mn due to a negative like-for-like-growth of -8.7% vs. -1.8% y-o-y. In H1 2008, A.T.U opened 16 new branches (9 in Germany), which increased itsnetwork to 642 branches in six European countries (thereof 594 in Germany). EBITDA (adj. inour definition) in H1 2008 decreased to EUR 85 mn vs. EUR 116 mn y-o-y. The FFO margin declined significantly to -6.2% vs. 3.0% y-o-y. Free cash flow declined, however, to EUR -79 mn vs. EUR 19.6 mn on a significant working-capital build-up compared to H1 2007. Reported net debt decreased to EUR 585 mn vs. EUR 726 mn q-o-q due to the recent capital injection of EUR 140 mn by KKR. In LTM H1 2008, FFO/total debt (adj.) declined to 4.4% vs. 8.2% inFY 2007 and net debt/EBITDA (adj.) weakened to 6.5x vs. 5.9x in FY 2007.

Liquidity At H1 2008, the company's liquidity was sufficient with a cash position of EUR 42 mnand an unused revolver of EUR 60 mn. In the H1 conference call, the CFO said that he expects liquidity to be in the range of EUR 40-80 mn at FYE 2008 assuming a like-for-like

<date>




growth in the range from -9% to below 0% for the full year. This would mean a cash flow ofbetween EUR 0 mn to EUR 40 mn in H2 2008.

NEW BUSINESS STRATEGY CONCEPT

Major causes for underperformance 4 cornerstones of new A.T.U 2013 plan – Decrease in mileage driven p.a. and spending for repair/inspection work – Higher seasonality compared to market due to product mix (high share of tires) – Increased competition esp. from OEMs – loss of customers in core car segment (4-12 year old

cars) – Expansion has led to cannibalization effects on existing branches – Low overall customer satisfaction – service and price/performance ratio behind customer

expectations – Over proportional increase in non-material related costs – especially in personnel costs in 2007 – 58 branches performed below required minimum contribution margin (16.1%) to cover indirect

costs – Underperformance intensified due to brand dilution, leadership problems, and decreasing

customer service levels

– Positioning and customer service: Re-establish competitive advantages from brand positioning (esp. to OEMs): Extend product/service range to maintain competitiveness, Improve operational performance, Review and improve underperforming branches

– Top-line measures/ Expansion: Increase LFL base load and non-seasonal business, Slow down German expansion and expand in selected European countries

– Cost measures: Reduce direct and indirect personnel expenses, Source in low-cost countries, Reduce other operating costs

– Execution and monitoring (program office, detailed measures, task forces)

Source: Company reports, UniCredit Global Research

Company outlook/ credit profile trend

The company stated that it would do everything possible to stay within its FYE 2008 covenant. Cash generating measures include for example the reduction of inventories and disposal of non-core activities (e.g. foreign operations) or choosing alternative businessstructures (e.g. recycling business). So far, the company still plans to achieve a 2008 EBITDAof < EUR 100 mn (before one-off items) and 2009 EBITDA is expected to return towards thelevel of 2007 (EUR 105.7 mn) with 2013 aimed to return towards the 2006 level (EUR 164 mn). In 2008, the company reduced its store growth rate and subsequently start-up costs significantly. It opens only stores which are already contracted and too expensive to cancel. It intends toopen only 25 new stores and less than 10 stores in 2009. Immediate cost savings are to comemainly from a reduction of temporary workers and of advertising expenses. Personal cost savings are expected to be EUR 30 mn in 2008 and the run-rate in 2009 of cost savings isexpected to be EUR 70 mn. We estimated a free cash flow to be roughly EUR -76 mn in FY 2008 and to return to a positive amount in FY 2009. This should lead to a covenant net debt/EBITDA of 7.8x in FY 2008 versus a loan covenant of 8.1x.

Model assumptions/risks We base our forecast on the following major assumptions: a) Medium-term sales growth of low single-digit annually; b) Reported EBITDA in FY 2008 of EUR 75 mn (after one-off items) and in FY 2009 of EUR 95 mn; c) Capex of 2.4% of sales annually over the next threeyears.

The main risks relate to an unsuccessful execution of the 2013 plan with cost savings, top-line growth and EBITDA below budget, which would consequently lead to a breach of the new covenants in 2008 or 2009 (e.g. due to unexpected negative deviations at organic growthrate, competition, working capital, raw materials prices that cannot be passed on, cyclicalweakening in Germany, unprofitable growth at A.T.U's foreign stores).

Things to watch ● November 2008: Q3 2008 results

● Negative deviations from current business plan or guidance revisions


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CAPITALIZATION

Senior Credit Facilities Borrower A.T.U Auto-Teile-Unger Holding GmbH Senior Credit Facility Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Shareholder loan 417.6 2014 Bullet 5% Issuer A.T.U Auto-Teile Unger Handels GmbH & Co. KG Senior Credit Facility Used amount (EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Loan Tranche A 122.4 2011 02/10: EUR 26 mn, 08/10: EUR 26 mn,

02/11: EUR 35 mn, 08/11: EUR 35 mn 225 bp

Loan Tranche B 170.8 2012 02/12: EUR 85 mn, 08/12: EUR 85 mn 262.5 bp Loan Tranche C 177.2 2013 02/13: EUR 88 mn, 08/13: EUR 88 mn 312.5 bp Revolver EUR 60 mn 30.0 2013 225 bp Covenants at FYE 2008, FYE 2009 EBITDA/net cash interest: 1.2x, 1.5x Cash flow/total debt: 1x, 1x EBITDAR/net cash interest: 1x, 1x Net debt/EBITDA: 8.1x, 6.6x Notes Issuer A.T.U Auto-Teile-Unger Investment GmbH & Co. KG Senior Subord. Notes 150 2014 Bullet 725 bp Other Indebtedness at H1 2008 Pension obligations: EUR 0.3 mn Other bank debt: EUR 7.2 mn

Source: Company data, UniCredit Global Research

BOND DOCUMENTATION – ATUGR FLOAT 10/01/14

Issuer A.T.U Auto-Teile-Unger Investment GmbH & Co. KG Call/Put Call Schedule On or after October 1, 2006: 102%; 2007: 101%; 2008 and thereafter: 100% Equity claw back Expired Make whole clause No Change of control 101% Guarantees On a senior subordinated basis by each of the guarantors of the senior facilities. Security – Third priority pledge of all partnership interests in the issuer’s immediate subsidiary, AFM Autofahrerfachmarkt

Holding GmbH & Co. KG, and all of the shares of AFM Autofahrerfachmarkt Geschäftsführungs GmbH (AFM Autofahrerfachmarkt Holding GmbH & Co. KG’s general partner) and AFM Autofahrerfachmarkt Beteiligungs GmbH (a limited partner in AFM Autofahrerfachmarkt Holding GmbH & Co. KG).

– Third priority pledge of Proceeds Loan between the Issuer & AFM Autofahrerfachmarkt Holding GmbH & Co. KG. Ranking – Guarantees: senior subordinated obligations of the guarantors; rank junior to senior debt of guarantors; rank equal

with senior subordinated debt of the guarantors; rank senior to debt of the guarantors that is expressly subordinated to the guarantees.

– Notes and the guarantees: rank junior to debt of the other subsidiaries of the issuer that are not guarantors. Certain Covenants Limitation on Debt Fixed charge coverage ratio at least 2x; Most important carve outs/exceptions:

– Debt and any guarantees not exceeding EUR 55 mn. – Capitalized lease obligations, mortgage financings, purchase money obligations and other not exceeding the

greater of EUR 50 mn and 5% of total assets Limitation on Sale of Certain Assets Limit is fixed charge coverage ratio Limitation on Restricted Payments Dividend payments Limitations on Transactions with Affiliates >EUR 10 mn: if not less favorable than comparable transaction with an unrelated person:

>EUR 20 mn: resolution of board of directors Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering Yes


<date>




Business Description – A.T.U Germany's largest independent auto parts retail and service workshop chain. It was founded in 1985. At the end of FY 2007, the company had 626 branches, thereof 585 in Germany, 24 in Austria, 6 in CZ, 6 in NL, 3 in Italy and 2 in Switzerland. A.T.U operates two distribution centers and had 13,928 employees at FYE 2007. Shareholders are: 79.3% KKR, 18.1% Doughty Hanson, 2.6% A.T.U Management.

SALES FROM PARTS (FY 2007)

Accessories10%

Oil and filters7%

Alloy wheels4%

Batteries4%

Other25%

Tires 22%

Spare and wear parts 28%


SALES FROM WORKSHOP SERVICES (FY 2007)

Fitting tires17%

Inspection8%

Others12%

Installation of spare and wear

parts 59%

HU/AU4%


DEBT MATURITY PROFILE H1 2008

<1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years >5 yearsFinancial debt 057 55 26 31 120 326

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook

Comments (Rating Triggers)

S&P B- Negative Downgrade if operating profitability and liquidity worsen

Moody's Caa1 Stable Upgrade, if debt/EBITDA reduction to 6.5x

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

ATUGRP Float + 725 bp 10/1/2014

CCCn/Caa3s/-- EUR 150 5/22/2006 (103)

BOND STRUCTURE

Shareholders

Noteholders

Senior Credit FacilitiesA.T.U Auto-Teile-UngerHandels GmbH & Co. KG

A.T.U Auto-Teile-UngerHolding GmbH

A.T.U Auto-Teile-Unger Beteiligungs GmbH

Operating subsidiaries

A.T.U Auto-Teile-UngerInvestment GmbH & Co. KG

Shareholder loan


<date>




PROFIT AND LOSS (A.T.U)

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 1,068.2 1,144.9 1,237.2 1,316.4 1,380.3 655.0 1,375.8 623.4 1,362.1 1,375.7 1,403.2Raw materials used -370.9 -395.6 -420.1 -448.8 -492.1 -230.0 -493.3 -224.0 -500.9 -493.9 -503.0Personnel costs -387.0 -416.3 -455.2 -473.7 -482.7 -248.2 -509.7 -256.3 -504.0 -499.4 -509.4EBITDA reported 159.3 159.2 94.2 179.6 159.9 44.6 95.9 -6.9 -13.3 95.7 98.9Depreciation and amortization -69.6 -65.1 -74.8 -98.8 -99.2 -50.6 -222.3 -44.1 -102.2 -103.2 -105.2Other operating income/expenses -151.0 -173.8 -267.7 -213.9 -245.2 -132.0 -276.2 -150.0 -282.5 -286.8 -291.9EBIT reported 89.7 94.1 19.4 81.2 61.2 -5.8 -125.7 -51.0 -115.5 -7.5 -6.4Interest result -71.5 -73.3 -68.0 -56.0 -53.4 -26.5 -53.0 -29.3 -53.5 -53.5 -53.5EBT 18.3 20.8 -48.6 24.8 7.4 -32.5 -179.5 -80.3 -168.9 -61.0 -59.8Taxes on income -12.6 -10.3 -15.9 -16.9 -7.5 -0.5 -2.2 0 -2.2 -2.2 -2.2Net income 5.7 10.5 -64.5 8.0 -0.1 -33.0 -181.7 -80.3 -171.1 -63.2 -62.0

MAIN BALANCE SHEET FIGURES

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 708 636 1,204 1,145 1,065 1,033 872 841 712 622 531 thereof goodwill 615 573 1,043 972 901 865 710 679 557 487 375Cash & cash equivalents 45 16 17 86 61 52 120 42 71 108 149Total assets 1,031 948 1,557 1,533 1,478 1,436 1,306 1,194 1,094 1,043 998Equity incl. minorities 51 64 146 471 517 484 330 390 229 166 104Shareholder loans 250 275 356 0 0 0 0 0 0 0 0Pension provisions 0 0 0 0 0 0 0 0 0 1 1Financial liabilities 616 491 906 838 774 747 766 628 654 663 678 short term (<1 year) n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. long term (>1 year) 588 465 906 838 774 747 766 628 654 663 678Net working capital 206 220 245 144 232 209 165 192 160 160 163

CASH FLOW

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 112 114 124 122 101 20 57 -39 -49 60 63Change in working capital -21 -17 -25 58 -61 18 61 -28 5 0 -3Operating cash flow 91 97 99 180 40 37 118 -66 -43 60 60CAPEX -38 -28 -22 -39 -34 -18 -33 -13 -33 -33 -34Free cash flow 54 69 77 141 6 20 84 -79 -76 27 26Acquisitions/disposals 10 35 -727 -1 -5 -1 7 0 0 0 0Share buy back/issues 0 0 249 0 46 0 -6 140 140 0 0FCF after extraordinary items 64 104 -402 140 48 19 86 61 64 27 26

DEBT ADJUSTMENTS

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions 0 0 0 0 0 0 0 0 0 1 1For operating leases 562 599 633 673 755 770 828 828 962 1,092 1,193Others* 0 0 0 0 0 0 0 0 0 0 0

* Contingent liabilities, guarantees Source: Company data, UniCredit Global Research

<date>




PROFITABILITY RATIOS (A.T.U)

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 14.9% 13.9% 7.6% 13.6% 11.6% 6.8% 7.0% -1.1% -1.0% 7.0% 7.0%EBITDA margin adj. 21.8% 20.9% 20.3% 20.6% 21.6% 17.7% 18.2% 13.6% 17.9% 20.9% 21.3%EBIT margin rep. 8.4% 8.2% 1.6% 6.2% 4.4% -0.9% -9.1% -8.2% -8.5% -0.5% -0.5%EBIT margin adj. 13.7% 13.5% 12.5% 11.4% 10.1% 5.3% -2.5% 1.5% 5.0% 7.4% 8.1%Return on capital (before tax) 2.7% 3.8% n.m. 1.9% 0.6% 0.9% n.m. n.m. n.m. n.m. n.m.

CREDIT PROTECTION RATIOS

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 159 159 94 180 160 45 96 -7 -13 96 99EBITDA adj. 232 240 251 271 298 116 250 85 244 288 299FFO rep. 112 114 124 122 101 20 57 -39 -49 60 63FFO adj. 129 135 146 145 161 50 120 -7 24 143 144Net debt rep. 571 475 889 753 713 695 646 585 582 555 529Net debt adj. 1,133 1,074 1,522 1,426 1,469 1,465 1,474 1,414 1,544 1,648 1,723Total debt 616 491 906 838 774 747 766 628 654 663 678EBITDA net interest cover rep. 2.2 2.2 1.4 3.2 3.0 1.7 1.8 -0.2 -0.2 1.8 1.8EBITDA gross interest cover rep. 2.2 2.1 1.4 3.2 2.9 1.6 1.6 -0.2 -0.2 1.7 1.8EBIT net interest cover rep. 1.3 1.3 0.3 1.5 1.1 -0.2 -2.4 -1.7 -2.2 -0.1 -0.1EBIT net interest cover adj. 1.1 1.2 1.2 1.2 1.1 0.5 -0.3 0.1 0.5 0.6 0.7FFO rep. / total debt rep. 18.2% 23.2% 13.7% 14.5% 13.1% 9.1% 7.4% -0.2% n.m. 9.1% 9.3%FFO rep. / net debt rep. 19.7% 24.0% 14.0% 16.2% 14.2% 9.7% 8.8% -0.3% n.m. 10.8% 12.0%FFO adj. / net debt adj. 11.4% 12.5% 9.6% 10.1% 10.9% 9.2% 8.2% 4.4% n.m. 8.7% 8.4%FOCF rep. / total debt rep. 8.7% 14.0% 8.5% 16.8% 0.8% -6.4% 11.0% 4.4% n.m. 4.1% 3.9%FOCF rep. / net debt rep. 9.4% 14.5% 8.6% 18.7% 0.9% -6.9% 13.0% 4.7% n.m. 4.9% 5.0%RCF rep. / net debt rep. 19.7% 24.0% 14.0% 16.2% 14.2% 9.7% 8.8% -0.3% n.m. 10.8% 12.0%RCF adj. / net debt adj. 11.4% 12.5% 9.6% 10.1% 10.9% 9.2% 8.2% 4.4% 1.6% 8.7% 8.4%Total debt rep. / EBITDA rep. 3.9 3.1 9.6 4.7 4.8 5.4 8.0 14.2 n.m. 6.9 6.9Net debt rep. / EBITDA rep. 3.6 3.0 9.4 4.2 4.5 5.0 6.7 13.2 n.m. 5.8 5.3Net debt adj. / EBITDA adj. 4.9 4.5 6.1 5.3 4.9 5.1 5.9 6.5 6.3 5.7 5.8FFO rep. / net interest rep. 2.6 2.6 2.8 3.2 2.9 1.7 2.1 -0.3 0.1 2.1 2.2FFO rep. / gross interest rep. 2.5 2.5 2.8 3.2 2.8 1.7 1.9 -0.3 0.1 2.1 2.2Capex / sales 3.5% 2.4% 1.8% 2.9% 2.5% 2.7% 2.4% 2.0% 2.4% 2.4% 2.4%Capex / depreciation 33.6% 25.9% 17.2% 21.8% 19.0% 35.1% 8.0% 28.5% 18.2% 18.1% 18.4%

CAPITAL STRUCTURE

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 92.4% 88.5% 86.1% 64.0% 59.9% 60.7% 69.9% 61.7% 74.1% 80.0% 86.7%Net debt / net capitalization rep. 91.8% 88.1% 85.9% 61.5% 58.0% 58.9% 66.2% 60.0% 71.8% 77.0% 83.6%Net debt / net capitalization adj. 95.7% 94.4% 91.2% 75.2% 73.9% 75.2% 81.7% 78.4% 87.1% 90.9% 94.3%Net working capital / sales 19.3% 19.2% 19.8% 11.0% 16.8% 14.9% 12.0% 14.3% 11.7% 11.6% 11.6%Fixed assets / sales 66.3% 55.5% 97.3% 87.0% 77.1% 73.6% 63.4% 62.5% 52.3% 45.2% 37.8%

KEY MODEL ASSUMPTIONS

Comment FY 2008 FY 2009 FY 2010Sales growth Low organic growth, some new stores -1.0% 1.0% 2.0%EBITDA growth Restructuring in 2008 n.m. n.m. 3.4%EBIT growth Restructuring in 2008 n.m. n.m. -15.3%Capex incl. acquisition Around EUR 35 mn capex 33 33 34Change in working capital Build-up with more stores 5 0 -3Funds from operations (FFO) Successful restructuring in 2008 -49 60 63


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Dürr (HOLD) Investment rationale We have a hold recommendation for the DUERR 9.75% 07/11 bond. The company has a

positive credit profile momentum, strong financial flexibility and no refinancing needs ahead. Nevertheless, the bond already trades close to its first call price of 105.25 on or after July 15, 2008. The reason for this is that the company announced its intention to buy back 50%(=EUR 100 mn) of its HY bond. On September 11, Dürr concluded an agreement with abanking consortium of 7 banks comprising of a revolving credit line of EUR 200 mn and aguarantee facility of EUR 240 mn for a term of three years. The new facilities replace theexisting credit facilities. Dürr also announced the redemption of a tranche of EUR 100 mn ofits HY bond in mid-October 2008 at a price of 105.250% and plans to redeem the other half in Q3 2009 at a price of 102.625%.

Recent developments On June 17, the company announced that it placed a capital increase equivalent to justbelow 10% of capital stock mainly with institutional investors. On June 18, S&P placed its B rating on Credit Watch with positive implications. Should Dürr use the proceeds from the capital increase to reduce debt and is likely able to sustain its earnings improvement overtime, a one notch rating upgrade is possible in S&P's view. On September 15, Moody's upgraded Dürr to B1 with stable outlook from B2 with positive outlook, prompted by thesuccessful extension and increase of Duerr's existing revolving credit and guarantee facilitywhich has further enhanced the company's financial flexibility. Moody's, however, cautions that Duerr is still strongly exposed to the level of investment activity in the automotive industrywhich is currently challenged by weak demand and increased input costs.

PAINT AND ASSEMBLY SYSTEMS DIVISION (PAS) MEASURING AND PROCESS SYSTEMS (MPS)

-

200

400

600

800

1,000

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1,400

1,600

2004 2005 2006 2007 H1/07 H1/08

in E

UR

mn

0%

1%

2%

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4%

5%

6%

7%

8%

9%Incoming orders Revenues EBITDA margin

-

200

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2004 2005 2006 2007 H1/07 H1/08

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0%

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3%

4%

5%

6%

7%

8%

9%Incoming orders Revenues EBITDA margin


Latest results recap On August 7, the company reported H1 results which were slightly better thanexpected. Revenues increased by 15.7% to EUR 752 mn and adjusted EBITDAimproved to EUR 45.0 mn vs. EUR 29.7 mn. FFO weakened in H1 2008 to EUR -7.3 mn vs. EUR 2.2 mn y-o-y. Operating cash flow in H1 2008 improved to EUR -16.6 mn vs. EUR -33.2mn on a reduction in working capital. Free cash flow (after interest, tax, capex) improved toEUR -31.0 mn vs. EUR -45.4 mn a year earlier. In LTM H1 2008, total debt/EBITDA (adj.) improved slightly to 3.6x from 4.4x y-o-y. FFO/total debt (adj.) improved significantly to 7.9%vs. -7.6% y-o-y. In Q2 2008, the growth of new orders started to slow as they decreased by11.6% y-o-y to EUR 357.3 mn (H1 2008: -4.1% y-o-y). The order backlog rose however by 9.5% to EUR 1,172 mn y-o-y. 45.2% of new orders in H1 2008 came from Europe excl. Germany, 27.7% from Asia, Africa, Australia and 13.5% from Germany.

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Liquidity The company's financial flexibility is strong. Dürr's cash position was EUR 116.1 mn at H1 2008, while it had short-term financial debt of only EUR 9.3 mn and an unused RCF of EUR100 mn. The company received EUR 43.7 mn cash in July 2008 from its capital increase. Dürr has approx. EUR 50 mn in working capital swings throughout the year, with its net debt peakalways occurring in Q3 of each fiscal year as it usually only generates positive free cash flowin Q4. Dürr's liquidity profits from a prepayments-to-order backlog ratio of between 12-14%.


The company expects new orders in 2008 to be more or less on a level with last year provided economic conditions and the exchange rate situation do not deteriorate further. The company's 2008 targets are for consolidated sales to rise by up to 10%, a furtherimprovement in earnings and an EBIT margin of 5%. This is based on the planned increase in gross margins through improved internal processes. In addition, overhead costs (selling, administrative and R&D expenses) should rise less than proportionally compared to salerevenues. Also, Dürr intends to only take orders in the final assembly systems businesses that offer adequate margins. The partial redemption of the bond will reduce net interest, although the redemption and the arrangement of the new credit facility will lead to one-off costs of EUR 9.6 mn in FY 2008. Dürr expects a substantial increase in net income and intends to pay a higher dividend for 2008. The tax rate should decline to a future normal level of 30% (2007: 39.0%). Dürr expects cash flow from operating activities to be positive in 2008and to reach at least the 2007 level. Net working capital should be slightly lower despite risingsales revenues. The company aims for a positive FCF again and wants to post a net cashposition at FYE 2008 for the first time since 1998. Capex in 2008 (including planned smallishbolt-on acquisitions in the Balancing and Assembly Products and Cleaning and FiltrationSystems business units) are planned to be around the same level as last year, as most of theexpenditures on harmonizing IT systems to improve internal processes were undertaken in2007. Dürr intends to increase its R&D spending slightly versus 2007 (EUR 20.5 mn). The equity ratio at FYE 2008 should substantially strengthen to about 30%. For 2009, Dürrexpects sales growth of about 5% and a more-than-proportional improvement in earnings based on further productivity improvements, for example through the introduction of a Group-wide IT system. For 2010, it has set an ambitious EBIT margin target of about 6% within theframework of the “Dürr 2010” strategy. Despite the return to dividend payments, we believe that Dürr should be able to generate free cash flow (after interest, capex, and dividends) of approx. EUR 12 mn in FY 2008. We estimate total debt/EBITDA (adj. for pension and leasedebt) in 2008 will improve to 2.8x vs. 4.3x y-o-y and FFO/total debt (adj.) to 18.2% vs. 10.1% y-o-y. We adjusted for Dürr's accounting receivable financing programs amounting to EUR 20.8 mn (FY 2006: EUR 0 mn) and factoring volume of EUR 14.2 mn (FY 2006: EUR 11.9mn). S&P expects Dürr to maintain a ratio of FFO/debt of about 15% and an EBITDA interestcoverage ratio above 2x and if the group sustains these targets in 2008, it might raise its rating on Dürr.

Model assumptions/risks For our estimates in 2008, we assumed sales growth of around 8% and animprovement in its EBIT margin to 5.0% in FY 2008. We assumed a slight increase in working capital by EUR 7.4 mn, which is in line with revenue growth. The main risks to ourmodel are the failure to improve the profitability in line with targets as well as free cash flow,lower-than-expected OEM vehicle production, increasing price pressure of OEMs, lower orders from Asia and a higher-than-expected build-up of working capital (e.g. due to lower order prepayments).



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CAPITALIZATION

Senior Credit Facilities Borrower Dürr AG Senior Credit Facility Amount (in EUR) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Facility A rev. cash line 100 mn 06/09 Bullet determined to net debt/EBITDA grid n.a. Facility B guarantee line 171 mn 06/09 Bullet determined to net debt/EBITDA grid n.a. Covenants After the refinancing in July 2004, covenants until Dec. 31, 2006, were adjusted to the FOCUS restructuring program; premature termination is only possible if the covenants are infringed and with a two-third majority by the bank syndicate (Agent: Deutsche Bank, Mandated Arranger: Commerzbank, Deutsche Bank, LBBW). Notes Issuer Dürr AG Senior subord. Notes 200 07/11 Bullet Coupon 9.75% Other Indebtedness at Q2 2008 Other short-term financial debt: EUR 9.317 mn Other long-term financial debt: EUR 7.756 mn Available Credit Lines at Q2 2008 Facility A: EUR 0.0 mn drawn; Facility B: EUR 99.0 mn drawn EUR 175 mn bilateral guarantee line with insurance companies, thereof EUR 130.1 mn drawn EUR 19.6 mn bilateral lines of credit (thereof EUR 4.7 mn undrawn) for working capital as well as smaller loans with various banks with terms of 1-15 years and interest rates between 3.75%-6.75% of EURIBOR plus margin.


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BOND DOCUMENTATION – DUERR 9.75% 07/15/11

Issuer Duerr AG Call/Put Call Schedule On or after July 15, 2008: 105.25%; 2009: 102.625%; 2010 and thereafter: 100% Equity claw back Prior to July 15, 2007 up to 35% at 110.5% Make whole clause Prior to July 15, 2008: Bund plus 50 bp Change of control 101% Guarantees Certain subsidiaries of the issuer provide guarantees on a senior subordinated basis. Each direct and indirect

guarantee is subordinated to all senior debt of such guarantor. Notes and guarantees are structurally subordinated to all obligations of the issuer’s subsidiaries that do not guarantee the notes.

Security Secured by a second priority lien over shares of certain specified subsidiaries of the issuer, which is junior to the first priority liens of such specified subsidiaries in favor of the lenders under the bank facilities.

Ranking Senior subordinated and subordinated to senior debt. Rank equally to senior subordinated debt. Certain Covenants Limitation on Debt Consolidated coverage ratio: 2.75x

Most important carve outs/exceptions: – Bank debt EUR 200 mn – Capitalized lease obligations and similar debt not exceed EUR 10 mn – General basket EUR 25 mn

Limitation on Sale of Certain Assets Receives at least fair market value and at least 75% in cash, cash equivalents, replacement assets or a combination thereof; within 360 days to repay debt or to invest in replacement assets; after that obliged to an offer to noteholders if excess proceeds exceed EUR 10 mn

Limitation on Restricted Payments 50% of consolidated net income for the period plus net cash proceeds from capital stock issue/sale plus amount of debt reduction after conversion/exchange of convertible/exchangeable for capital stock plus net reduction in restricted investments made by Duerr or restricted subsidiaries Most important carve outs/exceptions: – Employee/management capital stock transactions of EUR 5 mn – Loans to employees/management EUR 2 mn – General basket of EUR 15 mn

Limitations on Transactions with Affiliates Not less favorable to Duerr as in a comparable transaction in arms-length dealings with a person who is not such an affiliate; > EUR 5 mn approved by a majority of the members of the Management Board and by a majority of the members of such board having no personal stake in such transaction > EUR 15 mn with written opinion from an independent investment banking, accounting or appraisal firm of internationally recognized standing

Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering Yes


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Business Description – Dürr AG Dürr AG, based in Stuttgart, is one of the world's leading suppliers of automotive paint and final assembly systems, and technology leader in paint application technology and robots. The company is directly present in 19 countries and had 5,936 employees at FYE 2007. Major shareholders are 38.2% Heinz Dürr GmbH, 12.7% Aton GmbH (wholly owned by the Dr. Helmig family), Harris Assoc. 7.8% and Heinz und Heide Dürr Stiftung GmbH, Berlin. The current market cap is EUR 398 mn.

SALES BY REGION (FY 2007)

Germany19%

Rest of Europe38%

North and Central America

20%

South America 3%

Asia/Africa/Australia 20%


EBITDA BY SEGMENT (FY 2007)

Measuring and process systems

34%

Corporate Center

2%

Paint and assembly systems

64%


DEBT MATURITY PROFILE 2007

<1 year 1 to 2 years 2 to 3 years 3 to 4 years >4 yearsFinancial debt 46 26 21 221 192

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B Cwp Prompted by new extended facilities and early bond redemption

Moody's B1 Stable Improving operating performance, but strongly exposure to auto sector investment activity

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

DUERR 9.75% 7/15/2011

CCC+cwp/B3s EUR 200 7/15/2008 (105.25)

BOND STRUCTURE

GuarantorSubsidiaries

Dürr AG

EUR 200 mn 9.75% senior subordinatednotes due 2011

Non-Guarantor

Subsidiaries

EUR 400 mn bank facilities

Seniorguarantee

Subordinatedguarantee

Noteholders


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PROFIT AND LOSS (DÜRR AG)

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 2,044.9 1,903.3 1,400.6 1,361.2 650.3 1,476.6 752.7 1,596.9 1,659.9 1,709.2Cost of goods and services sold -1,712.5 -1,589.8 -1,180.4 -1,141.0 -545.6 -1,236.7 -625.1 -1,309.4 -1,357.8 -1,387.9Distribution expenses -134.8 -132.3 -97.6 -94.7 -47.1 -95.1 -48.9 -102.2 -106.2 -109.4R&D expenses -27.8 -26.5 -21.1 -21.1 -11.6 -20.5 -12.1 -22.4 -23.2 -23.9Administration -123.3 -110.5 -92.8 -83.1 -42.6 -87.7 -44.5 -102.2 -101.3 -104.3Other operating income/expenses -26.7 -1.6 -79.0 11.9 7.6 19.0 2.4 19.0 19.0 19.0EBITDA reported 46.4 63.9 -16.1 50.9 20.0 70.9 33.5 95.7 107.4 119.8EBIT reported 19.8 42.6 -70.3 33.1 11.0 55.7 24.6 79.7 90.4 102.8Adj. EBIT (bef. pension interest) 53.7 60.2 13.1 48.1 15.9 67.2 30.8 92.3 103.0 115.5Income from investments 0.1 0 -1.2 2.7 0.6 1.9 1.3 0 0 0Interest result -20.7 -24.0 -17.0 -21.0 -11.4 -22.9 -10.4 -23.2 -9.7 -9.7Other financial items 0 0 0 0 0 0 0 -9.6 0 0EBT reported -0.9 18.6 -88.5 14.8 0.1 34.8 15.4 46.9 80.7 93.1Extraordinary result 0 0 108.9 0 0 0 0 0 0 0Taxes on income -21.1 -7.0 2.1 -6.6 0 -13.6 -4.6 -14.5 -24.5 -28.0Net income -22.0 11.6 22.5 8.2 0 21.2 10.8 32.4 56.2 65.1


in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 510 514 441 423 420 410 405 403 425 448 thereof goodwill 297 309 267 262 264 263 260 268 268 268Cash & cash equivalents 195 46 125 101 59 147 116 148 148 148Total assets 1,510 1,435 1,189 1,040 1,069 1,075 1,142 1,095 1,137 1,174Equity incl. minorities 186 224 248 246 245 257 294 318 361 410Pension provisions 50 51 68 61 60 50 50 51 52 53Other provisions 64 73 56 60 59 55 59 55 55 55Financial liabilities 259 298 218 210 211 215 210 148 130 106 short term (<1 year) 161 85 17 10 11 15 9 n.a. n.a. n.a. long term (>1 year) 98 213 201 200 200 200 200 n.a. n.a. n.a.Net working capital -193 39 -25 26 67 -4 70 -1 3 6

CASH FLOW

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 20 49 -64 -37 2 30 -7 49 74 83Change in working capital 21 -170 -82 9 -35 37 -9 -3 -3 -3Operating cash flow 41 -121 -146 -29 -33 66 -17 46 71 80CAPEX -20 -24 -26 -18 -12 -26 -8 -28 -30 -30Free cash flow 21 -144 -172 -47 -45 41 -25 18 41 50Dividends -11 0 0 0 0 0 -6 -6 -13 -16Acquisitions/disposals -5 2 330 32 3 15 11 11 -10 -10Share buy back/issues 0 0 22 0 0 0 0 44 0 0FCF after extraordinary items 4 -142 180 -14 -42 55 -20 66 18 24

DEBT ADJUSTMENTS

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions 50 50 68 61 60 50 50 50 50 52For operating leases 71 77 56 54 54 95 95 95 95 95Others* 0 0 0 12 12 35 35 35 35 35


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PROFITABILITY RATIOS (DÜRR AG)

2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 3.4% -1.2% 3.7% 3.1% 4.8% 4.5% 6.0% 6.5% 7.0%EBITDA margin adj. 5.0% 5.4% 5.6% 4.6% 6.3% 6.0% 7.4% 7.9% 8.4%EBIT margin rep. 2.2% -5.0% 2.4% 1.7% 3.8% 3.3% 5.0% 5.4% 6.0%EBIT margin adj. 3.2% 0.9% 3.5% 2.4% 4.6% 4.1% 5.8% 6.2% 6.8%Return on capital (before tax) 3.6% n.m. 2.7% 5.8% 7.0% 11.7% 12.1% 16.4% 18.0%


2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 64 -16 51 20 71 34 96 107 120EBITDA adj. 96 76 76 30 93 45 119 130 143FFO rep. 49 -64 -37 2 30 -7 49 74 83FFO adj. 63 -55 -28 7 40 -2 60 85 93Net debt rep. 252 93 109 153 67 94 1 -18 -42Net debt adj. 380 217 235 279 247 274 181 163 141Total debt 298 218 210 211 215 210 148 130 106EBITDA net interest cover rep. 2.7 -0.9 2.4 1.7 3.1 3.2 4.1 11.1 12.3EBITDA gross interest cover rep. 2.4 -0.7 1.8 1.5 2.7 2.6 3.6 8.3 9.2EBIT net interest cover rep. 1.8 -4.1 1.6 1.0 2.4 2.4 3.4 9.3 10.6EBIT net interest cover adj. 1.9 0.6 1.8 1.1 2.1 2.0 2.8 5.4 6.0FFO rep. / total debt rep. 16.5% -29.3% -17.8% -17.0% 13.8% 9.5% 33.2% 57.1% 78.6%FFO rep. / net debt rep. 19.5% -68.5% -34.3% -23.5% 44.0% 21.3% n.m. n.m. n.m.FFO adj. / net debt adj. 16.7% -25.4% -11.8% -9.3% 16.1% 11.2% 32.9% 51.9% 66.4%FOCF rep. / total debt rep. -48.4% -78.8% -22.1% 10.9% 18.9% 61.2% 12.1% 31.7% 47.4%FOCF rep. / net debt rep. -57.3% -184.1% -42.8% 15.1% 60.5% 137.2% n.m. n.m. n.m.RCF rep. / net debt rep. 19.5% -68.5% -34.3% -23.5% 44.0% 14.5% n.m. n.m. n.m.RCF adj. / net debt adj. 16.7% -25.4% -11.8% -9.3% 16.1% 8.9% 29.5% 44.1% 55.2%Total debt rep. / EBITDA rep. 4.7 -13.5 4.1 3.9 3.0 2.5 1.6 1.2 0.9Net debt rep. / EBITDA rep. 3.9 -5.8 2.1 2.8 0.9 1.1 0 -0.2 -0.3Net debt adj. / EBITDA adj. 4.0 2.9 3.1 3.7 2.7 2.5 1.5 1.2 1.0FFO rep. / net interest rep. 3.0 -2.8 -0.8 1.2 2.3 0.3 3.1 8.6 9.6FFO rep. / gross interest rep. 2.9 -1.9 -0.4 1.2 2.1 0.4 2.9 6.7 7.4Capex / sales 1.2% 1.8% 1.3% 1.9% 1.8% 1.1% 1.8% 1.8% 1.8%Capex / depreciation 110.9% 97.7% 101.1% 135.2% 170.9% 90.7% 175.0% 176.5% 176.5%

CAPITAL STRUCTURE

2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 57.1% 46.8% 46.1% 46.3% 45.5% 41.6% 31.8% 26.5% 20.5%Net debt / net capitalization rep. 52.9% 27.3% 30.7% 38.4% 20.7% 24.1% 0.3% n.m. n.m.Net debt / net capitalization adj. 62.8% 46.6% 48.9% 53.3% 49.0% 48.2% 36.3% 31.0% 25.4%Net working capital / sales 2.0% -1.8% 1.9% 4.9% -0.3% 4.4% 0.0% 0.2% 0.3%Fixed assets / sales 27.0% 31.5% 31.1% 30.3% 27.8% 25.7% 25.2% 25.6% 26.2%


Comment FY 2008 FY 2009 FY 2010Sales growth Growth according to guidance 8.1% 3.9% 3.0%EBITDA growth 2008-2010 guidance 35.0% 12.2% 11.5%EBIT growth 2008-2010 guidance 43.0% 13.4% 13.7%Capex incl. acquisition Capex/sales stable 28 40 40Change in working capital In line with revenue growth -3 -3 -3Funds from operations (FFO) Improvement in profitability 49 74 83


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Europcar (BUY FRN/SELL Sub) Investment rationale We change our recommendation on Europcar bonds from hold to buy for the Floater

bond and to a sell for the sub bonds. Europcar's fleet value is 95% covered by repurchase programs with explicit or implicit buy-back provisions. Significant write-downs on its EUR 2,984 mn rental fleet (book value at H1 2008) due to lower residual values on lower used-vehicle car prices are rather unlikely. Consequently, the recovery value of the FRNs is likely ata minimum range of approx. 50-60 (EUR 2,984 mn minus priority debt, assuming fully-drawn revolver, excl. cash). H1 results showed again a resilient picture in regard to top-line growth and EBIT margin. The company said, however, that the challenges in the economic andindustry environment in H2 2008 started to dampen growth and the improvement of operatingprofitability in most markets. Europcar gained market share in Europe, supported by bolt-on acquisitions and increased its capacity utilization. Nevertheless, it suffers under increasingfleet holding costs and rising interest payments. Although Europcar's business is dependenton cyclical corporate business travel and tourism activity and has a relatively high debtleverage, the credit profile is supported by its flexible cash generative business model as itcan reduce its fleet relatively quickly to reflect demand changes. Due to Europcar's acquisitive financial policy, the risk for bolt-ons is high and the potential for deleveraging is low. Europcarconfirmed in its conference call that a call of its floater bond is currently unlikely. We believe that an exit of Europcar's sponsors is also unlikely.

FLEET HOLDING COSTS UP AND RPD DOWN FLEET SIZE INCREASED IN H1 2008

0

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120

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32

34

36

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40

Average fleet holding costs (per unit/month)

Average revenue per rental day, RPD (RS)

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2001 2002 2003 2004 2005 2006 2007 H1 07 H1 0860

65

70

75Average Fleet in k unitsUtilisation in % (RS)

Source: Company reports (no data about fleet holding cost in H1 2008 available), UniCredit Global Research

Recent developments On September 4, Europcar and privately-owned Enterprise Rent-A-Car (Baa2s/BBBs) concluded a strategic alliance to form the world's largest car rental network offering a fleet of more than 1.2 million vehicles at more than 13,000 locations in 162 countries.This partnership expands the Transatlantic alliance established in 2006 by Europcar with National Car Rental and Alamo Rent-A-Car after Enterprise purchased the National and Alamo brands in North America in August 2007. The alliance provides rental car coverage for customers traveling between each partner company's areas of operations. Under the terms of the agreement, the partners will take a coordinated approach to global corporate accountsand offer a harmonized loyalty program. The expanded alliance is intended to leverage anddevelop traffic between North America and Europe: each year, an estimated 12 million travelers cross the Atlantic in either direction. It also aims to leverage and boost traffic withAsia-Pacific through Europcar's new hub in Australia and New Zealand.

Latest results recap On September 8, the company reported H1 results with revenues up 6.6% at constantGBP/EUR exchange rate (organic growth: +4.9%) driven by higher rental day volumes

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despite the increasingly challenging business environment. Europcar presented a resilient adjusted operating margin of 9.7% despite higher fleet holding costs, reflecting the integration of the 2006-2007 acquisitions and other cost-cutting programs. Reported net debt increased to EUR 3,127 mn at H1 2008 from EUR 2,796 mn q-o-q. We note that the company increased its operating lease debt to EUR 647 mn in H1 2008 vs. EUR 351 mn in FY 2007,which in turn reduces the need to draw on the more expensive senior asset financing loan at130 bp. In addition, we note that operating lease debt is not included in any covenant definition and reduces the risk for any potential pressure from that side. We calculated a LTMH1 2008 net debt/EBITDA (adj.) of 5.0x vs. 4.5x in FY 2007, which takes into account theincrease in operating lease debt by a multiple of 1.84x compared to FY 2007.

Liquidity The company's financial flexibility was good in Q2 with a cash position of EUR 340 mnplus an undrawn senior asset financing loan of EUR 955 mn and undrawn revolver ofEUR 109 mn. Short-term debt was EUR 2,653 mn, mainly the fleet financing loans. The indenture has a loan covenant of CF to total debt service of 1.1x (definition not public) and a consolidated fixed charge coverage of 2.0x (FY 2007: adj. corporate EBITDA/adj. cashcorporate interest was 3.0x) in its bonds. Positively, the bond covenant does not include the interest on the asset financing loan and focuses on corporate EBITDA and corporate interest.We believe that Europcar still aims to refinance its fleet lease loans with asset backed bonds when this is possible at lower interest costs compared with operating lease debt.


The company declines to provide any concrete indications about its planningassumptions. Nevertheless, in its 2007 financial statements, it provided a forecast for its cash position, which implies a FCF generation in FY 2008 of EUR 190 mn and in 2009-2012: EUR +304 mn cumulative (=means average FCF of EUR 76 mn p.a.). With its H1 2008 results release, Europcar said that the challenges in economic and industry environment are now starting to dampen growth and the improvement of operating profitability in most markets.Nevertheless, the company said that its balanced market segment contribution andgeographic coverage will again be key assets for 2008. Europcar's measures are: (a) revenue enhancement initiatives bolstered, (b) operating flexibility and efficiency, fleet and network productivity to be further enhanced, in continuation of gains achieved in H1 2008, (c) control of fleet-related costs and operating expenses tightened, (d) integration of PremierFirst andAsia-Pacific acquisition according to plan, (e) continued focus on cash generation and control of net debt and (f) successful implementation of the newly expanded alliance withEntrepriseRent a Car.

Model assumptions/risks For our cash flow model, we assumed free cash flow of EUR 180 mn in FY 2008. Sales growth of 2% should lead to a lower increase in working capital and therefore could result in a stabilization of credit metrics in the absence of acquisitions. We note that growth in this industry is also possible through franchises without investment in working capital, however, ata lower margin. We assumed a capex/sales ratio of ca. 1-2% p.a. and a decrease of FFO/sales to ca. 21-22%. We estimate that free cash flow should stay positive, supported by a lower increase in fleet sales. Nevertheless, we do not expect a significant improvement incredit metrics going forward. Major risks are rising fleet holding costs and interest expenses,continued acquisitions, maintenance of contractual arrangements with OEMs and repurchaseprograms, utilization rates, stable RPD and pricing for buying/renting cars as well as cyclicalstability and headroom within the loan/bond covenants.

Things to watch ● End of November 2008: Q3 2008 results


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CAPITALIZATION

Senior Credit Facilities Borrower Europcar Groupe S.A., France / Europcar International S.A.S.U. (ECI-France) Senior Credit Facility Initial Amount (in EUR) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Senior Revolving Credit Facility

350 mn 2013 bullet 225 bp (for EGSA), 175 bp (for other than EGSA)

Covenants Cash flow to total debt service > 1.1x Borrower Europcar International S.A.S.U. (ECI-France) Senior Credit Facility Initial Amount (in EUR) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Senior Asset Financing Loan*

2,740 mn 05/2011 Bullet 130 bp

UK Fleet financing GBP 560 mn n.a. n.a. Covenants *Mandatory prepayment in change of control case Notes Issuer Europcar Groupe S.A. Senior subordinated secured notes

425 mn 05/2013 Bullet Floater +350 bp

Senior subordinated unsecured notes

375 mn 05/2014 Bullet Coupon 8.125%

Other Indebtedness at FYE 2007 Current: Bank overdrafts: EUR 17.9 mn, Other short-term liabilities: EUR 10.0 mn, Accrued interests: EUR 13.2 mn Non-current: Other long-term liabilities: EUR 33.7 mn


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BOND DOCUMENTATION – EUROCA 8.125% 05/15/14

Issuer Europcar Groupe S.A. Call/Put Call Schedule On or after May 15, 2010: 104.063%, May 15, 2011: 102.031%, May 15, 2012 and thereafter: 100% Equity claw back Prior May 15, 2009 up to 35% at 108.125% Make whole clause Prior to May 15, 2010: Bund plus 50 bp Change of control Put at 101% Guarantees No Security No Ranking – subordinated to all issuer debt, limited to EUR 300 mn under the Senior Revolving Credit Facility (or under any

refinancing or replacement of such facility); – subordinated to all secured issuer debt to the extent of the value of the assets securing such secured

indebtedness (other than to the extent such assets also secure the Notes on an equal and ratable or prior basis); – subordinated to debt/liabilities (incl. trade payables) of each of the Issuer’s subsidiaries that are not subsidiary

guarantors – equal with senior subordinated issuer debt – senior to subordinated issuer obligations

Certain Covenants Limitation on Debt Consolidated fixed charge coverage ratio of 2.0x

Not to exceed an amount equal to EUR 300 mn plus potential refinancing of the senior credit facilities; not to exceed debt under Senior Asset Financing Loan or permitted take-out financing equal or greater of (x) EUR 2,900 mn and (y) the borrowing base. Most important carve outs/exceptions: – Capitalized lease obligations, mortgage financings, purchase money obligations shall not in the aggregate exceed

EUR 35 mn – General basket not exceed the greater of (x) EUR 60 mn and (y) 2.0% of Consolidated total assets

Limitation on Sale of Certain Assets Most important carve outs/exceptions: – Consideration at least Fair Market value and (for disposals with fair market value > EUR 20 mn) at least 75% of

the consideration received consists of cash or cash equivalents – Net cash proceeds must be used within 360 days to permanently repay debt or to invest in replacement assets or

any combination thereof – When aggregate amount of excess proceeds exceeds EUR 25 mn, on the 361st day after asset disposal make an

offer to purchase from all holders of notes Limitation on Restricted Payments Aggregate amount of restricted payments does not exceed the sum of:

– 50% of consolidated net income for the period from April 1, 2006 to the end of the most recent fiscal quarter ending prior to the date of such restricted payment plus 100% of the aggregate net cash proceeds of stock stale received by the Issuer plus conversion into capital stock plus net reduction in restricted investments

Most important carve outs/exceptions: – Management, former/existing employees not exceed 1. EUR 10 mn, plus 2. EUR 5 mn multiplied by the number of

calendar years that have commenced since the Issue Date, plus (y) the Net Cash Proceeds received by the Issuer since the Issue Date from, or as a capital contribution from, the issuance or sale to Management Investors of Capital Stock of the Issuer or Capital Stock

– Management/consulting fees not to exceed EUR 7 mn – General basket: EUR 35 mn; additional restricted payments not exceed greater of (x) EUR 25 mn and (y) 1% of

consolidated total assets Limitations on Transactions with Affiliates – Majority of disinterested directors if transactions greater than EUR 5 mn Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering Yes


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BOND DOCUMENTATION – EUROCA FLOATER 05/15/13

Issuer Europcar Groupe S.A. Call/Put Call Schedule On or after May 15, 2007: 102.00%, May 15, 2008: 101.00%, May 15, 2009 and thereafter: 100% Equity claw back No Make whole clause Prior to May 15, 2010: Bund plus 50 bp Change of control Put at 101% Guarantees – Guaranteed by certain of German and UK subsidiary guarantors with subsidiary guarantees being senior

subordinated obligations of the subsidiary guarantors (In 2005, the subsidiary guarantors accounted for 45.6% of total revenues, 52.9% of EBT and 48.6% of total assets of the Europcar Group).

Security – Secured by a second priority security interest in the shares of ECI owned by the Issuer. The first priority security interest is in favor of the senior revolving credit facility lenders.

Ranking – Subordinated to all issuer debt, limited to EUR 300 mn under the Senior Revolving Credit Facility (or under any refinancing or replacement of such facility);

– Subordinated to all secured issuer debt to the extent of the value of the assets securing such secured indebtedness (other than to the extent such assets also secure the Notes on an equal and ratable or prior basis);

– Subordinated to debt/liabilities (incl. trade payables) of each of the Issuer’s subsidiaries that are not subsidiary guarantors

– Equal with senior subordinated issuer debt and senior to subordinated issuer obligations Certain Covenants Limitation on Debt Consolidated fixed charge coverage ratio of 2.0x

– Not to exceed an amount equal to EUR 300 mn plus potential refinancing of the senior credit facilities; not to exceed debt under Senior Asset Financing Loan or permitted take-out financing equal or greater of (x) EUR 2,900 mn and (y) the borrowing base.

Most important carve outs/exceptions: – Capitalized lease obligations, mortgage financings, purchase money obligations shall not in the aggregate exceed

EUR 35 mn – General basket not exceed the greater of (x) EUR 60 mn and (y) 2.0% of Consolidated total assets

Limitation on Sale of Certain Assets Most important carve outs/exceptions: – Consideration at least Fair Market value and (for disposals with fair market value > EUR 20 mn) at least 75% of

the consideration received consists of cash or cash equivalents – Net cash proceeds must be used within 360 days to permanently repay debt or to invest in replacement assets or

any combination thereof – When aggregate amount of excess proceeds exceeds EUR 25 mn, on the 361st day after asset disposal make an

offer to purchase from all holders of notes Limitation on Restricted Payments Aggregate amount of restricted payments does not exceed the sum of:

– 50% of consolidated net income for the period from April 1, 2006 to the end of the most recent fiscal quarter ending prior to the date of such restricted payment plus 100% of the aggregate net cash proceeds of stock stale received by the Issuer plus conversion into capital stock plus net reduction in restricted investments

Most important carve outs/exceptions: – Management, former/existing employees not exceed 1. EUR 10 mn, plus 2. EUR 5 mn multiplied by the number of

calendar years that have commenced since the Issue Date, plus (y) the Net Cash Proceeds received by the Issuer since the Issue Date from, or as a capital contribution from, the issuance or sale to Management Investors of Capital Stock of the Issuer or Capital Stock

– Management/consulting fees not to exceed EUR 7 mn – General basket: EUR 35 mn; additional restricted payments not exceed greater of (x) EUR 25 mn and (y) 1% of

consolidated total assets Limitations on Transactions with Affiliates – Majority of disinterested directors if transactions greater than EUR 5 mn Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering Yes


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Business Description – Europcar Groupe S.A. Europcar is the leading car rental organization in Europe based on number of rental days, and one of three global car rental organizations. It operates 2,950 locations in more than 145 countries worldwide, is present at 197 airports and employs around 5,232 people. In 2007, its average fleet was 216,645 vehicles. It derives ca. 65% of its revenues from non-airport stations and 35% from airport stations. 55% of its revenues were generated from corporate customers and 45% from leisure customers. 95% of its fleet is covered by repurchase programs with explicit/implicit buy-back provisions. In H1 2006, Paris-based investment company Eurazeo purchased 100% of Europcar from Volkswagen AG.

REVENUES BY COUNTRY (FY 2007)

Germany35%

Italy16%

Spain12%

UK10%

France20%

Other countries7%


FLEET DELIVERIES BY BRAND (FY 2007)

VW Group brands23%

Renault13%

Fiat16%

DCX9%

PSA11%

GM18%

Other10%



<1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years >5 yearsFinancial debt 1,788 n.a. n.a. n.a. n.a. 550

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB- Stable FFO/ND 12-15% over the cycle, ND/Capital of about 80%

Moody's B1 Stable Continuing improvement of operating profitability, with 1.5x interest cover in 2008

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

EUROCA 8.125% 5/15/2014

B+s/B3s EUR 375 5/15/2010 (104.063)

EUROCA Float 5/15/2013

BB-s/B2s EUR 425 5/15/2007 (102)

BOND STRUCTURE

Europcar International SASU(ECI-France)

operating subsidiaries

Europcar Groupe SA(France)

Shareholders

EUR 375 mn 8.125% 2014EUR 425 mn FRN 2013

Senior Asset Financing Loan

Senior Revolving Credit Facilities


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PROFIT AND LOSS (EUROPCAR GROUPE S.A.)

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 1,105.3 1,174.1 1,279.5 1,469.3 989.7 2,046.8 1,020.6 2,087.7 2,108.6 2,150.8Raw materials used -631.2 -669.3 -741.8 -862.8 -568.7 -1,196.3 -616.1 -1,219.2 -1,231.4 -1,256.0Personnel costs -197.6 -213.4 -234.2 -255.5 -184.1 -311.8 -174.5 -317.3 -320.5 -326.9EBITDA reported 132.8 141.7 159.8 184.0 108.9 270.9 92.9 278.2 281.4 286.9Depreciation and amortization -15.2 -18.0 -13.4 -15.7 -16.1 -32.0 -16.2 -33.4 -33.7 -34.4Other operating income/expenses -143.8 -149.7 -143.7 -167.0 -128.0 -228.7 -130.6 -233.8 -236.2 -240.9EBIT reported 117.6 123.7 146.4 168.3 92.8 238.9 76.7 244.8 247.7 252.5Interest result -45.3 -40.0 -45.4 -119.6 -95.2 -196.8 -104.0 -210.0 -205.0 -200.0EBT 72.2 83.7 101.0 48.7 -2.4 42.1 -27.3 34.8 42.7 52.5Taxes on income -18.7 -30.5 -30.6 -16.4 -7.7 -21.9 1.9 -14.0 -17.0 -21.0Net income 53.5 53.2 70.5 32.3 -10.1 20.2 -25.4 20.8 25.7 31.5


in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 96 97 126 1,067 1,560 1,504 1,539 1,151 767 379 thereof goodwill 11 6 11 n.a. n.a. n.a. n.a. n.a. n.a. n.a.Cash & cash equivalents 21 25 49 230 243 327 340 327 327 327Total assets 2,363 2,631 3,195 4,429 6,286 5,509 6,128 5,421 5,331 5,226Equity incl. minorities 241 262 475 807 819 813 792 835 861 893Pension provisions 41 44 57 66 72 62 65 65 70 75Financial liabilities 1,464 1,567 1,696 2,691 3,559 3,179 3,466 3,037 2,884 2,710 short term (<1 year) 1,383 1,414 1,523 2,131 2,782 2,364 2,654 n.m. n.m. n.m. long term (>1 year) 81 153 173 560 777 815 813 n.m. n.m. n.m.Net working capital 1,580 1,764 2,027 2,232 2,872 2,482 2,685 2,718 2,980 3,231

CASH FLOW

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 240 293 314 350 8 613 -3 439 450 465Change in working capital -2 -186 -257 -126 -240 -327 -160 -236 -262 -251Operating cash flow 238 108 56 224 -232 286 -163 204 188 214CAPEX -23 -22 -28 -180 -10 -19 -13 -30 -35 -40Free cash flow 215 86 28 45 -242 267 -175 174 153 174Dividends 0 -30 0 0 0 0 0 0 0 0Acquisitions/disposals -169 -165 -282 -1,277 -197 -259 -32 -32 0 0Share buy back/issues 0 5 148 0 0 0 0 0 0 0FCF after extraordinary items 46 -104 -105 -1,232 -439 9 -207 141 153 174

DEBT ADJUSTMENTS

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions 41 44 57 66 72 32 35 77 82 87For operating leases 73 84 225 230 230 754 1,387 1,387 1,387 1,387Others* 0 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (EUROPCAR GROUPE S.A.)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 12.0% 12.1% 12.5% 12.5% 11.0% 13.2% 9.1% 13.3% 13.3% 13.3%EBITDA margin adj. 26.4% 25.5% 29.0% 32.8% 13.8% 39.2% 23.5% 45.1% 45.0% 44.7%EBIT margin rep. 10.6% 10.5% 11.4% 11.5% 9.4% 11.7% 7.5% 11.7% 11.7% 11.7%EBIT margin adj. 23.9% 22.6% 24.9% 29.0% 10.1% 31.3% 10.3% 32.1% 32.1% 32.1%Return on capital (before tax) 4.2% 4.6% 4.7% 1.4% 2.5% 1.1% 2.8% 0.9% 1.1% 1.5%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 133 142 160 184 109 271 93 278 281 287EBITDA adj. 292 299 371 482 136 802 240 942 949 962FFO rep. 240 293 314 350 8 613 -3 439 450 465FFO adj. 253 309 353 390 28 742 116 677 688 702Net debt rep. 1,443 1,542 1,648 2,461 3,316 2,851 3,127 2,710 2,557 2,383Net debt adj. 1,557 1,671 1,930 2,757 3,618 3,637 4,548 4,174 4,026 3,857Total debt 1,464 1,567 1,696 2,691 3,559 3,179 3,466 3,037 2,884 2,710EBITDA net interest cover rep. 2.9 3.5 3.5 1.5 1.1 1.4 0.9 1.3 1.4 1.4EBITDA gross interest cover rep. 2.9 3.4 3.3 1.5 1.1 1.3 0.8 1.3 1.4 1.4EBIT net interest cover rep. 2.6 3.1 3.2 1.4 1.0 1.2 0.7 1.2 1.2 1.3EBIT net interest cover adj. 5.6 6.4 6.2 3.4 1.0 2.9 0.8 2.7 2.8 2.9FFO rep. / total debt rep. 16.4% 18.7% 18.5% 13.0% 4.1% 19.3% 17.4% 14.5% 15.6% 17.1%FFO rep. / net debt rep. 16.6% 19.0% 19.1% 14.2% 4.4% 21.5% 19.2% 16.2% 17.6% 19.5%FFO adj. / net debt adj. 16.3% 18.5% 18.3% 14.1% 5.1% 20.4% 18.2% 16.2% 17.1% 18.2%FOCF rep. / total debt rep. 14.7% 5.5% 1.7% 1.7% -2.6% 8.4% 20.5% 5.7% 5.3% 6.4%FOCF rep. / net debt rep. 14.9% 5.6% 1.7% 1.8% -2.8% 9.4% 22.7% 6.4% 6.0% 7.3%RCF rep. / net debt rep. 16.6% 17.1% 19.1% 14.2% 4.4% 21.5% 19.2% 16.2% 17.6% 19.5%RCF adj. / net debt adj. 16.3% 16.7% 18.3% 14.1% 5.1% 20.4% 18.2% 16.2% 17.1% 18.2%Total debt rep. / EBITDA rep. 11.0 11.1 10.6 14.6 15.6 11.7 13.6 10.9 10.2 9.4Net debt rep. / EBITDA rep. 10.9 10.9 10.3 13.4 14.5 10.5 12.3 9.7 9.1 8.3Net debt adj. / EBITDA adj. 5.3 5.6 5.2 5.7 9.7 4.5 5.0 4.4 4.2 4.0FFO rep. / net interest rep. 6.3 8.3 7.9 3.9 1.1 4.1 1.0 3.1 3.2 3.3FFO rep. / gross interest rep. 6.2 8.1 7.4 3.9 1.1 3.9 1.0 3.1 3.2 3.3Capex / sales 2.1% 1.8% 2.2% 12.2% 1.0% 0.9% 1.2% 1.4% 1.7% 1.9%Capex / depreciation 152.6% 119.9% 210.8% 1143.3% 62.1% 59.6% 77.2% 89.8% 103.7% 116.2%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 85.9% 85.7% 78.1% 76.9% 81.3% 79.6% 81.4% 78.4% 77.0% 75.2%Net debt / net capitalization rep. 85.7% 85.5% 77.6% 75.3% 80.2% 77.8% 79.8% 76.5% 74.8% 72.7%Net debt / net capitalization adj. 85.3% 85.2% 79.0% 76.4% 80.7% 81.2% 84.7% 82.8% 81.8% 80.6%Net working capital / sales 142.9% 150.2% 158.4% 151.9% 162.3% 121.3% 129.2% 130.2% 141.3% 150.2%Fixed assets / sales 8.7% 8.3% 9.8% 72.6% 88.1% 73.5% 74.1% 55.1% 36.4% 17.6%


Comment FY 2008 FY 2009 FY 2010Sales growth Lower car rental market growth 2.0% 1.0% 2.0%EBITDA growth Rather unchanged profitability 2.7% 1.1% 2.0%EBIT growth Rather unchanged profitability 2.5% 1.2% 2.0%Capex incl. acquisition Capex/Sales approx. 1-2% of sales 64 35 40Change in working capital Increase in vehicle fleet size -236 -262 -251Funds from operations (FFO) FFO/Sales 21-22% 439 450 465


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Ford (SELL) Investment rationale We continue to have a sell recommendation on Ford Credit bonds. We mainly cover the

euro-denominated benchmark-sized bonds issued by Ford Credit and FCE Bank plc., which are both 100% owned by Ford Motor. After management announced several downward revisions of its planning assumptions regarding industry volume, market share and automotivefree cash flow, we think that the risks around the name are still high in the current volatilefunding environment with Ford Credit having significant bond redemptions, secured debtmaturities and a deteriorating earnings environment (e.g. lower resale value of cars, higherrefinancing costs, increasing delinquency rates) and Ford Motor continuously generatingnegative free cash flow due to ongoing cash outflow for its restructuring activities. In addition,the risk of weakening U.S. car sales (high oil prices, weaker US consumer confidence) and a subsequent further step-up in necessary restructuring are still high. On the other hand, the following are credit positive factors: the high available liquidity of both Ford Motor Co. and Ford Credit, the labor agreement with the UAW, as this will reduce Ford's healthcareobligation by USD 23.7 bn in 2010 with funding of USD 13.6 bn, thereof cash funding of USD 5.1 bn in 2008-2009. Ford Credit also has no mortgage or subprime exposure like GMAC. We also note that the Big 3 and the U.S. auto suppliers are heavily lobbying for USD 25-50 bn in government loan guarantees to speed development of fuel-efficient vehicles.

Recent developments On June 20, Ford said that it is making further reductions to its North American truckproduction plan while adding more small cars, crossovers and fuel-efficient powertrains, in response to the continued deterioration in the U.S. businessenvironment and the accelerated shift away from large trucks and SUVs.

EUROPE WAS THE STRONGEST DIVISION OF FORD IN H1 FORD'S U.S. MARKET SHARE CONTINUES TO SLIDE

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Latest results recap On July 24, the company reported Q2 2008 results with an EPS of -62 cents, which was below the expectation of -28 cents. In H1 2008, automotive free cash flow (after capex and subvention payments to Ford Credit of USD 1.6 bn and before pension contributions) weakened to USD -4.6 bn vs. USD 2.9 bn y-o-y. Ford's global automotive margin in Q2 weakened to -2.6% vs. -0.4% y-o-y. Revenues in North America plunged by 24% to USD 14.2 bn and Q2 EBT (adj.) to USD -1.3 bn vs. USD -0.3 bn y-o-y, reflecting unfavorable volumeand mix, especially in the full-size pickup truck and traditional SUV segments, and unfavorable net pricing, partly offset by cost reductions. For Q2, Ford South Americarevenues increased by 28% to USD 2.3 bn and EBT improved to USD 388 mn vs. USD 255 mn a year ago. In Europe, revenues increased by 26% (in USD terms) and EBT improved toUSD 582 mn vs. USD 262 mn, primarily explained by favorable volume and mix, and cost

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reductions. In Q2, Volvo's revenues dropped by 48% to USD 4.3 bn and EBT declined to USD -120 mn vs. USD -399 mn y-o-y, reflecting unfavorable volume and mix, unfavorable net pricing, and unfavorable exchange rates, partially offset by cost reductions. Ford Asia Pacific Africa revenues improved by 3.0% to USD 1.8 bn and the EBT improved to USD 50 mn vs.USD 26 mn y-o-y. Ford Motor Credit weakened to USD -334 mn vs. USD 105 mn y-o-y, reflecting higher depreciation expenses for leased vehicles and higher provisions for creditlosses and weakness in the North American vehicle auction market. In LTM H1 2008, weestimate industrial FFO/total debt (adj.) of about 5.5% and total debt/EBITDA (adj.) of about7.0x.

LIQUIDITY OVERVIEW FOR NEXT TWELVE MONTHS AFTER Q2 2008 RESULTS

Ford Motor Corp. Ford Motor Credit Gross cash 26.6 Cash 19.6 Unused committed facilities 11.6 Committed ABCP and ABS liquidity programs 35.4 Ballpark estimate for automotive cash burn -10.0 Asset-backed CP (FCAR) 16.3 Total short-term debt -1.4 Credit facilities 2.7 Liquidity at end of H1 2009 26.8 Capacity: in excess of eligible receivables -7.8 Cash to support on-balance sheet securitizations -5.4 Utilization -37.8 LT debt payable within one year, senior notes -12.1 Liquidity at end of H1 2009 10.9


Liquidity Ford and Ford Credit's short-term liquidity appears sufficient over a 12-month horizon.The biggest challenge on the side of Ford Credit is the continuous necessary refinancing of itsABCP and ABS liquidity programs. At Ford Motor, the biggest challenge is the extent of itsautomotive cash burn (and potential support for Ford Credit to stay within its leverage target)and to stay within its (not publicly known) loan covenants. Ford/Ford Credit bond maturities in 2008 are USD 1.9 bn, but USD 12.2 bn in 2009. For 2008, Ford Credit's public term fundingplan is between USD 13-18 bn (H1 2008: USD 11 bn), USD 1-3 bn in unsecured funding (H1 2008: USD 1 bn) and USD 12-15 bn in securitization (H1 2008: USD 10 bn). Its private term debt funding plan is for between USD 12-18 bn (H1 2008: USD 11 bn). Ford stated that during 2007-2009 it expects its negative automotive FCF (incl. cash expenditures for personnelreductions and accelerated interest supplement as well as lease support payments to Ford Credit) to exceed USD 16 bn (of which USD 7 bn has already been expensed as of H1 2008).The cash outflow includes investments in new products (at USD 6 bn p.a.). Ford's recentUAW labor agreement should contribute meaningfully to its cash flow prior to 2010.

Company outlook/ credit profile trend/Model assumptions/risks

Ford said that it expects its 2008 operating and overall results now to be worse than2007. Its planning assumptions for U.S. Industry Volume are 14-14.5 mn and for Europe are 17.2-17.4 mn. For 2008, the company expects a negative operating-related cash flow (FY 2007: USD 0.4 bn), capex of USD 6 bn and U.S. market share (Ford, Lincoln, Mercury) in thehigh 13% area. Given the company's cash outflow guidance, we do not expect any improvement in its credit metrics in 2008-2009. We largely used Ford's guidance for main figures, unchanged pension/health-care debt adjustments. Main risks to our model are the failure to execute the restructuring plan cost savings and improve FCF due to further declines in market share and lower industry sales, especially in North America.

Things to watch ● November 7, 2008: Q3 2008 results


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CAPITALIZATION (FORD MOTOR CO., AUTOMOTIVE OPERATIONS)

Debt at H1 2008 Issuer Automotive operations Short-term debt USD 1,432 mn (thereof: bonds USD 500 mn) Long-term debt USD 25,028 mn (thereof bonds USD 13.5 bn) Senior Notes Issuer Ford Motor Co. All bond maturities, currencies 14,217 mn 2008 maturities 500 mn 2009 maturities 0 mn 2010 maturities 2 mn Liquidity and available credit lines (in USD) at H1 2008 Gross cash Gross cash: USD 26.6 bn, thereof:

– Cash and cash equivalents: USD 16.9 bn – Marketable securities: USD 5.1 bn – Loaned securities: USD 7.4 bn – Securities-in-transit: USD -0.1 bn – UAW-Ford Temporary Asset Account: USD -2.7 bn – Short-term VEBA assets: USD -- bn.

Credit facilities – USD 12.2 bn of contractually-committed credit facilities with financial institutions, including: - USD 11.5 bn senior secured credit facility established in December 2006 - USD 700 mn of unsecured credit facilities USD 11.6 bn of these facilities were available for use; of the lines available for use, 98% (or USD 11.4 bn) are committed through December 15, 2011, and the remainder are committed for a shorter period of time.

– Collateral for secured facilities: Includes a majority of principal domestic manufacturing facilities, excluding facilities to be closed, subject to limitations set forth in existing public indentures and other unsecured credit agreements; domestic accounts receivable; domestic inventory; up to USD 4 bn of marketable securities or cash proceeds there from; 100% of the stock of principal domestic subsidiaries, including Ford Credit (but excluding the assets of Ford Credit); certain intercompany notes of Ford VHC AB, a holding company for Volvo Car Corporation (“Volvo”), Ford Motor Company of Canada, Limited (“Ford Canada”) and Grupo Ford S. de R.L. de C.V. (a Mexican subsidiary); 66% -100% of the stock of all major first tier foreign subsidiaries (including Volvo); and certain domestic intellectual property, including trademarks.

– Covenants: The Credit Agreement requires ongoing compliance with a borrowing base covenant and contains other restrictive covenants, including a restriction on the ability to pay dividends. The Credit Agreement prohibits the payment of dividends (other than dividends payable solely in stock) on common and class B stock, subject to certain limited exceptions. In addition, the Credit Agreement contains a liquidity covenant to maintain a minimum of USD 4 bn in the aggregate of domestic cash, cash equivalents, loaned and marketable securities and short-term VEBA assets and/or availability under the RCF. Based on the Borrowing Base value of USD 22.3 bn and the total outstanding amount of debt secured by collateral of USD 7.5 bn, the resulting collateral coverage ratio is 2.96. Assuming the USD 11.5 bn RCF were fully drawn and the USD 1.5 bn of non-loan exposure permitted under the facility were fully utilized, the collateral coverage ratio would have been 1.12. All of the global unsecured credit facilities are free of MAC clauses, restrictive financial covenants (e.g. debt-to-equity limitations and minimum net worth requirements), and credit rating triggers.

– Events of Default: In addition to customary payment, representation, bankruptcy and judgment defaults, the Credit Agreement contains cross payment and cross acceleration defaults with respect to other debt for borrowed money and a change in control default.

Source: Company data, Bloomberg, UniCredit Global Research

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CAPITALIZATION (FORD MOTOR CREDIT, FINANCIAL SERVICES SECTOR)

Total debt at H1 2008 Issuer Financial services sector (Ford Motor Credit Corp.) Total debt USD 137,519 mn Total short-term debt USD 26,260 mn - ABCP USD 14,213 mn - Other asset-backed short-term debt USD 4,843 mn - Ford Interest Advantage USD 4,855 mn - Unsecured CP's USD 460 mn - Other short-term debt USD 1,889 mn Long-term debt payable within one year USD 34,327 mn - Senior notes USD 12,101 mn - Asset-backed notes USD 22,226 mn Long-term debt after one year USD 77,013 mn Senior debt USD 43,572 mn Asset-backed notes USD 33,441 mn Senior Notes (in USD) Issuer Ford Group All bond maturities, currencies 61,198 mn 2008 maturities 1,931 mn 2009 maturities 12,363 mn 2010 maturities 7,575 mn 2008 Term debt funding plan Public term funding plan:

– Between USD 13-18 bn (H1 2008: USD 11 bn) – USD 1-3 bn in unsecured funding (H1 2008: USD 1 bn) and USD 12-15 bn in securitization (H1 2008: USD 10 bn) Private term debt funding plan: – Private term funding plan between USD 12-18 bn (H1 2008: USD 11 bn)

Available liquidity and credit Lines at H1 2008 (in USD bn) Cash, cash equivalents and marketable securities USD 19.6 bn Committed ABCP and ABS liquidity programs USD 35.4 bn

- Agreements with a number of bank-sponsored ABCP conduits (“conduits”) and other financial institutions whereby such parties are contractually committed, at Ford's option, to purchase eligible retail or wholesale assets or to purchase or make advances under ABS backed by retail or wholesale assets for proceeds of up to USD 29.4 bn at H1 2008 (USD 17.5 bn retail and USD 11.9 bn wholesale) of which USD 10.4 bn are commitments to FCE. These committed liquidity programs have varying maturity dates, with USD 20.4 bn having maturities within the next 12 months (of which USD 3.8 bn relates to FCE commitments), and the balance having maturities between August 2009 and September 2011. Ford's ability to obtain funding under these programs is subject to having a sufficient amount of assets eligible for these programs. At H1 2008, USD 19.1 bn of these commitments were in use. These programs are free of MAC clauses, restrictive financial covenants and credit rating triggers. However, the unused portion of these commitments may be terminated if the performance of the underlying assets deteriorates beyond specified levels. Based on Ford's experience and knowledge as servicer of the related assets, we do not expect any of these programs to be terminated due to such events. - Committed liquidity program for the purchase of up to USD 6 bn of unrated ABS of which USD 4 bn is committed through 2009, that at Ford's option can be supported with various retail, wholesale, or lease assets. Ford's ability to obtain funding under this program is subject to having a sufficient amount of assets available to issue the securities. This program is also free of MAC clauses, restrictive financial covenants and credit rating triggers. At H1 2008, Ford had USD 3.1 bn of outstanding funding in this program.

Asset-backed CP (FCAR) USD 16.3 bn Credit facilities USD 2.7 bn Committed capacity USD 54.4 bn Committed capacity and cash USD 74.0 bn Less: capacity: in excess of eligible receivables USD -7.8 bn Less: Cash to support on-balance sheet securitizations USD -5.4 bn Less: Utilization USD -37.8 bn Liquidity available for use USD 23.0 bn

Source: Company data, Bloomberg, UniCredit Global Research

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Business Description – Ford Motor (exFinSvcs) Ford Motor Company designs, manufactures and services cars and trucks. The company also provides vehicle-related financing, leasing, and insurance through Ford Motor Credit Company. In addition, Ford provides the rental of cars, trucks, and industrial & construction equipment through the Hertz Corporation. At FYE 2007, the company employed around 246,000 people worldwide, thereof 94,000 in North America. The main shareholders are 40% Class B stock (Ford family); 60% common stock is 13.1% Bank of America, 7.5% Wellington, 7.35% Brandes, 4.5% Tracinda. Market cap is currently approx. USD 18.1 bn.

VEHICLE MIX OF SALES BY SEGMENT IN U.S. (FY 2007)

Full-size pickup27%

Other10%

SUV/CUV30%

Cars33%


EBT BY SEGMENT (FY 2007)

(4,000) (3,000) (2,000) (1,000) - 1,000 2,000

North Americasegment

Other automotive

Asia Pacific

Volvo

Europe

South America

Ford Motor Credit



<1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years >5 yearsFinancial debt 61,052 29,215 16,944 17,030 9,286 35,003

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B- Negative Progress in North American turnaround; maintaining substantial cash balance

Moody's B3 Negative Four year labor agreement; significant liquidity position, balanced against challenging environment & negative CF generated through 2009

Fitch B- Negative Decline in key product categories, relentless competition

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

F 5.75% 1/12/2009 B-n/B1n/B+n EUR 1,500 F Float +100 bp 9/30/2009

Bn/B1n/B+n EUR 750

F 4.875% 1/15/2010 B-n/B1n/B+n EUR 750 F 7.125% 1/16/2012 Bn/B1n/B+n EUR 1,000 F 7.125% 1/15/2013 Bn/B1n/B+n EUR 1,000

BOND STRUCTURE

Ford Motor Co.

NoteholdersFord Motor Credit

100%


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PROFIT AND LOSS (FORD MOTOR (EXFINSVCS))

in USD mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 138,260 147,134 153,503 143,307 78,736 154,379 76,174 149,748 149,748 152,743Cost of goods and services sold -129,685 -135,856 -144,944 -148,869 -70,897 -142,587 -75,451 -138,367 -138,367 -141,134Administration -10,131 -11,455 -12,768 -12,359 -7,298 -13,660 -6,064 -13,178 -13,178 -13,441Other operating income/expenses 0 0 0 0 0 -2,400 0 0 0 0EBITDA reported 3,940 6,247 3,973 -11,121 4,041 2,495 5,259 5,203 5,403 5,567EBIT reported -1,556 -177 -4,209 -17,921 541 -4,268 -5,341 -1,797 -1,797 -1,833Adj. EBIT (bef. pension interest) 2,509 2,472 1,354 -841 2,801 691 -3,972 -9 138 114Income from investments 3,321 5,263 5,238 2,387 610 1,613 -2,260 1,613 1,613 1,613Interest result -426 -233 29 483 -269 -1,091 -1,113 -945 -745 -458EBT reported 1,339 4,853 1,058 -15,051 882 -3,746 -8,714 -1,129 -929 -678Taxes on income -123 -937 527 2,646 -305 1,294 349 400 330 240Net income 1,216 3,916 1,585 -12,405 577 -2,452 -8,365 -729 -599 -438


in USD mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 50,177 51,187 48,063 47,505 45,509 40,313 36,501 37,120 32,227 25,634 thereof goodwill 5,378 6,374 5,928 6,804 6,327 2,051 2,034 2,051 2,051 2,051Cash & cash equivalents 21,843 19,492 23,713 32,588 35,384 33,037 29,394 33,037 33,037 33,037Total assets 136,133 129,652 121,599 132,195 134,424 125,503 120,126 129,976 126,083 119,940Equity incl. minorities 8,779 16,922 14,048 -2,142 -695 7,049 -224 127 -6,665 -13,296Pension provisions 29,836 22,752 26,031 36,294 36,294 34,721 34,721 34,721 34,721 34,721Other provisions 17,714 16,122 13,354 13,545 12,406 7,738 5,049 7,738 7,738 7,738Financial liabilities 24,149 21,188 17,961 30,653 29,978 26,697 27,211 36,010 38,909 38,997 short term (<1 year) 1,930 2,359 1,061 2,139 1,598 920 1,432 n.m. n.m. n.m. long term (>1 year) 22,219 18,829 16,900 28,514 28,380 25,777 25,779 n.m. n.m. n.m.Net working capital -5,462 2,458 1,927 2,620 167 2,251 4,425 4,535 4,535 4,585

CASH FLOW

in USD mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 3,129 7,066 6,542 -5,449 4,800 4,545 1,400 1,271 3,601 6,962Change in working capital -1,811 -68 -1,106 8,039 700 -357 -3,100 -2,284 0 -50Operating cash flow 1,318 6,998 5,436 2,590 5,500 4,188 -1,700 -1,013 3,601 6,912CAPEX -7,357 -6,287 -7,123 -6,809 -2,600 -5,971 -2,900 -6,000 -6,500 -7,000Free cash flow -6,039 711 -1,687 -4,219 2,900 -1,783 -4,600 -7,013 -2,899 -88Dividends -733 -733 -738 -468 0 0 0 0 0 0Acquisitions/disposals 4,505 4,582 6,432 1,029 800 1,792 -2,300 -2,300 0 0Share buy back/issues 9 -151 325 248 0 3,491 0 0 0 0FCF after extraordinary items -2,258 4,409 4,332 -3,410 3,700 3,500 -6,900 -9,313 -2,899 -88

DEBT ADJUSTMENTS

in USD mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions 36,759 36,992 37,443 36,294 34,843 34,721 30,017 34,721 34,721 34,721For operating leases 1,417 1,380 1,412 1,341 1,341 1,246 1,246 1,360 1,475 1,589Others* -4,000 -4,100 -1,387 -1,800 -2,200 -1,900 -1,900 -1,900 -1,900 -1,900


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PROFITABILITY RATIOS (FORD MOTOR (EXFINSVCS))

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 2.8% 4.2% 2.6% -7.8% 5.1% 1.6% 6.9% 3.5% 3.6% 3.6%EBITDA margin adj. 6.0% 6.3% 6.4% 4.4% 8.2% 5.1% 8.9% 5.0% 5.2% 5.2%EBIT margin rep. -1.1% -0.1% -2.7% -12.5% 0.7% -2.8% -7.0% -1.2% -1.2% -1.2%EBIT margin adj. 1.8% 1.7% 0.9% -0.6% 3.6% 0.4% -5.2% 0.0% 0.1% 0.1%Return on capital (before tax) n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m.


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 3,940 6,247 3,973 -11,121 4,041 2,495 5,259 5,203 5,403 5,567EBITDA adj. 8,309 9,230 9,878 6,315 6,479 7,800 6,802 7,487 7,712 7,901FFO rep. 3,129 7,066 6,542 -5,449 4,800 4,545 1,400 1,271 3,601 6,962FFO adj. 3,433 7,400 6,884 -5,093 4,978 4,891 1,573 1,631 3,975 7,349Net debt rep. 2,306 1,696 -5,752 -1,935 -5,406 -6,340 -2,183 2,973 5,872 5,960Net debt adj. 36,482 35,967 31,716 33,900 28,578 27,727 27,180 37,154 40,168 40,370Total debt 24,149 21,188 17,961 30,653 29,978 26,697 27,211 36,010 38,909 38,997EBITDA net interest cover rep. 9.2 26.8 -137.0 23.0 15.0 2.3 4.7 5.5 7.3 12.2EBITDA gross interest cover rep. 3.0 5.1 3.3 -11.2 3.5 1.1 5.2 5.5 7.3 12.2EBIT net interest cover rep. -3.7 -0.8 145.1 37.1 2.0 -3.9 -4.8 -1.9 -2.4 -4.0EBIT net interest cover adj. 4.4 6.7 12.1 2.4 8.3 0.6 -3.4 0.0 0.2 0.2FFO rep. / total debt rep. 13.0% 33.3% 36.4% -17.8% -10.5% 17.0% 4.2% 3.5% 9.3% 17.9%FFO rep. / net debt rep. 135.7% 416.6% -113.7% 281.6% 58.3% -71.7% -52.5% 42.8% 61.3% 116.8%FFO adj. / net debt adj. 9.4% 20.6% 21.7% -15.0% -9.7% 17.6% 5.5% 4.4% 9.9% 18.2%FOCF rep. / total debt rep. -25.0% 3.4% -9.4% -13.8% -1.6% -6.7% -41.8% -19.5% -7.5% -0.2%FOCF rep. / net debt rep. -261.9% 41.9% 29.3% 218.0% 8.6% 28.1% 521.5% n.m. n.m. n.m.RCF rep. / net debt rep. 103.9% 373.4% -100.9% 305.8% 59.5% -71.7% -52.5% 42.8% 61.3% 116.8%RCF adj. / net debt adj. 7.4% 18.5% 19.4% -16.4% -10.0% 17.6% 5.5% 4.4% 9.9% 18.2%Total debt rep. / EBITDA rep. 6.1 3.4 4.5 -2.8 -4.4 10.7 7.3 6.9 7.2 7.0Net debt rep. / EBITDA rep. 0.6 0.3 -1.4 0.2 0.8 -2.5 -0.6 0.6 1.1 1.1Net debt adj. / EBITDA adj. 4.4 3.9 3.2 5.4 2.9 3.6 3.3 5.0 5.2 5.1FFO rep. / net interest rep. 8.3 31.3 -224.6 12.3 18.8 5.2 2.3 2.3 5.8 16.2FFO rep. / gross interest rep. 3.4 6.8 6.4 -4.5 5.1 3.0 2.4 2.3 5.8 16.2Capex / sales 5.3% 4.3% 4.6% 4.8% 3.3% 3.9% 3.8% 4.0% 4.3% 4.6%Capex / depreciation 134.4% 98.3% 87.6% 101.1% 74.3% 88.3% 96.7% 85.7% 90.3% 94.6%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 73.3% 55.6% 56.1% 107.5% 102.4% 79.1% 100.8% 99.6% 120.7% 151.7%Net debt / net capitalization rep. 20.8% 9.1% -69.3% 47.5% 88.6% n.m. 90.7% 95.9% n.m. n.m.Net debt / net capitalization adj. 95.2% 93.1% 92.3% 102.1% 97.4% 70.2% 85.8% 88.5% 105.1% 127.0%Net working capital / sales -4.0% 1.7% 1.3% 1.8% 0.1% 1.5% 2.9% 3.0% 3.0% 3.0%Fixed assets / sales 36.3% 34.8% 31.3% 33.1% 30.9% 26.1% 24.0% 24.8% 21.5% 16.8%


Comment FY 2008 FY 2009 FY 2010Sales growth Weak growth in U.S., other markets above GDP -3.0% 0% 2.0%EBITDA growth Some improvement from restructuring 108.5% 3.8% 3.0%EBIT growth Difficult auto earnings environment in U.S. -57.9% 0% 2.0%Capex incl. acquisition Capex plan 11,000 6,500 7,000Change in working capital Relatively unchanged -2,284 0 -50Funds from operations (FFO) FFO margin at approx. 2% 1,271 3,601 6,962


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General Motors (SELL) Investment rationale We continue to have a sell recommendation for GM bonds. We focus our coverage on

GM's EUR-denominated benchmark bonds GM 8.375% 07/33 and GM 7.25% 07/13, whichcurrently trade at price levels below 50 and 60, respectively. Main risks for the bond price are a weaker-than-expected free cash flow of GM due to a continued decline in its NorthAmerican and global automotive earnings and at its shareholding in GMAC as well as the difficult funding environment. The other automotive businesses in Europe and other countries are weak profit contributors. In addition, the company continues to have significant cashoutflows for the restructuring of its North American business and for Delphi. Another riskwould be potential support for GMAC and indirectly for ResCap. We also believe that there is execution risk for its plan to bolster liquidity by a cumulative USD 15 bn through 2009, especially regarding the target to generate USD 4-7 bn through asset sales and financing activities. We note that GM indicated that in case of an emergency it would have additional gross unencumbered assets of over USD 20 bn (e.g. stock of foreign subsidiaries, brands, stake in GMAC, and real estate), which could support a significant secured debt offering, ormultiple offerings. This, in turn, would lead to a further decline in the recovery value for GM'sunsecured bondholders. We also note that the Big 3 and the US auto suppliers are heavilylobbying for USD 25-50 bn in government loans for the development of fuel-efficient vehicles.

LOSSES AT GMAC AND GMNA NORTH AMERICAN VOLUMES DOWN SINCE 2002

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

2001 2002 2003 2004 2005 2006 2007 H1 07 H1 08

EB

T (a

dj.)

in U

SD

mn

GMNA GME Other Automotive GMAC/other financing

0

1,000

2,000

3,000

4,000

5,000

6,000

2000 2001 2002 2003 2004 2005 2006 2007 H107

H108

Uni

t sal

es (i

n '0

00)

20

21

22

23

24

25

26

27

28

29

Mar

ket s

hare

GMNA unit deliveries North American market share (cars/trucks)


Latest results recap On August 1, GM presented H1 2008 results. Automotive revenues decreased by 10.3% to USD 80.6 bn and adjusted EBITDA dropped to USD 1.6 bn vs. USD 8.6 bn y-o-y. Automotive free cash flow (after capex, dividends, cash restructuring costs) weakened to USD-7.8 bn vs. USD 1.1 bn y-o-y on lower FFO, a working capital build-up and higher capex. Reported net debt increased to USD 19.9 bn vs. USD 12.7 bn at FYE 2007. In LTM H1 2008, credit metrics deteriorated to net debt/EBITDA (adj.) of 14.2x from 5.2x in FY 2007 and FFO/net debt (adj.) weakened to -2.6%. GM's H1 2008 EBT (adj.) segment margin in the automotive business declined to -3.1% vs. 4.9% y-o-y, with GMNA's segment EBT margin in H1 2008 deteriorating to -11.4% vs. -0.3% y-o-y.

Liquidity The company's liquidity was sufficient at H1 2008, with cash, marketable securities and readily available assets of the VEBA trust of USD 21.6 bn and USD 7.6 bn in unused committed credit facilities. GM had USD 8 bn of short-term debt at H1 2008 and estimates the cash impact of its special items to be around EUR 1 bn in 2008/2009 and USD 1.7 bn post2009. GM's target is to maintain at least USD 18-20 bn in liquidity and access to USD 4-5 bn in credit lines. GM estimates that a one-million unit decline in the US auto industry would have

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a negative liquidity impact of approximately USD 2-3 bn. Our ballpark estimate for automotive cash burn is around USD 10 bn over the next 12 months. Some relief will come in 2010 from GM's UAW Labor Agreement, which will reduce retiree health-care obligations. GM's pro-forma OPEB expense will remain unchanged in 2008/2009, but the estimated annual pre-tax savings in 2010/11 will be USD 2.6-3.4 bn. The cash impact will be USD -3.3 bn in 2008, USD -0.9 bn in 2009, USD +2.6 bn in 2010 and USD +3.1 bn in 2011.

LIQUIDITY OVERVIEW FOR NEXT TWELVE MONTHS AFTER Q2 2008 RESULTS (IN USD BN)

General Motors GMAC Cash, marketable securities, VEBA 21.6 Cash 14.3 Available under credit facilities 7.6 Unused committed unsecured 0.4 Total short-term debt in balance sheet -8.8 Unused committed secured 65.4 Ballpark estimate for automotive cash burn in 12 months offset by liquidity measures

-10.0 Unused uncommitted unsecured 1.2

Liquidity at end of H1 2009 10.4 Unused uncommitted secured 4.3 Short-term debt -25.3 Long-term debt, due within one year -38.5 Liquidity at end of H1 2009 21.8


Company outlook/ credit profile development

On July 15, GM released a plan to improve its liquidity by a cumulative USD 15 bn through 2009. GM's liquidity planning assumptions are US light vehicle industry volumes of 14.0 mn units in 2008-2009 (FY 2007: 16.2 mn), US market share of approx. 21% (FY 2007: 23.5%) and a continued elevated average oil price of USD 120-140 mn in 2008 and USD 130-150 in 2009. While GM noted that it would have ample liquidity to meet its 2008 funding requirements, it is taking additional measures to bolster liquidity to protect itself against aprolonged US economic downturn, including a combination of operating and related actions, as well as asset sales and capital market activities. Through a number of internal operating changes and other actions, GM expects to generate around USD 10 bn in cumulative cashimprovements by the end of 2009 versus original plans. These measures include: GMNA structural cost USD 2.5 bn, salaried employment & OPEB savings USD 1.5 bn, capexreductions USD 1.5 bn, working capital improvements USD 2 bn, UAW VEBA payment deferrals USD 1.7 bn and dividend suspension USD 0.8 bn. GM tries to raise USD 4-7 bn through asset sales and financing activities consisting of: (a) USD 2-4 bn from sale or monetization of assets without impacting the strategic direction of the company (e.g.Hummer). Examples of such assets include stock of foreign subsidiaries, brands, stake in GMAC, and real estate; (b) opportunistically access global markets to raise additional liquidity initially targeting at least USD 2-3 bn in financing.

Model assumptions/risks GM's automotive credit metrics in 2008 will remain rather unchanged. For FY 2008-09, we estimate a cumulative cash outflow (after capex, dividends, after restructuring cash out, before net disposals) of USD 18 bn. In our scenario, GM's auto free cash flow will not turn positive before FY 2010. We estimate a negative automotive FFO/net debt (adj.) in FY 2008 and the return to 5.7% in FY 2009, which is commensurate to a CCC+ rating profile.Significant risks to our model relate to deviations in GM's liquidity plan assumptions andexecution risks connected to this.



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CAPITALIZATION (GENERAL MOTORS CORP.)

Debt at H1 2008 Issuer GM Autos & Other Short-term debt USD 8,008 mn Long-term debt USD 32,450 mn Senior Notes Senior Notes (in USD) Issuer GM at June 27, 2008 (Source: Bloomberg) GM bond maturities, currencies 15,961 mn 2008 maturities 750 mn 2009 maturities 19 mn 2010 maturities 0 2011 maturities 1,548 mn Available liquidity and credit Lines (in USD) at H1 2008 Available liquidity – USD 21.6 bn, thereof: Cash & cash equivalents: USD 19.4 bn, marketable securities: USD 1.1 bn, Readily-available assets

of VEBA trusts: USD 0.5 bn. Available under credit facilities – EUR 7.6 bn, thereof: USD 5.0 bn available in the U.S., USD 1.1 bn in other countries and USD 1.5 bn in JV's. Secured credit lines with a syndicate of banks

– USD 4.5 bn standby revolver (matures in July 2011); at H1 2008 the availability under the revolver was USD 4.4 bn.; borrowings are limited to an amount based on the value of the underlying collateral, which consists of certain North American accounts receivable and inventory of GM, Saturn Corporation, and General Motors of Canada Limited (GM Canada), certain facilities, property and equipment of GM Canada and a pledge of 65% of the stock of the holding company for our indirect subsidiary General Motors de Mexico, S de R.L. de C.V. This collateral also secures certain lines of credit, automatic clearinghouse and overdraft arrangements, and letters of credit provided by the same secured lenders, totaling USD 1.6 bn. In the event of work stoppages that result in the loss of a certain level of production, the secured facility would be temporarily reduced to USD 3.5 bn. As of August 1, 2008, Ford borrowed USD 1.0 bn against this facility leaving USD 3.4 bn currently available.

– USD 1.0 bn revolving credit agreement expiring in August 2009 that provides for borrowings of up to at June 30, 2008 for general corporate purposes, including working capital needs. Borrowings are limited to an amount based on the value of underlying collateral, which consists of residual interests in trusts that own leased vehicles and issue ABS collateralized by the vehicles and the associated leases. The underlying collateral was previously owned by GMAC and was transferred to GM as part of the GMAC transaction in November 2006. The underlying collateral is held by bankruptcy-remote subsidiaries and pledged to a trustee for the benefit of the lender. GM consolidates the bankruptcy-remote subsidiaries and trusts for financial reporting purposes. At H1 2008, USD 0.1 bn available.

– USD 0.5 bn in U.S. undrawn committed facilities, including certain off-balance sheet securitization programs, with various maturities up to one year.

– USD 1.0 bn in undrawn uncommitted lines of credit in other countries. – USD 1.5 bn in undrawn committed facilities for GM's consolidated affiliates with non-GM minority shareholders, primarily

GM Daewoo.

Source: Company reports, Bloomberg, UniCredit Global Research

<date>




Business Description – General Motors (exFinSvcs) General Motors Corporation manufactures and sells vehicles worldwide. At FYE 2007, the company had 266,000 employees worldwide (thereof: 139,000 at GM North America, 57,000 at GM Europe). The main shareholders are: 13.9% State Street, 7.1% Brandes Inv., 7.3% Southeastern AM. Market cap is currently around USD 11.4 bn.

SALES BY SEGMENT (FY 2007)

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

GMNA Totalfinancing

GME GMAP GMLAAM Other auto

in U

SD

mn


EBT BY SEGMENT (FY 2007)

-2,000 -1,500 -1,000 -500 0 500 1,000 1,500

GMLAAM

GMAP

GME

Total financing

Other auto

GMNA

in USD mn




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B- Negative Volatile/Unpredictable financial performance

Moody's Caa1 Negative Competitive & market challenges, relatively weak credit metrics in the near term

Fitch B- Negative Negative cash outflow is expected to increase in 2008

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

GM 7.25% 7/3/2013 B-n/Caa2n/CCC+n EUR 1,000 --GM 8.375% 7/5/2033 B-n/Caa2n/CCC+n EUR 1,500 --

BOND STRUCTURE

GM(Caa1n/B-n/B-n)

Noteholders

GMAC LLC(B3n/B-n/BB-n)

GMAC MortgageGroup Inc.

ResidentialCapital, LLC

(Can/CCC+n/Ccwn)

49%

Noteholders

Investment grade noteholders

Other GMACAssets

GM OperatingAssets


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PROFIT AND LOSS (GENERAL MOTORS (EXFINSVCS))

in USD mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 155,831 161,545 160,228 172,927 89,904 178,199 80,645 160,379 160,379 165,190Cost of goods and services sold -143,464 -148,689 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Administration -11,863 -11,863 -178,034 -180,595 -89,268 -182,589 -93,710 -179,440 -158,989 -157,220EBITDA reported 8,450 9,593 -7,706 532 4,736 3,910 -9,065 -10,461 10,191 17,070EBIT reported 504 993 -17,806 -7,668 636 -4,390 -13,065 -19,061 1,391 7,970Adj. EBIT (bef. pension interest) 7,764 6,702 44 4,888 4,363 3,211 -2,522 -7,100 10,352 13,931Income from investments 2,595 2,621 0 0 261 524 -3,282 -3,000 -2,000 -1,000Interest result -1,780 -2,480 1,066 2,721 -277 -1,674 -1,408 n.a. n.a. n.a.EBT reported 1,319 1,134 -16,740 -4,947 620 -5,540 -17,755 -24,813 -3,361 4,218Taxes on income 869 1,847 5,870 2,785 381 -37,162 -961 -1,200 -1,200 -600Net income 2,188 2,981 -10,870 -2,162 1,001 -42,702 -18,716 -26,013 -4,561 3,618


in USD mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 43,582 45,545 355,598 67,144 67,212 62,991 57,952 55,991 54,191 53,091 thereof goodwill 567 600 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Cash & cash equivalents 23,491 19,803 16,603 23,912 23,613 26,688 20,506 20,000 20,000 20,000Total assets 182,326 181,909 474,156 186,192 186,527 148,883 136,046 138,215 137,365 136,965Equity incl. minorities 25,575 28,123 15,700 -4,251 -2,290 -35,480 -55,594 -61,493 -66,054 -62,436Pension provisions 40,237 32,777 40,215 62,020 59,684 58,756 59,250 59,250 59,250 59,250Other provisions 15,657 15,657 20,430 15,957 15,106 15,597 20,825 20,000 20,000 20,000Financial liabilities 33,898 34,948 34,207 38,733 39,284 39,431 40,458 49,118 51,829 46,911 short term (<1 year) 4,305 4,488 1,627 5,666 5,150 6,047 8,008 n.m. n.m. n.m. long term (>1 year) 29,593 30,460 32,580 33,067 34,134 33,384 32,450 n.m. n.m. n.m.Net working capital 1,971 661 -294,135 1,711 -7,378 -2,777 1,201 -518 -568 -768

CASH FLOW

in USD mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 7,433 10,190 300 4,500 4,100 3,900 -1,900 -7,116 4,239 12,718Change in working capital 3,067 1,310 -1,000 -800 200 -500 -1,500 -2,259 50 200Operating cash flow 10,500 11,500 -700 3,700 4,300 3,400 -3,400 -9,375 4,289 12,918CAPEX -6,616 -7,300 -7,900 -7,500 -2,900 -7,500 -4,100 -7,000 -7,000 -8,000Free cash flow 3,884 4,200 -8,600 -3,800 1,400 -4,100 -7,500 -16,375 -2,711 4,918Dividends -1,121 -1,100 -1,100 -600 -300 -600 -300 0 0 0Acquisitions/disposals -18,518 -7,800 5,300 8,800 -500 6,200 1,500 0 0 0Share buy back/issues -7 0 0 0 0 0 0 0 0 0FCF after extraordinary items -15,762 -4,700 -4,400 4,400 600 1,500 -6,300 -16,375 -2,711 4,918

DEBT ADJUSTMENTS

in USD mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions 57,053 56,315 59,093 51,690 50,873 46,150 46,323 46,323 46,323 46,323For operating leases 3,697 3,549 3,797 2,226 2,226 2,031 2,031 2,031 2,031 2,031Others* 0 0 0 0 0 0 0 0 0 0


<date>




PROFITABILITY RATIOS (GENERAL MOTORS (EXFINSVCS))

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 5.4% 5.9% -4.8% 0.3% 5.3% 2.2% -11.2% -6.5% 6.4% 10.3%EBITDA margin adj. 10.3% 9.7% 6.6% 7.7% 9.6% 6.6% 2.0% 1.1% 12.1% 14.1%EBIT margin rep. 0.3% 0.6% -11.1% -4.4% 0.7% -2.5% -16.2% -11.9% 0.9% 4.8%EBIT margin adj. 5.0% 4.1% 0.0% 2.8% 4.9% 1.8% -3.1% -4.4% 6.5% 8.4%Return on capital (before tax) n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m.


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 8,450 9,593 -7,706 532 4,736 3,910 -9,065 -10,461 10,191 17,070EBITDA adj. 16,008 15,609 10,594 13,400 8,619 11,809 1,627 1,798 19,450 23,329FFO rep. 7,433 10,190 300 4,500 4,100 3,900 -1,900 -7,116 4,239 12,718FFO adj. 7,731 10,497 750 4,812 4,256 4,198 -1,751 -6,818 4,536 13,016Net debt rep. 10,407 15,145 17,604 14,821 15,671 12,743 19,952 29,118 31,829 26,911Net debt adj. 71,157 75,009 80,494 68,737 68,769 60,924 68,306 77,471 80,183 75,264Total debt 33,898 34,948 34,207 38,733 39,284 39,431 40,458 49,118 51,829 46,911EBITDA net interest cover rep. 4.7 3.9 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.EBITDA gross interest cover rep. 4.7 3.9 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.EBIT net interest cover rep. 0.3 0.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.EBIT net interest cover adj. 3.6 2.4 -0.1 -2.0 11.2 1.7 -1.7 -2.4 3.5 4.7FFO rep. / total debt rep. 21.9% 29.2% 0.9% 11.6% 13.5% 9.9% -5.2% -14.5% 8.2% 27.1%FFO rep. / net debt rep. 71.4% 67.3% 1.7% 30.4% 33.8% 30.6% -10.5% -24.4% 13.3% 47.3%FFO adj. / net debt adj. 10.9% 14.0% 0.9% 7.0% 8.1% 6.9% -2.6% -8.8% 5.7% 17.3%FOCF rep. / total debt rep. 11.5% 12.0% -25.1% -9.8% -4.3% -10.4% -37.1% -33.3% -5.2% 10.5%FOCF rep. / net debt rep. 37.3% 27.7% -48.9% -25.6% -10.8% -32.2% -75.2% -56.2% -8.5% 18.3%RCF rep. / net debt rep. 60.7% 60.0% -4.5% 26.3% 30.0% 25.9% -13.5% -24.4% 13.3% 47.3%RCF adj. / net debt adj. 9.3% 12.5% -0.4% 6.1% 7.2% 5.9% -3.5% -8.8% 5.7% 17.3%Total debt rep. / EBITDA rep. 4.0 3.6 -4.4 72.8 6.1 10.1 -4.1 -4.7 5.1 2.7Net debt rep. / EBITDA rep. 1.2 1.6 -2.3 27.9 2.4 3.3 -2.0 -2.8 3.1 1.6Net debt adj. / EBITDA adj. 4.4 4.8 7.6 5.1 4.3 5.2 14.2 43.1 4.1 3.2FFO rep. / net interest rep. 5.2 5.1 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.FFO rep. / gross interest rep. 5.2 5.1 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Capex / sales 4.2% 4.5% 4.9% 4.3% 3.2% 4.2% 5.1% 4.4% 4.4% 4.8%Capex / depreciation 83.3% 84.9% 78.2% 91.5% 70.7% 90.4% 102.5% 81.4% 79.5% 87.9%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 57.0% 55.4% 68.5% 112.3% 106.2% 998.0% -267.3% -396.9% -364.4% -302.2%Net debt / net capitalization rep. 28.9% 35.0% 52.9% 140.2% 117.1% -56.0% -56.0% -89.9% -93.0% -75.8%Net debt / net capitalization adj. 89.0% 94.2% 104.1% 91.9% 91.3% 160.1% 266.4% 268.0% 296.4% 292.2%Net working capital / sales 1.3% 0.4% -183.6% 1.0% -4.7% -1.6% 0.7% -0.3% -0.4% -0.5%Fixed assets / sales 28.0% 28.2% 221.9% 38.8% 42.8% 35.3% 34.3% 34.9% 33.8% 32.1%


Comment FY 2008 FY 2009 FY 2010Sales growth Decline in US sales -10.0% 0% 3.0%EBITDA growth Restructuring effects n.m. n.m. 67.5%EBIT growth Restructuring effects 334.2% n.m. 473.2%Capex incl. acquisition Capex plan 7,000 7,000 8,000Change in working capital Working capital rather unchanged -2,259 50 200Funds from operations (FFO) Restructuring effects -7,116 4,239 12,718


<date>




GMAC (SELL) Investment rationale We continue to have a sell recommendation for GMAC bonds. Although current CDS

levels in the meantime discount a default at GMAC and ResCap within five years with a very high likelihood, we think that in the current credit market and earnings environment these credits will continue to underperform. Main risks are funding concerns for (secured) debt and that ResCap and GMAC would need to take further write-downs in 2008 results, which might lead to a violation of ResCap's or GMAC's leverage covenants. Meanwhile, also GMAC'sNorth American automotive finance unit is under pressure and produced a net loss in H1 2008due to GM's difficult situation in the declining U.S. car market (e.g. declining used vehicle prices, higher delinquency rates and refinancing costs). Some of ResCap's credit facilitiescontain certain financial covenants, among other covenants requiring it to maintain aconsolidated tangible net worth of USD 250 mn, and, subject to applicable grace periods,consolidated liquidity of USD 750 mn. In the case of a covenant breach, GMAC would have toinject further equity into ResCap. GMAC's own leverage covenant in its USD 11.4 bn secured facility includes a leverage ratio covenant that restricts the ratio of consolidated borrowedfunds to consolidated net worth to be no greater than 11x on the last day of any fiscal quarter. At H1 2008, this leverage ratio was 10.1x, which indicates relatively low headroom in our view. GM, which is a 49% shareholder of GMAC, already stated that it would have no legalobligation to fund GMAC. We also do not expect Cerberus to inject equity into GMAC and/orResCap.

RESCAP LOSS CONTINUED TO WIDEN IN H1 2008 RESCAP ASSETS FURTHER REDUCED IN H1 2008

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

-

1,000

2,000

2005 2006 2007 H1 07 H1 08

Net

inco

me

Automotive Finance North America Automotive Finance InternationalResCap InsuranceOther

(40,000)

(20,000)

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2005 2006 2007 H1 07 H1 08

Seg

men

t ass

ets

in U

SD

mn

Automotive Finance North America Automotive Finance InternationalResCap InsuranceOther


Recent developments On July 31, S&P lowered its ratings on GMAC to B- with negative outlook, mirroring the downgrade on GM reflecting expanding cash losses in GM's North American automotive operations caused by sharply lower U.S. light-vehicle sales and the recent dramatic shift in demand away from large pickup trucks and SUVs amid higher gasprices and the weak economy. On June 16, Moody's downgraded GMAC's rating to B3 with negative outlook based on GMAC's increased exposure to Residential Capital LLC. Moody's downgrade also reflects growing pressure on the profitability of GMAC's auto financeoperations, arising from higher average borrowing costs and weakening asset quality. According to Moody's, GMAC's asset quality is being affected by a marked decline in used vehicle values in recent quarters, which decreases expected recoveries from loan defaultsand reduces residual realization on retail leases. According to Moody's, GMAC tightened its loan underwriting in H2 2007, which resulted in improved delinquency rates in Q1 2008. Nevertheless, higher unemployment and declining consumer credit alternatives are likely toresult in higher loan defaults in Moody's view. Moody's said that the credit extensions and

<date>




capital injections from GMAC to ResCap have also increased the demands on GMAC'sliquidity and capital ratios. GMAC has obtained a new USD 11.4 bn three-year senior secured bank facility that replaces its USD 6 bn unsecured credit facilities. The facility steps down to USD 7.9 bn after two years. The new facility provides added funding capacity to GMAC, butusage encumbers GMAC's assets, resulting in structural subordination of senior unsecuredcreditors. Moody's believes that asset coverage of unsecured creditors has weakened inrecent quarters. Moody's also said that GMAC's leverage continues to be higher than autocaptive peers. Moody's negative outlook on the GMAC rating reflects the continued operatinguncertainty at ResCap, as well as the challenging operating environment for the coreconsumer auto finance operations.

Latest results recap On July 31, GMAC reported Q2 2008 net income of USD -2,482 mn vs. USD 293 mn y-o-y (FY 2007: USD -2,332 mn vs. FY 2006 USD 2,125 mn). The Q2 results included a USD 1.86 bn loss at ResCap.

Liquidity GMAC’s consolidated cash and cash equivalents were USD 14.3 bn as of Q2 2008down from USD 17.7 bn at FYE 2007. Of these total balances, ResCap’s consolidated cash and cash equivalents were only USD 6.6 bn. After the refinancing, ResCap's debt maturities in 2008 and 2009 are moderate with USD 277 mn in 2008, USD 649 mn in 2009, but thenUSD 3.6 bn in 2010.


In its outlook statement, GMAC stated that it would continue to manage through thesofter economic environment and the global market disruption with significant actions geared toward achieving longer-term financial health.

Recent actions include: (a) Stabilizing liquidity by refinancing bank lines, extending debt maturities, and preserving long-term ownership of GMAC Bank; (b) Significantly reducing ResCap's balance sheet; (c) Taking steps to increase pricing and improve returns for allautomotive leasing and lending activities; (d) Reducing the volume of new lease originations in the U.S. and suspending all incentivized lease programs in Canada; (e) Executing a plan to preserve the value of the insurance business; and (f) Leveraging the proven servicing platforms in mortgage and auto finance to mitigate frequency and severity of losses.

GMAC plans to be focused on executing strategies that restore profitability and longer-term financial health including improving funding costs, evaluating opportunities to shed non-core operations, and taking steps that move GMAC toward an independent, bank-funded lender and servicer.

Model assumptions/risks Major risks are: further necessary support for ResCap, more write-downs and subsequent covenant breaches and deterioration in GMAC's other businesses (Automotive Finance International, Insurance).


● ResCap liquidity and covenants

Dr. Sven Kreitmair, CFA +49 89 378-13246 [email protected]

<date>




CAPITALIZATION

Total debt at H1 2008 Issuer General Motors Acceptance Corp. Short-term debt, thereof: USD 25,321 mn - Commercial paper USD 1,064 mn - Demand notes USD 5,652 mn - Bank loans and overdrafts USD 6,583 mn - Repurchase agreements and other USD 12,022 mn Long-term debt, thereof: USD 153,776 mn - Senior debt due within one year USD 38,490 mn - Senior debt due after one year USD 109,335 mn Fair value adjustment USD 343 mn Total debt USD 173,489 mn (thereof secured debt USD 89,621 mn) Senior Notes (in USD) at September 1, 2008 (Source: Bloomberg) Issuer GMAC Issuer ResCap GMAC bond maturities, all currencies 40,506 ResCap bond maturities, all currencies 9,825 2008 maturities 2,514 2008 maturities 274 2009 maturities 8,923 2009 maturities 399 2010 maturities 5,748 2010 maturities 3,448 Available liquidity and credit Lines at H1 2008 Cash reserves – USD 14.3 bn cash and cash equivalents, therefore:

- USD 7.7 bn GMAC (excl. ResCap) - USD 2.9 bn ResCap excl. bank - USD 3.7 bn GMAC bank

Unsecured: Committed thereof unused Uncommitted thereof unusedAutomotive finance operations (syndicated multi-currency global credit facility), thereof: Revolving credit facility – multiyear USD 500 mn International bank lines (USD 943 mn in Canada, USD 1.4 bn in Europe)

0.52.3

--0.4

7.5 1.0

ResCap (Mortgage operations) -- -- 0.5 0.2Other -- -- 0.1 --Total unsecured 2.8 0.4 8.1 1.2Secured: Global Automotive Finance operations - Whole-loan forward flow agreements (through June/October 2010) - New Center Asset Trust (NCAT) - Revolving credit facility, maturity June 2011, declining to USD 7.9 bn on June 2010 - U.S. facilities - Variable note funding facility - International facilities

25.310.011.47.96.0

24.4

25.310.09.41.22.42.0

0.2 --

ResCap - Repurchase agreements - Facilities for construction lending receivables - Facilities for mortgage servicing rights - Other

4.11.40.37.2

2.70.2

--3.3

15.1 4.3

Other - Bilateral secured - Commercial Finance operations - Insurance operations

21.41.10.1

8.40.40.1

-- --

Total secured 120.6 65.4 15.3 4.3Total 123.4 65.8 23.4 5.5

Note: The Secured Facility includes a leverage ratio covenant that restricts the ratio of consolidated borrowed funds to consolidated net worth to be no greater than 11.0:1 on the last day of any fiscal quarter. At H1 2008, this leverage ratio was 10.1. Source: Company reports, Bloomberg, UniCredit Global Research

<date>




Business Description – GMAC LLC GMAC, based in Detroit, Michigan, US, is active in the fields of Global Auto Finance (Consumer Finance, Automotive Commercial Finance, Vehicle Remarketing Services), ResCap (U.S. Residential Real Estate, Business Capital, International Business), Insurance (Consumer products, commercial products) and other (Commercial Finance, Capmark, other corporate). The company has around 26,700 employees worldwide. GMAC is 49%-owned by GM and 51%-owned by a consortium headed by Cerberus.

SEGMENT ASSETS (FY 2007)

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

AutomotiveFinance

NorthAmerica

AutomotiveFinance

International

ResCap Insurance Other

in U

SD

mn


SEGMENT RESULTS (FY 2007)

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

AutomotiveFinance

NorthAmerica

AutomotiveFinance

International

ResCap Insurance Other

in U

SD

mn




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B- Negative ResCap's weakened condition, upward pressure if sustained profitability is reached

Moody's Caa1 Negative Business concentration on GM business, affirmation of support to ResCap

Fitch B- Negative Review on credit worthiness of GMAC and ResCap, residential mortgages business remains stressed

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

GMAC 4.75% 9/14/2009

B-n/B3n/B+n EUR 1,250 --

GMAC 5.75% 9/27/2010

B-n/B3n/B+n EUR 1,000 --

GMAC 5.375% 6/6/2011

B-n/B3n/B+n EUR 1,500 --

GMAC 5.75% 5/21/2010

B-n/B3n/B+n EUR 500 --

BOND STRUCTURE

GM(Caa1n/B-n/B-n)

Noteholders

GMAC LLC(B3n/B-n/BB-n)

GMAC MortgageGroup Inc.

ResidentialCapital, LLC

(Can/CCC+n/Ccwn)

49%

Noteholders

Investment grade noteholders

Other GMACAssets

GM OperatingAssets


<date>




Chemicals H1 2008 recap and outlook for the full year

Growth in the chemicals industry has moderated as spillover effects from the financial crisis impacted economic growth while the economic outlook is getting increasinglybleak. Output growth in Q2 2008 was a mere 0.4% which, while slightly above the 0.2%recorded for Q1, is still substantially less than the 6.2% reported for Q2 2007, according to the Association of the German Chemical Manufacturers (VCI). Despite higher raw material andenergy costs as well as rising inflation which impacted economic growth in almost all regions,Asia remains the growth engine for the world economy according to the VCI. Markets in Russia and Latin America as well as markets in the Middle East continued to grow strongly, too, buoyed by record commodity and oil prices, with the latter, however, declining since July. In the European Union, spillover effects from the financial crisis and inflation fears triggered by rising oil and energy prices increasingly weigh on economic and consumer sentiment. Thecurrent euro strength further exacerbated this trend. In North America, the chemicals industry felt the impact of a slowdown in industrial production and the automotive and construction industry in particular. We believe that economic developments in the region remain one of the key risk factors for chemicals manufacturers in 2008 and beyond. While average prices in the German chemicals industry were 4.5% higher y-o-y, margins remained under pressure as price hikes were in the majority of cases insufficient to recover input cost inflation. Owing to continuously high and volatile raw material prices and more importantly slowing demand, we expect this trend to persist. The VCI revised its outlook for 2008 downwards, now expecting output growth of a mere 1.0% vs. the initial prediction of 2.5%.

RAW MATERIAL COSTS CONTINUE TO RISE

0

100

200

300

400

500

600

700

800

900

1,000

Jan-

95Ju

l-95

Jan-

96Ju

l-96

Jan-

97Ju

l-97

Jan-

98Ju

l-98

Jan-

99Ju

l-99

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

EUR/tEthylene Propylene Butadiene Naphtha Crude oil

200

300

400

500

600

700

800

900

1,000

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Benzene Toluene

EUR/t

Source: Datastream, UniCredit Global Research

Key credit drivers for our HY universe

The 2008 outlook is getting increasingly bleak. Despite the recent strengthening of the USD and the drop in the oil price, the continuously elevated feedstock costs and weakening demand remain the most important risk factors. Given their elevated leverage, Ineos and LyondellBasell are particularly vulnerable to margin pressure from lower demand. For Cognis, the key credit drivers continue to be the strategic considerations of itssponsors, which, in light of the current wave of consolidation, could result in a disposal of thecompany to a trade buyer. Degussa's credit profile is largely driven by the owners' ambitious capex programs, while Rhodia' should continue to be driven by the development in the Carbon Emission Rights market.

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

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LyondellBasell (SELL) Investment rationale We maintain our sell recommendation (which we recently changed) on LyondellBasell

(LB) based on concerns about a potential covenant breach amid a significantlydeteriorating trading environment for basic plastics producers, and polypropylene, inparticular. The main concern relates to the expected breach of covenants as a consequenceof the massive debt load following the all debt-financed acquisition of Lyondell and to a slowing economic environment. While liquidity looks sufficient to cover upcoming needs, S&Poutlined the limited covenant headroom, citing slower-than-expected de-leveraging and weakening global demand in combination with new capacities coming on stream (starting in2009) as key risk factors. While we expect demand for polyethylene (used in packaging) toremain comparatively stable, market conditions for polypropylene (used in a variety of applications ranging from automotive to consumer goods) are more prone to a material weakening on the back of a general global economic slowdown. In Refining, LB benefits fromthe general favorable market conditions and its ability to refine sour crude in its Houston refinery, but trading conditions for refiners are getting tougher and Q3 will be impacted by ascheduled turnaround of its Houston refinery. Unfortunately, Ike (the hurricane) paid a visit to the neighborhood too. Overall, we believe that pro-forma leverage of around 5.8x is too high, given the current stage of the petrochemicals cycle and considering the clouds looming on theeconomic horizon. We note that S&P calculated an adj. leverage of 5.5x. The agency in itsreport confirmed our previously voiced view that LB is unlikely to generate meaningful freecash flows in FY 2008 which could be applied to debt reduction.

Recent developments S&P cut LyondellBasell's rating by one notch from B+ to B, citing weaker-than-expected Q2 results and the increase in financial leverage due primarily to significantly higher rawmaterial costs and weakening demand for polymers amid a more challenging business outlook for the coming quarters as the main reasons. The outlook is negative. The agency said that it expects LyondellBasell to renegotiate its covenants to avoid a breach in 2009. Thenegative outlook reflects the increased risk of a further downgrade if LB's headroom under its financial covenants continues to decline rapidly over the coming quarters, the agency said.

Latest results recap

LB's Q2 results continued to be impacted by rising raw material costs, a weakening of demand mainly for polypropylene as well as by the effects from an outage at a cracker in Houston. Revenues in the quarter totaled USD 15.6 bn, while EBITDA came in at USD 477 mn at a margin of 5.8% versus 6.7% in Q1. Performance especially in the Polymerssegment disappointed, with adj. EBITDA (as reported by LB) of USD 235 mn being down 29%q-o-q, reflecting rising feedstock costs and softening demand for propylene. Cash flow generation turned positive in the quarter, with free operating cash flow at USD 429 mn helped by significant releases from working capital. Driven by the acquisition of the Berre refinery (net outflows USD 520 mn), debt levels further increased from USD 23.1 bn at the end of Q1 to USD 23.3 bn. While LB did not disclose a pro-forma leverage figure, we calculate a leverage of 5.8x (Q1: 5.2x) net debt to EBITDA and 6.2x (Q1 5.6x) for adjusted net debt to EBITDA.

Liquidity LyondellBasell's liquidity is likely to be constrained by covenant headroom rather thanoutright access to liquidity from various sources. In its earnings call, the company said that it had USD 2.8 bn available as of H1 2008, thereof USD 956 mn in unrestricted cash. While total short-term debt amounted to USD 2.8 bn incl. USD 186 mn CPLTD at H1 2008, USD 1.2 bn related to inventory based facilities. There was no indication that LyondellBasellencountered difficulties in selling receivables with total headroom under all LB securitization programs and its inventory base facility amounting to USD 330 mn. Further sources ofliquidity are the USD 1 bn RCF where LB had USD 909 mn available as well as LB's USD 750 mn contractually subordinated RCF issued by Access Industries Holdings, which is junior to the existing RCF, which was undrawn as of H1 2008. We note that the subordinated USD 8 bn interim facility, which was intended as a bridge for HY or mezzanine financings, will

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automatically convert into a senior secured loan in 12/2008.

POLYETHYLENE AND POLYPROPYLENE WITH DROP IN MARGIN (IN EUROPE)

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45%PE C2 Margin over feedstock (RS)

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Company outlook/credit profile trend

While liquidity remains safe in the short-term, we remain concerned about a potential covenant breach given the significant leverage at the late stage of the petrochemicalcycle and rising pressure on operating margins from a slowdown in demand. Earnings in Q3 will be impacted by USD 150 mn as a result of a scheduled outage at its Houston refinery, which the company cited in its earnings call. In addition, Hurricane Ike will also leaveits mark on operating performance. Cash flow generation should seasonally improve in H2,with a further cash payment to Shell in connection with the Berre refinery acquisition of approximately USD 375 mn for inventory valuation adjustments, partly offset by furtherdisposal proceeds (USD 160 mn for its TDI business and a cash settlement of its dispute withReliant Energy). While the recent oil price decline has eased pressure from the raw materialcost front in its petrochemicals unit (with cracker margins noticeably increasing in Q3), itnaturally creates downward pressure on refining spreads as already indicated in its Q2earnings report. With a view to the weakness in the North American olefins market and apotential slowdown in the global economy, we are skeptical about the company's ability toquickly deleverage, and we continue to expect leverage to trend upwards over the course of 2008. With respect to ratings, the agencies expect FFO to debt to fall below 10% beyond2009. Given the interest burden of more than USD 2 bn (the lenders recently exercised theirflex options increasing spreads by 0.5% or gross interest by about USD 50 mn p.a.), Moody's noted that rating pressure could arise if FFO-interest/interest were to fall below 2.0x and FCF/total debt were to weaken to the low single-digits.

Main risk factors We believe that the main risk remains a further increase in the oil price, resulting in pressure on operating margins and rising working capital requirements, a slowdown inthe world economy and resulting weakening of pricing power in (poly)olefins. Further risks include the smooth integration of Lyondell and potential further acquisitions.

Things to watch ● Feedstock cost inflation; demand for chemicals and polyolefins; development of leverage

● End of November 2008: Q3 2008 results


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CAPITALIZATION

Senior Credit Facilities Borrower Basell B.V. and other HoldCos and Operating Subsidiaries Senior Credit Facility Initial Amount (in mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee New Revolving Facility EUR 1,650 (new) n.a. n.a. n.a. n.a. Securitization Facility EUR 650 2012 Securitization Facility USD 200 2010 Structured Finance Transaction

EUR 1,000

Senior Bridge Facility A USD 2,000 ca. 12/2015

n.a. n.a. n.a.

Senior Bridge Facility B USD 9,450 ca. 12/2015

n.a. n.a. n.a.

Revolver USD 1,000 ca. 12/2014

n.a. n.a. n.a.

Bridge Loan USD 7,000 ca. 12/2015

n.a. n.a. n.a.

Asset backed Facility USD 1,000 n.a n.a. n.a. n.a. Revolving Credit Facility USD 750 n.a n.a. LIBOR +6% Contractually

subordinated Covenants (old facilities) Fixed charge cover ratio of 1.1:1x Notes Issuer Basell A.F. SCA Senior Notes USD 300 03/27 Bullet Coupon 8.10% Senior Notes EUR 500 08/15 Bullet Coupon 8.375% Senior Notes USD 615 08/15 Bullet Coupon 8.375% Debentures USD 100 2010 Bullet Coupon 10.25% Debentures USD 225 2020 Bullet Coupon 9.8% Debentures USD 150 2026 Bullet Coupon 7.55% Debentures USD 250 2026 Bullet Coupon 7.625% Convertible USD 158 2023 Bullet Coupon 4.0% Other Indebtedness USD 97 mn


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BOND DOCUMENTATION – NELL AF 8.375% 08/15/15

Issuer Nell A.F. S.a.r.l. Call/Put Call Schedule On or after 08/15/10: 104.188%, 08/15/11: 102.792%, 08/15/10: 101.396%, 08/15/13: 100.0% Equity claw back On or Prior to August 15, 2008, 35% from a rights offering at 108.375% Make whole clause On or Prior to August 15, 2010, Bund +50 bp Change of control 101% Guarantees Jointly and severally guaranteed on an unsecured basis from subsidiaries representing more than 85% of FY 2004

consolidated EBITDA. Security Second priority pledge of the High Yield Proceeds Loan and of 100% of the shares of Nell Funding Ranking – Equal to all senior indebtedness and senior to all subordinated indebtedness

– Subordinated to secured indebtedness Certain Covenants Limitation on Debt Fixed Charge Coverage Ratio of at least 2.0x. The most important carve outs are:

– Indebtedness under the senior credit facilities not exceeding EUR 1.95 bn, less net cash proceeds from asset sales

– Capital lease obligations and acquisition of assets not exceeding EUR 50 mn – Guarantees to secure indebtedness incurred by Joint Ventures not exceeding EUR 75 mn in aggregate – Indebtedness incurred pursuant to the Australian (max. AUD 80 mn) and Hong Kong Facility (max. EUR 30 mn) – Additional indebtedness not exceeding EUR 50 mn – Non-recourse indebtedness incurred in a securitization transaction

Limitation on Sale of Certain Assets – Consideration at least equal to the fair value, and – 75% of the disposal proceeds received in cash – and application of the net proceeds within 365 days after receipt to debt reduction, to make investments into

assets or properties, or acquisition of a restricted subsidiary. Does not apply to disposal proceeds less than EUR 20 mn, or if consideration for the sale constitutes a replacement asset or related businesses and such sale is for fair market value.

Limitation on Restricted Payments – Aggregate amount not to exceed 50% of cumulative consolidated net income earned from July 1, 2005, less amount that were used for Permitted Investments and net losses plus 100% from the proceeds of the sales of Qualified Capital.

– Payments for legal fess (max EUR 1.5 mn p.a.), monitoring and service fees (max. EUR 2.5 mn p.a.), transaction fees (max. EUR 5 mn) and reasonable expenses paid to AI Petrochemical LLC (max EUR 1 mn p.a.).

– Starting 5 years from issuance date, the repurchases of common stock from employees and directors of Basell not exceeding EUR 2% of the share capital.

– Additional Restricted Payments not to exceed EUR 10 mn. Limitations on Transactions with Affiliates Board resolution if transaction is greater than EUR 5 mn.

Fairness Opinion if transaction is greater than EUR 25 mn. Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering Yes

Source: Offering memorandum, UniCredit Global Research

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Business Description – LyondellBasell LyondellBasell (www.lyondellbasell.com) is the world third largest petrochemical company with extensive refining operations. The company was created following the merger acquisition of US based Lyondell through Basell N.V. in FY 2007. The company, which holds leading market positions in most of its businesses, is active along the five business segments Olefins/Polyolefins and Derivatives, Propylene Oxide, Technology, Advnaced Polyoelfins and Refining/Fuels. In 9M 2007 and excluding its numerous Joint Ventures, it generated 55% of its pro forma sales of USD 42.8 bn in US, 39% in Europe and 6% in the Rest of the World. Its pro forma EBITDA for the same period amounted to EUR 5.1 bn. LyondellBasell is owned by Access Industries, a privately industrial group, founded in 1986.

REPORTED SALES BY SEGMENT (FY 2007)

Chemicals29.2%

Fuels2.3%

Poylmers66.0%

Technology2.4%


PRO FORMA EBITDA BY SEGMENT (FY 2007)

Chemicals31.6%

Fuels35.5%

Poylmers27.6%

Technology5.3%



<1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years >5 yearsFinancial debt 2,874 147 325 301 413 20,355

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B Negative Down: Debt/EBITDA <5x by FYE 2008; Up: debt reduction> USD 1.5 bn in FY 2008

Moody's B1 Negative Down: FFO-Interest/Interest <2.0x, FCF/Debt low single digits; Up: Leverage of 4x net adj.debt /EBITDA

Fitch B+ Stable Up: further de-leveraging, Down: operating margin erosion

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

LYO 8.375% 8/15/2015 CCC+n/B3n/B-s EUR 500 8/15/2010 (104.19)

LYO 8.375% 8/15/2015 CCC+n/B3n/B-s USD 615 8/15/2010 (104.19)

BOND STRUCTURE

AI Petrochemicals LLC

Basell FinanceCompany

Basell AF2015Notes

EUR 500 mnUSD 615 mn

Basell & LyondellNon-US Subsidiaries

2027 Notes

USD 300 mn

Basell HoldingsLyondellBasell

Finance Company

BridgeFacility

Basell & LyondellUS Subsidiaries


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PROFIT AND LOSS (LYONDELLBASELL)

in USD mn 2004 2005 2006 H1 07 2007 H1 08 2008eSales 6,747.0 8,566.0 13,175.0 7,810.0 17,120.0 28,364.0 57,437.1Cost of goods and services sold -5,954.0 -7,721.0 -11,788.0 -6,819.0 -15,216.0 -26,879.0 -54,680.1Distribution expenses -125.0 -151.0 -525.0 -276.0 -740.0 -576.0 -1,206.2R&D expenses -145.0 -125.0 -132.0 -60.0 -135.0 -105.0 -287.2Administration -217.0 -263.0 0 0 -95.0 0 0Other operating income/expenses -113.0 -45.0 0 -7.0 0 0 0EBITDA reported 622.0 652.0 1,188.0 874.0 1,426.0 1,742.0 3,163.6EBIT reported 193.0 261.0 730.0 648.0 934.0 804.0 1,263.6Adj. EBIT (bef. pension interest) 240.8 323.0 786.2 670.1 1,084.3 879.1 1,413.9Income from investments 93.0 96.0 130.0 78.0 162.0 72.0 140.0Interest result -68.0 -147.0 -262.0 -155.0 -283.0 -931.0 -2,000.0Other financial items 0 0 32.0 7.0 127.0 48.0 0Discontinuing operations 0 0 0 0 0 0 0EBT reported 218.0 210.0 630.0 578.0 940.0 -7.0 -596.4Extraordinary result 0 92.0 1.0 0 0 0 0Taxes on income -61.0 -125.0 -234.0 -202.0 -279.0 -2.0 -50.0Net income 157.0 177.0 397.0 376.0 661.0 -9.0 -646.4


in USD mn 2004 2005 2006 H1 07 2007 H1 08 2008eFixed assets 4,834 3,700 4,817 3,694 27,259 27,402 27,581 thereof goodwill 366 63 0 0 5,247 5,147 5,147Cash & cash equivalents 57 590 884 266 2,031 2,534 2,534Total assets 7,512 7,230 9,549 7,014 39,728 42,474 41,840Equity incl. minorities 3,124 998 1,557 1,492 2,065 2,157 2,192Shareholder loans 0 0 0 0 0 0 0Pension provisions 363 514 431 349 458 458 458Other provisions 784 681 1,057 837 5,966 5,737 5,737Financial liabilities 1,949 3,348 4,143 2,412 24,415 25,819 24,861 short term (<1 year) 738 603 920 622 2,874 4,186 4,186 long term (>1 year) 1,211 2,745 3,223 1,790 21,541 21,633 20,675Net working capital 1,209 1,216 1,408 1,540 3,571 4,240 3,593

CASH FLOW

in USD mn 2004 2005 2006 H1 07 2007 H1 08 2008eFFO (Funds from operations) 534 534 775 670 1,123 942 1,170Change in working capital -42 57 259 -179 57 -457 -22Operating cash flow 492 591 1,034 491 1,180 485 1,148CAPEX -256 -242 -263 -106 -411 -399 -900Free cash flow 236 349 771 385 769 86 248Dividends 0 0 0 -188 -522 0 0Acquisitions/disposals 44 174 -286 0 -11,450 -638 -654Share buy back/issues 0 0 0 0 0 0 0FCF after extraordinary items 280 523 485 197 -11,203 -552 -406

DEBT ADJUSTMENTS

in USD mn 2004 2005 2006 H1 07 2007 H1 08 2008eFor pensions 433 607 417 413 411 482 411For operating leases 160 311 303 233 1,228 1,228 1,228Others* 0 0 90 0 0 0 0


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PROFITABILITY RATIOS (LYONDELLBASELL)

2004 2005 2006 H1 07 2007 H1 08 2008eEBITDA margin rep. 9.2% 7.6% 9.0% 11.2% 8.3% 6.1% 5.5%EBITDA margin adj. 10.3% 8.9% 9.8% 11.7% 10.4% 6.8% 6.1%EBIT margin rep. 2.9% 3.0% 5.5% 8.3% 5.5% 2.8% 2.2%EBIT margin adj. 3.6% 3.8% 6.0% 8.6% 6.3% 3.1% 2.5%Return on capital (before tax) 2.5% 2.6% 8.2% 23.6% 2.5% 0.6% -2.7%


2004 2005 2006 H1 07 2007 H1 08 2008eEBITDA rep. 622 652 1,188 874 1,426 1,742 3,164EBITDA adj. 696 763 1,296 916 1,776 1,917 3,514FFO rep. 534 534 775 670 1,123 942 1,170FFO adj. 560 583 827 690 1,323 1,042 1,370Net debt rep. 1,892 2,758 3,259 2,146 22,384 23,285 22,327Net debt adj. 2,485 3,676 4,069 2,792 24,023 24,995 23,966Total debt 1,949 3,348 4,143 2,412 24,415 25,819 24,861EBITDA net interest cover rep. 9.1 4.4 4.5 5.6 5.0 1.9 1.6EBITDA gross interest cover rep. 7.7 3.8 3.6 4.8 4.0 1.7 1.4EBIT net interest cover rep. 2.8 1.8 2.8 4.2 3.3 0.9 0.6EBIT net interest cover adj. 2.9 1.8 2.7 4.0 2.7 0.9 0.7FFO rep. / total debt rep. 27.4% 15.9% 18.7% 48.6% 4.6% 5.4% 4.7%FFO rep. / net debt rep. 28.2% 19.4% 23.8% 54.7% 5.0% 6.0% 5.2%FFO adj. / net debt adj. 22.5% 15.9% 20.3% 43.7% 5.5% 6.7% 5.7%FOCF rep. / total debt rep. 12.1% 10.4% 18.6% 57.8% 3.1% 1.1% 1.0%FOCF rep. / net debt rep. 12.5% 12.7% 23.7% 65.0% 3.4% 1.2% 1.1%RCF rep. / net debt rep. 28.2% 19.4% 23.8% 45.9% 2.7% 4.6% 5.2%RCF adj. / net debt adj. 22.5% 15.9% 20.3% 37.0% 3.3% 5.4% 5.7%Total debt rep. / EBITDA rep. 3.1 5.1 3.5 1.5 17.1 11.3 7.9Net debt rep. / EBITDA rep. 3.0 4.2 2.7 1.3 15.7 10.2 7.1Net debt adj. / EBITDA adj. 3.6 4.8 3.1 1.7 13.5 9.0 6.8FFO rep. / net interest rep. 8.9 4.6 4.0 5.3 5.0 2.0 1.6FFO rep. / gross interest rep. 7.6 4.1 3.3 4.7 4.2 1.9 1.5Capex / sales 3.8% 2.8% 2.0% 1.4% 2.4% 1.4% 1.6%Capex / depreciation 59.7% 61.9% 57.4% 46.9% 83.5% 42.5% 47.4%

CAPITAL STRUCTURE

2004 2005 2006 H1 07 2007 H1 08 2008eTotal debt / capitalization rep. 38.4% 77.0% 72.7% 61.8% 92.2% 92.3% 91.9%Net debt / net capitalization rep. 37.7% 73.4% 67.7% 59.0% 91.6% 91.5% 91.1%Net debt / net capitalization adj. 44.9% 78.2% 72.2% 66.2% 91.9% 91.9% 91.5%Net working capital / sales 17.9% 14.2% 10.7% 9.8% 20.9% 11.3% 6.3%Fixed assets / sales 71.6% 43.2% 36.6% 23.5% 159.2% 72.7% 48.0%


Comment FY 2008Sales growth Acquisition-driven growth 235.5%EBITDA growth Earnings growth on consolidation impact 121.9%EBIT growth Earnings growth on consolidation impact 35.3%Capex incl. acquisition Restraint in capex going forward 1,945Change in working capital Raw material prices to impact w/c -22Funds from operations (FFO) Cash flow to rise on acquisition 1,170


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Cognis (BUY) Investment rationale We maintain our buy recommendation on the floater and recently changed our hold

recommendation on the senior subordinated bond to buy, largely as a result of an improving business risk profile. We base our buy recommendation on the FRN mainly on a strengthened business portfolio following the disposal of Pulcra and the 50% stake in Cognis'Oleochemicals JV (expected to close in H2 2008), which should improve the likelihood of asales of Cognis to a trade buyer, in our view. The consolidation in the industry has beenaccelerating recently, as petrochemical producers increasingly seek to bolster their presence in specialty chemicals. In such a case, investors are to benefit from COC-clauses at 101%. In addition, investors in the FRN benefit from good asset protection, while an investment in thesubordinated issue is more of a speculative type. From a fundamental perspective, the competitive environment looks very challenging, with margins continuing to be under pressure as only parts (around 65% historically) of raw material cost inflation can be quickly passed onto the market. According to statements in its earnings call, the company may forgo volumes to defend its margins. Overall, adjusted EBITDA is expected to come in below the prior year'slevel of EUR 410 mn (including the discontinuing units), while cash flow generation isexpected to benefit mainly from reduced interest costs following the refinancing. From a structural perspective, we also note the absence of near-term maturities as well as thereasonably good liquidity situation at Cognis.

ONGOING MARGIN PRESSURE AND WEAK CREDIT PROTECTION METRICS

Margins remain under pressure Leverage increased again

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

2000 2001 2002 2003 2004 2005 2006 2007 LTMH1 08

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0EBITDA margin adj.

EBITDA gross interest cover adj. (RS)

0%

5%

10%

15%

20%

25%

30%

35%

40%

2000 2001 2002 2003 2004 2005 2006 2007 LTMH1 08

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0FFO adj. / net debt adj.Net debt adj. / EBITDA adj. (RS)

Source: Cognis, UniCredit Global Research

Latest results recap Cognis' Q2 2008 results showed continued growth momentum while input cost inflationcontinued to burden earnings. In Q2, sales rose by 7.3% (13.2% organically, i.e. excluding FX effects and changes in scope) to EUR 768 mn, driven by all its core business units excludingPulcra and Oleochemicals, which are reported as discontinued operations. Volumes weredown on weakening demand. Adjusted EBITDA (for the continuing operations) declined by2.3% y-o-y to EUR 86 mn (+1% organically), negatively impacted by adverse currency effects,input cost inflation and the slowdown in US housing and construction activity, which hurt its Functional Chemicals unit in particular (adj. EBITDA down 15.9%). Price increases could evidently not entirely compensate for the rise in raw materials and energy costs, with adjusted EBITDA (for the continuing operations) declining 2.3% y-o-y to EUR 86 mn at a margin of 11.2% vs. 12.3% y-o-y. The group's cash flow generation improved significantly in the quarteras a result of lower restructuring expenses, tight working capital management and lower cashinterest following last year's refinancing offsetting higher tax payments. Free operating cash flow generation amounted to EUR 30 mn (vs. an outflow of EUR 141 mn y-o-y). Reported

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leverage increased compared to Q1, with net leverage through the senior at 4.4x (vs. 4.3x)and total net leverage (including the PiK Loan) at 6.5x (vs. 6.4x), partly reflecting the effect from reporting Pulcra and Oleochemcials as discontinued operations.

Liquidity Despite noticeable pressure on cash flow generation in H1, Cognis' liquidity isrelatively safe given only EUR 47 mn in short-term debt and as the majority of its debt does not come due before 2013. Cash amounted to EUR 91 mn at H1 2008 with around EUR 220 mn available under its EUR 250 mn RCF facility. The company will also benefit fromdisposal proceeds for Pulcra and Oleochemicals of around EUR 130 mn upon closing (expected for H2) as well as from the typical seasonal inflow from working capital in any H2.


During Q2, Cognis announced the long awaited disposal of its Pulcra Chemicals unit as well as its 50% stake in it Oleochemcials JV. While the EUR 26 mn Cognis will receive for its Pulcra unit are comparatively minor (EV EUR 36 mn, H1 LTM sales EUR 238 mn, adj. EBITDA EUR 7 mn), the company will book an inflow of EUR 104 mn for its fully consolidated stake in the Oleochemicals JV (H1 LTM sales of EUR 656 mn, adj. EBITDA of EUR 48 mn)which was valued at EUR 285 mn (EV). Closing for both transactions is now expected by theend of 2008. The disposals mark a significant milestone in Cognis' efforts to concentrate on its core businesses. While leverage increased pro-forma from the disposals, the main benefit for the credit profile will be the removal of highly volatile (Oleochemicals) and shrinkingbusinesses (Pulcra) from its scope of consolidation, contributing to an immediate margin uplift. Cognis' LTM adj. EBITDA margin pro-forma for both disposals was 12.4%, according to our calculation, versus an LTM adjusted EBITDA margin of 11.0% at H1. We believe that through the disposals, two key obstacles to an eventual exit of the sponsors were removed. Major chemical players are looking for specialty chemicals assets to reduce their dependenceon commodities (demonstrated by Dow's acquisition of Rhom & Haas at an EV/EBITDA of 11.2x based on the company's FY 2008 projected earnings) and are frequently rumored to be interested in Cognis (assuming an EBITDA multiple of around 7x, the business would be valued at around EUR 2.45 bn on an LTM adj. EBITDA of EUR 350 mn). In the absence of a takeover of the company in the short-to-medium term, we expect the cash proceeds of EUR 130 mn to be received for Pulcra and Oleochemicals, however, to be used to fund risingworking capital requirements and growth investments (within 15 months). Replacement assets in its core businesses typically sell for higher multiples than those achieved for Pulcraand Oleochemicals. In combination with the continuing pressure on the operatingperformance, we expect leverage to remain stable or probably to trend marginally higher over the next quarters. For 2008, Cognis expects the challenging market conditions to persist andwill focus on recovering ongoing cost inflation through price increases, also at the expense ofvolumes if need be. Profitability is expected to come in slightly below the prior year's level of EUR 410 mn (including Pulcra and Oleochemicals) in terms of adjusted EBITDA, according to management's comment during the earnings call

Main risks to our model Main risks to our model include further escalating raw material costs, deteriorating pricing power and currency effects, which could weigh on the operating performance and subsequently cash flows.

Things to watch ● Raw material cost inflation and development of operating margins

● End of November: Q3 2008 results


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CAPITALIZATION

Senior Credit Facilities Borrower Cognis GmbH, Cognis Corporation and certain other subsidiaries of Cognis KG Senior Credit Facility Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/EURIBOR +) Commitment fee Senior credit facilities approx. 827 05/13 n.a. n.a. n.a. Revolving Credit Facility 250 05/13 n.a. n.a. applicable PIK Loans (issued by Holding in July 2007)

362 01/15 Bullet EURIBOR + 7.0% none

Covenants n.a. Notes Issuer Cognis GmbH Issues Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/EURIBOR +) Commitment fee Senior FRN 610 09/13 none US LIBOR + 200 bp none Senior FRN USD 293 09/13 none EURIBOR + 200 bp none Senior Subordinated Notes (not affected by refinancing)

345 05/14 Bullet 9.5% none

Other Indebtedness EUR 69 mn equivalent in Oleochemical JV as of 12 2007, EUR 30 mn in Finance Leases


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BOND DOCUMENTATION – FRN SENIOR NOTES 2013

Issuer Cognis GmbH Call/Put Call Schedule Callable at 100% every three months starting 11/15/08. 10% of outstanding principal at any time from certain disposal

proceeds Equity claw back On or prior to November 15, 2008, 35% from a rights offering at par. Make whole clause On or prior to May 7, 2007, Bund +50 bp (Treasury +50 bp for USD Tranche) Change of control 101% Guarantees Senior guarantee by Cognis Corp., Cognis IP Management GmbH, Cognis BV, Grünau Illertissen GmbH, Cognis

S.p.A., Cognis Brazil Ltda., Cognis France SAS. The guarantors accounted for more than 70% of FY 2006 EBITDA and total assets.

Security Virtually all assets of the Group, with the exception of Process Chemical Assets Ranking Senior to all other indebtedness, except for the new Revolving Credit Facility, the counterparties under hedging

agreements, in essence the senior secured loans Certain Covenants Limitation on Debt Total debt under Fixed Charge cover Ratio of at least 2.0x and LTM Consolidated Leverage Ratio of at least 4.75x.

The most important carve outs are: – Indebtedness under the senior credit facilities not exceeding EUR 250 mn, less net debt reductions from a

receivables transaction (i.e. securitization) less proceeds from asset sales used to repay indebtedness – Capital lease obligations and acquisition of assets not exceeding EUR 50 mn or 5% of consolidated tangible

assets – Additional indebtedness not exceeding EUR 250 mn

Limitation on Sale of Certain Assets – Consideration at least equal to the fair market value, and – 75% of the disposal proceeds received in cash – and application of the net proceeds within 360 days after receipt to senior debt reduction, to make investments

into replacement assets or acquisition of a restricted subsidiary. Limitation on Restricted Payments The most important carve outs are:

– Aggregate amount not to exceed 50% of cumulative consolidated net income earned from July 1, 2007, plus 100% of the proceeds of marketable securities received from contributions to its equity capital.


Fairness opinion if transaction is greater than EUR 25 mn. Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering Yes


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BOND DOCUMENTATION – 9.5% SENIOR NOTES 2014

Issuer Cognis GmbH Call/Put Call Schedule On or after May 15, 2009: 104.75%, 2010: 103.167%, 2011: 101.583%, 2012: 100.0% Equity claw back On or prior to May 7, 2007, 35% from a rights offering at 109.5% Make whole clause On or prior to May 7, 2007, Bund +50 bp Change of control 101% Guarantees Senior subordinated guarantee by Cognis KG

Security Third priority pledge over partnership interests of Cognis KG, the shares of the general partners in Cognis KG (Cognis Verwaltungs GmbH and Cognis Limited Partner KG) and certain assets

Ranking Subordinated Certain Covenants Limitation on Debt Fixed Charge Coverage Ratio of at least 2.5x. The most important carve outs are:

– Indebtedness under the senior credit facilities not exceeding EUR 1.73 bn, less net cash proceeds from asset sales

– Capital lease obligations and acquisition of assets not exceeding EUR 50 mn or 5% of consolidated tangible assets

– Non-recourse indebtedness incurred in a securitization transaction – Indebtedness incurred to buy back equity interests of officers of EUR 2.5 mn – Additional indebtedness not exceeding EUR 100 mn

Limitation on Sale of Certain Assets – Consideration at least equal to the fair value, and – 75% of the disposal proceeds received in cash – and application of the net proceeds within 365 days after receipt to debt reduction, to make investments into

assets, or acquisition of a restricted subsidiary. Limitation on Restricted Payments The most important carve outs are:

– Aggregate amount not to exceed 50% of cumulative consolidated net income earned from July 1, 2004, less amount that was used for Permitted Investments and net losses plus 100% of the proceeds of marketable securities received from contributions from its equity capital.


Fairness opinion if transaction is greater than EUR 25 mn. Fall away/ Suspension Covenants Yes Negative pledge Yes Anti Layering Yes


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Business Description – Cognis GmbH Cognis is a leading specialty chemicals manufacturer, active in the production of care chemicals, functional chemicals and food ingredients. The company sells its products to a broad variety of industries, thus mitigating the impact of customer-industry specific cycles. Through its focus on the development of natural based products, Cognis tries to benefit from the growth trends "wellness" in consumer end-markets and "sustainability & performance" in industrial-end markets. It has recently announced the disposal of its Pulcra Chemcials unit as well as its 50% stake in its Oleochemicals JV to concentrate on it core businesses. The company is owned by funds advised by Permira (42.1%), Goldman Sachs (43.8%) and Schroder Life Science Funds (3.66%).


Care Chemicals41.4%

Oleochemicals17.2%

Other Activities0.6%

Process Chemicals

7.0%

Functional Products24.3%

Nutrition & Health9.5%



Care Chemicals53.3%

Functional Products22.8%

Oleochemicals7.4%

Nutrition & Health16.4%



<1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years >5 yearsFinancial debt 70 7 4 46 3 1,981

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B Stable FFO/debt >10% by 2009. Down: Failure to achieve adequate cash flow protection ratios; Up: IPO of better pricing power

Moody's B2 Negative Up: EBITDAR/adj. debt <5x, FCF/adj. debt >5%, Down: EBITDAR/adj. debt >6.5x, (FFO + Int Expense)/ Int Expense <2.0x

Fitch B Stable Up: Further improvement operating performance & financial flexibility, Down: increase in gross cash-pay leverage at 5.8x

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

COGNIS 9.5% 5/15/2014

CCC+s/ Caa1n/CCC+ EUR 345 5/15/2009 (104.75)

COGNIS Float + 200 bp 9/15/2013

Bs/B1n/BB-s EUR 610 11/15/2008 (100)

BOND STRUCTURE

Cognis HoldingLuxembourg S.à.r.l.

Senior Notes

Shareholders

Cognis GmbH

Cognis Beteiligungs-GmbH

Other subsidiaries

PIK Loan

Senior Secured Debt

Cognis Holding


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PROFIT AND LOSS (COGNIS GMBH)

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eSales 3,126.0 2,950.0 3,073.0 3,176.0 3,372.0 1,775.0 3,518.0 1,533.0 3,078.3Cost of goods and services sold -2,287.0 -2,216.0 -2,311.0 -2,403.0 -2,497.0 -1,317.0 -2,631.0 -1,172.0 -2,354.9Distribution expenses -459.0 -444.0 -427.0 -423.0 -439.0 -219.0 -429.0 -163.0 -338.6R&D expenses -76.0 -61.0 -59.0 -92.0 -94.0 -46.0 -91.0 -42.0 -77.0Administration -127.0 -123.0 -122.0 -113.0 -120.0 -60.0 -117.0 -46.0 -98.5Other operating income/expenses -35.0 -56.0 -55.0 -88.0 -16.0 -14.0 -65.0 -7.0 -18.5EBITDA reported 362 298 299 303 365 196 360 177 341EBIT reported 142 50 99 57 206 119 185 103 191Adj. EBIT (bef. pension interest) 185 111 167 113 239 153 268 116 236Income from investments 1 1 0 0 0 0 0 0 0Interest result -148 -140 -128 -193 -165 -127 -173 -70 -142Other financial items -36 -13 -16 0 1 0 -46 0 -10Discontinuing operations 0 0 0 0 0 0 0 6 9EBT reported -41 -102 -45 -136 42 -8 -34 39 48Taxes on income 17 38 18 0 -40 -9 -86 -28 -35Net income -24 -64 -27 -136 2 -17 -120 11 13


in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eFixed assets 1,358 1,227 1,125 1,084 1,042 1,019 971 809 733 thereof goodwill 111 110 98 103 147 147 146 142 71Cash & cash equivalents 299 190 106 107 233 141 132 91 211Total assets 2,948 2,619 2,515 2,551 2,640 2,687 2,505 2,530 2,333Equity incl. minorities 55 289 -75 -148 -120 -486 -610 -617 -597Pension provisions 519 446 451 464 444 446 435 395 395Other provisions 197 186 202 111 79 79 39 61 61Financial liabilities 1,885 1,396 1,527 1,638 1,704 2,095 2,106 1,964 1,964 short term (<1 year) 50 65 47 65 129 70 73 47 47 long term (>1 year) 1,835 1,331 1,480 1,573 1,575 2,025 2,033 1,917 1,917Net working capital 768 655 657 563 556 686 654 716 692

CASH FLOW

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eFFO (Funds from operations) 184 92 112 130 134 37 68 131 163Change in working capital 40 59 -28 -11 -16 -115 -86 -87 -38Operating cash flow 224 151 84 119 118 -78 -18 44 125CAPEX -98 -122 -132 -132 -100 -49 -132 -52 -125Free cash flow 126 29 -48 -13 18 -127 -150 -8 0Dividends -8 -12 -325 -2 0 0 0 0 0Acquisitions/disposals 13 -8 17 3 -36 1 11 -2 130Share buy back/issues 0 0 0 0 40 0 0 0 0FCF after extraordinary items 131 9 -356 -12 22 -126 -139 -10 130

DEBT ADJUSTMENTS

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eFor pensions 550 483 498 562 516 791 451 411 411For operating leases 34 37 42 30 45 45 66 42 66Others* 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (COGNIS GMBH)

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eEBITDA margin rep. 11.6% 10.1% 9.7% 9.5% 10.8% 11.0% 10.2% 11.5% 11.1%EBITDA margin adj. 13.4% 12.5% 12.4% 11.6% 12.2% 13.3% 13.0% 12.8% 13.0%EBIT margin rep. 4.5% 1.7% 3.2% 1.8% 6.1% 6.7% 5.3% 6.7% 6.2%EBIT margin adj. 5.9% 3.8% 5.4% 3.6% 7.1% 8.6% 7.6% 7.6% 7.7%Return on capital (before tax) 1.2% -3.4% -0.3% -6.2% 4.4% 4.8% 0.8% 7.3% 3.6%


2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eEBITDA rep. 362 298 299 303 365 196 360 177 341EBITDA adj. 418 370 380 367 411 236 456 196 400FFO rep. 184 92 112 130 134 37 68 131 163FFO adj. 197 103 125 138 147 43 81 137 177Net debt rep. 1,586 1,206 1,421 1,531 1,471 1,954 1,974 1,873 1,753Net debt adj. 2,170 1,726 1,961 2,122 2,032 2,789 2,491 2,326 2,230Total debt 1,885 1,396 1,527 1,638 1,704 2,095 2,106 1,964 1,964EBITDA net interest cover rep. 3.0 2.8 2.9 2.0 2.7 1.5 2.1 2.5 2.4EBITDA gross interest cover rep. 2.9 2.6 2.8 2.0 2.5 1.5 2.0 2.5 2.3EBIT net interest cover rep. 1.2 0.5 1.0 0.4 1.5 0.9 1.1 1.5 1.3EBIT net interest cover adj. 1.5 1.0 1.5 0.7 1.7 1.2 1.5 1.6 1.6FFO rep. / total debt rep. 9.8% 6.6% 7.3% 7.9% 7.9% 3.5% 3.2% 8.2% 8.3%FFO rep. / net debt rep. 11.6% 7.6% 7.9% 8.5% 9.1% 3.7% 3.4% 8.6% 9.3%FFO adj. / net debt adj. 9.1% 6.0% 6.4% 6.5% 7.2% 3.1% 3.3% 7.5% 7.9%FOCF rep. / total debt rep. 6.7% 2.1% -3.1% -0.8% 1.1% -2.8% -7.1% -4.6% 0.0%FOCF rep. / net debt rep. 7.9% 2.4% -3.4% -0.8% 1.2% -3.0% -7.6% -4.8% 0.0%RCF rep. / net debt rep. 11.1% 6.6% -15.0% 8.4% 9.1% 3.7% 3.4% 8.6% 9.3%RCF adj. / net debt adj. 8.7% 5.3% -10.2% 6.4% 7.2% 3.1% 3.3% 7.5% 7.9%Total debt rep. / EBITDA rep. 5.2 4.7 5.1 5.4 4.7 5.8 5.9 5.8 5.8Net debt rep. / EBITDA rep. 4.4 4.0 4.8 5.1 4.0 5.4 5.5 5.5 5.1Net debt adj. / EBITDA adj. 5.2 4.7 5.2 5.8 4.9 6.8 5.5 5.6 5.6FFO rep. / net interest rep. 2.5 1.9 2.1 1.9 2.0 1.3 1.4 2.9 2.2FFO rep. / gross interest rep. 2.4 1.8 2.0 1.9 1.9 1.3 1.4 2.9 2.1Capex / sales 3.1% 4.1% 4.3% 4.2% 3.0% 2.8% 3.8% 3.4% 4.1%Capex / depreciation 46.4% 55.5% 66.0% 53.7% 62.9% 63.6% 75.4% 70.3% 83.3%

CAPITAL STRUCTURE

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eTotal debt / capitalization rep. 97.2% 82.8% 105.2% 109.9% 107.6% 130.2% 140.8% 145.8% 143.7%Net debt / net capitalization rep. 96.6% 80.7% 105.6% 110.7% 108.9% 133.1% 144.7% 149.1% 151.6%Net debt / net capitalization adj. 97.5% 86.9% 106.9% 112.8% 110.4% 124.0% 134.4% 140.5% 141.2%Net working capital / sales 24.6% 22.2% 21.4% 17.7% 16.5% 20.0% 18.6% 21.9% 22.5%Fixed assets / sales 43.4% 41.6% 36.6% 34.1% 30.9% 29.7% 27.6% 24.7% 23.8%


Comment FY 2008Sales growth Disposal related drop -12.5%EBITDA growth Profitability held back by escalating raw material costs -5.3%EBIT growth Profitability held back by escalating raw material costs 3.2%Capex incl. acquisition Company's guidance 125Change in working capital Raw material prices impact w/c -38Funds from operations (FFO) Benefits from tax refund 163


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EVONIK (Degussa) (SELL) Investment rationale We maintain our sell recommendation on the DEGUSS 5.125% 12/13 bond and are

buyers of protection in the 5Y CDS. We believe that Evonik's spreads trade in the Baa3/BBB- range, which does not reflect the risk of the anticipated weakening of its credit profile both as a result of a slowdown in the operating environment as well as a result of itsgrowth ambitions. Following the scrapping of the IPO back in April, CVC announced the acquisition of a 25.01% stake in the capital of Evonik in June. CVC was granted substantial control rights in exchange for the higher-than-expected purchase price of EUR 2.4 bn. RAG Foundation, the majority owner, and CVC plan to IPO Evonik in the medium term. We havestated before that weighing up the pros and cons, we believe that the involvement of PE is overall less preferable for holders of the Evonik Degussa bond. A more positive effect fromthe potentially increasing focus on operating efficiency and performance could be outweighedby even more pressure for the use of higher leverage and the pursuit of a more aggressivegrowth path to maximize the value of Evonik (especially considering the high equity portion inthe transaction). In addition, accelerating dividend payouts and an ambitious investment plan (around EUR 1.5 bn in capex scheduled for FY 2008, with a total budget capex for 2008-2010of EUR 4.3 bn) are expected to hinder a meaningful improvement of Evonik's balance sheetprofile, and leverage is likely to increase going forward. Potential disposal proceeds (North American cyanide activities) will be largely consumed by further growth initiatives andpotential acquisitions, while operating free cash flow is expected to remain negligible over a foreseeable time frame.

RAG SHAREHOLDER STRUCTURE

RAG previous shareholding structure Current shareholding structure

Industrial Groupinvesting activities:

Degussa, Steag, RAG Immobilien

100 %

RAGGroup Holding with mining branch

E.ON RWE ThyssenKrupp Arcelor Proceeds from the sale of the 25.01% stake to CVC and a potential IPO will be made available to the mining sector through the foundation

100% 74.99% 25.01%

EvonikIndustries AG

Foundation

CVC

RAGMining Group


Recent developments In July, Moody's revised outlook on Evonik's Baa3 rating to stable from negative. The agency said that the revision "reflects its improved financial risk profile following the successful separation of RAG's hard coal mining activities from the industrial activities of its100% owner Evonik Industries in parallel with the material reduction in the group'sconsolidated debt and recovery in credit metrics achieved over the past two years."

On June 5, RAG Foundation announced that it had agreed to sell a 25.01% stake inEvonik for EUR 2.4 bn to private equity firm CVC Capital Partners. 50% of the EUR 2.4 bn purchase price is debt-funded. The Evonik Group is valued at approximately EUR 10 bn,almost double the figure that was previously anticipated. In the bidding process, CVC triumphed over rivals Blackstone, KKR and Bain Capital. Apart from the valuation, the good

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working relationship of CVC with the unions turned the balance in its favor, according to press reports. CVC will be granted representation in all relevant committees as well as thesupervisory board and its influence over the strategic direction of Evonik should be significant. RAG and CVC plan to float Evonik by 2013 at the latest.

Results recap

Evonik raised its guidance for FY 2008 on strong Q2 figures, which show a healthyunderlying momentum. Sales rose 11% to EUR 7.936 bn, driven by continuously healthyorganic growth in its largest unit Chemicals (+12%) as a result of better volumes (+4%) andhigher pricing (+8%). Profitability in EBITDA terms increased 10% to EUR 1,275 mn at amargin of 16.1% y-o-y. EBIT rose 17% to EUR 869 mn. Debt levels rose sequentially to EUR 4.4 bn but were reduced by EUR 0.3 bn y-o-y. We calculate a fully loaded leverage (including adjustments for pensions and other off-balance sheet liabilities) of 3.0x down from 3.1x for Q1 and 3.3x at FYE 2007. Due to the strong results, Evonik raised its outlook for 2008 and now expects sales growth in the high single-digit range, while earnings in EBIT terms are expected to improve slightly y-o-y (despite one-off items booked in FY 2007). Evonik plans to spend around EUR 1.7 bn in capex in FY 2008, EUR 1.6 bn in FY 2009 and EUR 1.0 bn in FY 2010.

Liquidity Evonik had EUR 319 mn in on-balance sheet cash as well as an undrawn EUR 2,250 mn credit facility available as of FYE 2007. In addition, the company has access to EUR 577 mn in bilateral credit facilities. However, EUR 83 mn of the cash balance were pledged as security under two project financing schemes for power plants. Cash balances as of FYE2007 amounted to EUR 319 mn (no details as to the amount of trapped cash given) withadditional disposal proceeds for Rütgers Chemicals expected in Q2. The company'supcoming maturities in 2008 of EUR 657 mn are covered by available liquidity sources.Overall, we believe Evonik's liquidity should be sufficient to cover upcoming needs.


Following the sale of the 25.01% stake to CVC, the development of Evonik's creditprofile will – apart from lingering economic risks – critically depend on its future financial policy with view to growth and shareholder remuneration. Although disposal proceeds have contributed to an improving credit profile and will continue to do so, we believe that the announced EUR 4.3 bn investment program will put additional pressure on Evonik's financial profile. In addition, Evonik will significantly accelerate its dividend payments, with EUR 280 mn to go in 2008, EUR 320 mn in 2009 and EUR 400 mn in 2010 for CVC and RAGFoundation to be able to meet their obligations (service its debt for the former and meetenvironmental obligations for the latter). On top of the more generous shareholder remuneration, the involvement of CVC is also believed to trigger a more shareholder-friendly stance both in terms of external as well as internal growth. This might be somewhat offset bypositive effects from a potentially increasing efficiency focus. We note that S&P has affirmedits stable outlook for Evonik on total debt to EBITDA of 4.0x and FFO to total debt of around 20% (FYE 2007: 20.1%), whereas Moody's Baa3 rating requires a reduction of leverage to 3.0x on a sustainable basis and RCF to net debt in the high teens (FYE 2007: 16.7%).

Main risk factors A significant slowdown in the economic environment, accelerating shareholder remuneration, significant M&A activity and a higher-than-expected investment program (for example additional power plants in its power generating unit) remain the key risks, in our view.

Things to watch ● Development of leverage in light of announced capex program and accelerating dividends

● November 16: Q3 2008 results


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CAPITALIZATION

Syndicated Loans Borrower Degussa AG Syndicated Loans Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee RCF* 1,000 n.a. n.a. n.a. n.a.* total amount of EUR 2 bn, arranged by RAG, EUR 1 bn designated to Degussa. Covenants n.a. Notes Issuer Degussa AG Senior Bond 1,250 12/13 Bullet Coupon 5.125% Other Indebtedness CP program totaling EUR 750 mn (outstanding amount EUR 152 as of FYE 2005) Other borrowing facilities to non-banks totaling EUR 31 mn as of FYE 2005 Finance lease obligations totaling EUR 70 mn as of FYE 2005


BOND DOCUMENTATION – DEGUSS 5.125% 12/10/13

Issuer Degussa AG Call/Put Call Schedule No Equity claw back No Make whole clause No Change of control No Guarantees No Security No Ranking Pari passu Certain Covenants Limitation on Debt No Limitation on Sale of Certain Assets No Limitation on Restricted Payments No Limitations on Transactions with Affiliates No Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering No Cross-default No


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Business Description – RAG / Degussa Evonik Industries AG (www.evonik.de) is a majority owned subsidy of the RAG Foundation Düsseldorf, Germany. The conglomerate comprises real estate, power generation and the leading specialty chemical company Degussa (www.degussa.com), issuer of the DEGUSS 5.125% 12/13. RAG Beteiligungs Group is organized along five business divisions: Consumer Solutions, Technology Specialties and Specialty Materials, as well as Real Estate and Power Generation. In FY 2007, Evonik generated 41% of its sales in Germany, 24% in Europe and 15% in North America, 17% Asia and the remainder (3%) in the rest of the world. Evonik employs some 41,550 people. In Q2 2008, RAG Foundation sold roughly 25.01% to Private Equity investor CVC.


Technical Specialities

33.9%

Energy19.4%

Real Estate2.8%

Other3.0%

Consumer Solutions

19.9%

Specialty Materials

21.0%


EBIT BY SEGMENT (FY 2007)

Technical Specialities

29.7%

Energy29.3%

Specialty Materials

18.9%

Consumer Solutions

14.3%

Real Estate7.7%




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB Stable To maintain rating FFO/debt at 20%; Debt/EBITDA of <4x

Moody's Baa3 Negative Up: Net debt/EBITDA below 3.0x, Down: Failure of planned IPO, future framework of hard coal subsidies, unable to reduce financial leverage

Fitch N.R.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

DEGUSS 5.125% 12/10/2013

BBs/Baa3n EUR 1,250

BOND STRUCTURE

EVONIK

Degussa

100%

Noteholders


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PROFIT AND LOSS (EVONIK)

in EUR mn 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 14,262.1 14,108.0 7,565 14,543 7,926 14,834 15,131Raw materials used -7,360.3 -7,536.0 -6,345 -7,836 -6,651 -7,936 -8,095Personnel costs -2,984.9 -2,948.0 0 -2,773 0 -2,804 -2,860EBITDA reported 1,910.7 1,920.0 1,220 2,047 1,275 2,346 2,371Depreciation and amortization -1,307.8 -1,334.0 -432 -1,119 -406 -1,038 -1,059Other operating income/expenses -2,006.2 -1,704.0 n.a. -1,887 n.a. -1,748 -1,805EBIT reported 602.9 586.0 788 928 869 1,308 1,312Income from investments 70.1 51.0 n.a. 34 n.a. 50 50Interest result -424.8 -470.0 -240 -451 -264 -450 -450Other financial items 10.9 25.0 n.a. 16 0 10 10Discontinuing operations 0.0 0.0 n.a. 0 168 168 0EBT 259.1 192.0 548 527 605 918 922Extraordinary result 0.0 993.0 -160 602 0 0 0Taxes on income -182.6 -33.0 -108 -158 -206 -250 -250Net income 76.5 1,152.0 280 971 399 668 672


in EUR mn 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 14,689 13,636 n.a. 13,149 n.a. 13,811 14,501 thereof goodwill 2,206 3,191 n.a. 3,160 n.a. 3,160 3,260Cash & cash equivalents 401 444 n.a. 319 n.a. 319 319Total assets 23,750 20,953 n.a. 19,800 n.a. 21,084 22,074Equity incl. minorities 5,249 4,320 n.a. 5,081 n.a. 5,809 6,101Pension provisions 4,301 4,070 0 3,894 3,894 3,894 3,894Financial liabilities 6,050 5,878 4,600 4,964 4,400 5,414 6,063 short term (<1 year) 2,373 2,306 4,600 971 4,400 5,414 6,063 long term (>1 year) 3,676 3,572 0 3,993 0 0 0Net working capital 2,789 2,311 0 2,400 0 2,916 3,166

CASH FLOW

in EUR mn 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) 846 1,519 n.a. 1,707 n.a. 1,706 1,731Change in working capital 301 -377 n.a. -492 n.a. -516 -250Operating cash flow 1,147 1,142 n.a. 1,215 n.a. 1,190 1,481CAPEX -1,093 -1,084 n.a. -1,068 n.a. -1,700 -1,600Free cash flow 54 58 n.a. 147 n.a. -510 -119Dividends -282 -143 n.a. -296 n.a. -340 -380Acquisitions/disposals 606 231 n.a. 977 n.a. 400 -150Share buy back/issues 0 0 n.a. 0 n.a. 0 0FCF after extraordinary items 378 146 n.a. 828 n.a. -450 -649

DEBT ADJUSTMENTS

in EUR mn 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions 5,002 4,607 4,607 3,976 3,976 3,976 3,976For operating leases 307 345 345 2 257 257 257Others* 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (EVONIK)

2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 13.4% 13.6% 16.1% 14.1% 16.1% 15.8% 15.7%EBITDA margin adj. 14.7% 15.3% 16.5% 18.6% 17.9% 17.8% 17.6%EBIT margin rep. 4.2% 4.2% 10.4% 6.4% 11.0% 8.8% 8.7%EBIT margin adj. 5.3% 5.7% 10.6% 10.7% 12.6% 10.6% 10.4%Return on capital (before tax) 1.6% 1.1% 11.1% 4.7% 16.9% 7.6% 7.1%


2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 1,911 1,920 1,220 2,047 1,275 2,346 2,371EBITDA adj. 2,099 2,160 1,249 2,705 1,419 2,634 2,659FFO rep. 846 1,519 n.a. 1,707 n.a. 1,706 1,731FFO adj. 887 1,542 n.a. 1,735 n.a. 1,734 1,759Net debt rep. 5,649 5,434 4,600 4,645 4,400 5,095 5,744Net debt adj. 10,958 10,386 9,552 8,623 8,633 9,328 9,977Total debt 6,050 5,878 4,600 4,964 4,400 5,414 6,063EBITDA net interest cover rep. 4.5 4.1 5.1 4.5 4.8 5.2 5.3EBITDA gross interest cover rep. 3.8 3.1 5.1 3.7 4.8 4.3 4.3EBIT net interest cover rep. 1.4 1.2 3.3 2.1 3.3 2.9 2.9EBIT net interest cover adj. 1.6 1.6 3.1 3.3 3.6 3.3 3.3FFO rep. / total debt rep. 14.0% 25.8% n.a. 34.4% n.a. 31.5% 28.5%FFO rep. / net debt rep. 15.0% 28.0% n.a. 36.7% n.a. 33.5% 30.1%FFO adj. / net debt adj. 8.1% 14.8% n.a. 20.1% n.a. 18.6% 17.6%FOCF rep. / total debt rep. 0.9% 1.0% n.a. 3.0% n.a. -9.4% -2.0%FOCF rep. / net debt rep. 1.0% 1.1% n.a. 3.2% n.a. -10.0% -2.1%RCF rep. / net debt rep. 10.0% 25.3% n.a. 30.4% n.a. 26.8% 23.5%RCF adj. / net debt adj. 5.5% 13.5% n.a. 16.7% n.a. 14.9% 13.8%Total debt rep. / EBITDA rep. 3.2 3.1 2.3 2.4 2.1 2.3 2.6Net debt rep. / EBITDA rep. 3.0 2.8 2.3 2.3 2.1 2.2 2.4Net debt adj. / EBITDA adj. 5.2 4.8 4.2 3.2 3.0 3.5 3.8FFO rep. / net interest rep. 3.0 4.2 4.0 4.8 4.0 4.8 4.8FFO rep. / gross interest rep. 2.7 3.5 4.0 4.1 4.0 4.1 4.1Capex / sales 7.7% 7.7% n.a. 7.3% n.a. 11.5% 10.6%Capex / depreciation 66.8% 62.8% n.a. 77.6% n.a. 163.7% 151.1%

CAPITAL STRUCTURE

2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. 53.5% 57.6% 100.0% 49.4% 100.0% 48.2% 49.8%Net debt / net capitalization rep. 51.8% 55.7% 100.0% 47.8% 100.0% 46.7% 48.5%Net debt / net capitalization adj. 70.7% 73.3% 106.0% 63.3% 101.0% 62.0% 62.4%Net working capital / sales 19.6% 16.4% 0.0% 16.5% 0.0% 19.7% 20.9%Fixed assets / sales 103.0% 96.7% 0.0% 90.4% 0.0% 93.1% 95.8%


Comment FY 2008 FY 2009Sales growth Disposals offset by good organic growth 2.0% 2.0%EBITDA growth Earnings outpacing top line 14.6% 1.1%EBIT growth Earnings outpacing top line 40.9% 0.3%Capex incl. acquisition Company guidance 1,800 1,750Change in working capital Rising feedstock cost to impact w/c -516 -250Funds from operations (FFO) Profitability improvements feeding through 1,706 1,731


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Ineos (SELL) Investment rationale We have a sell recommendation owing predominantly to our fundamental concerns

regarding Ineos' elevated leverage amidst a slowing economic environment as well asits continuous shareholder-friendly policy. While Ineos' broadly-diversified business portfolio, its progress on cost cutting as well as the recent strengthening of the USD should partly mitigate the impact of volatile raw material costs against the backdrop of a generallymore clouded macro economic outlook in 2008, we nevertheless estimate that Ineos' creditprofile will weaken despite expected net cash inflows from M&A in Q3 (EUR 190 mn disposal proceeds for its Silicas unit) as well as a cutback in scheduled capex to EUR 600 mn for thefull year 2008. Despite the relief on the raw material front as a result of the drop in the oil price, which should benefit Q3 results, we expect margin pressure to persist in the medium term and cash flow generation to remain weak. With regard to its financial policy, Ineos has in the past stated that it does not intend to accelerate debt repayments beyond the requirementsset out in its loan docs. Ineos did acknowledge that its leverage is relatively high given theexpected economic slowdown, but did not seem overly concerned with regard to its leveragetests under the loan facilities (rumored to be at 4.6x on an adjusted level). Furthermore, our general concerns regarding the company's outspoken commitment to increase shareholder value as demonstrated by recent acquisitions were not put at ease, despite management's expectation that there may be fewer attractive M&A opportunities going forward. Ineos' CDS tightened following the conference call but continues to trade upfront and we see no room for a further tightening over the next couple of months. We stick to our view that Ineos' spreads will remain susceptible to adverse newsflow.

Recent developments On July 2, Ineos completed the sale of the Ineos Silicas business to PQ Corp. for a total consideration of approximately EUR 320 mn, of which approximately EUR 190 mn was received in cash. On August 18, Ineos completed the acquisition of BASF's Seal Sands site for "a nominal consideration". The business will be part of the Ineos Nitriles segment.

CREDIT METRICS REMAIN RELATIVELY WEAK

Profitability remains under pressure Leverage increased again

-5%

0%

5%

10%

15%

20%

Q1

2005

Q2

2005

Q3

2005

Q4

2005

Q1

2006

Q2

2006

Q3

2006

Q4

2006

Q1

2007

Q2

2007

Q3

2007

Q4

2007

Q1

2008

Q2

2008

O&P North AmericaO&P EuropeRefiningChemicals IntermediatesTotal

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Q1

2006

Q2

2006

Q3

2006

2006

Q1

2007

Q2

2007

Q3

2007

2007

Q1

2008

Q2

2008

-

0.5

1.0

1.5

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2.5

3.0

3.5

4.0

4.5

5.0Net debt LTM EBITDA Net debt to LTM EBITDA adj.



Q2 2008 results reflect a weakening operating performance partly as a result of severalone-off items but also owing to persisting pressure from feedstock costs which couldnot be offset by the company's ongoing cost cutting efforts. EBITDA was down 29% to EUR 475 mn (margin 6.0%) from the record level of EUR 668 mn (margin 9.6%) y-o-y but up at EUR 420 mn q-o-q. Adjusted for one-off items related to the strike at Grangemouth (EUR 101 mn), which impacted predominantly the Refining but also the O&P Europe business, as

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well as the explosion at its Cologne site (EUR 15 mn), EBITDA was down 12% y-o-y. All chemical units except O&P North America, where EBITDA grew slightly to EUR 69 mn (from EUR 63 mn y-o-y), reported weaker results owing to significantly higher raw material costs and despite further cost savings achieved year-over-year. Owing to weak cracker margins as a result of the spike in the oil price and despite substantial fixed cost reductions, O&P Europereported an EBITDA of a mere EUR 54 mn (margin 1.9%), which Ineos believes is evenbelow trough-of-the-cycle margins. The recent drop in the oil price (and related raw materialssuch as ethylene) should ease the pressure on margins in the O&P as well as Intermediatebusinesses at least in Q3. However, the declining oil price should put pressure on Refining,which recorded USD 180 mn in inventory holding gains, contributing to an EBITDA of EUR149 mn (margin 4.7% vs. EUR 181 mn and 7.8% y-o-y) and which is likely to post high double-digit EUR million inventory holding losses in Q3, in our view. Owing to lower earnings,cash flow generation was also weak, with FFO plummeting 46% to a mere EUR 322 mn while free operating cash flow was EUR 122 mn (vs. EUR 503 mn). As a result, debt decreased to EUR 7,735 mn with leverage going up from 3.7x at Q1 and 3.3x at FYE 2007 to 4.1x in the quarter.

Liquidity Ineos' liquidity cushion seems adequate based on EUR 515 mn in on balance sheet cash as well as EUR 374 mn in headroom available under its revolving credit facility. In addition, Ineos had some headroom under its receivables facility, taking the total amount of available liquidity to around EUR 1.2 bn as of H1 2008. Ineos' short-term debt maturities amounted to about EUR 221 mn. With view to the recent drop in the oil price, we expect some relief from the working capital front in addition to the typical release of working capital in H2 ofany given year. Liquidity will be further strengthened by EUR 190 mn in cash proceeds forSilicate booked in Q3, which will not have to be applied to debt reduction.


Q2 leverage of 4.1x based on LTM EBITDA marks a further deterioration from the low of3.7x recorded for Q1 and the 3.3x reported in FY 2007. While the recent drop in the oil price should provide some relief for Ineos' operating performance in the short term and in Q3in particular, we expect continuing margin pressure from a slowdown in economic activity andthe continuously elevated raw material costs. Leverage continues to be elevated and despite disposal proceeds for its Silicas business (EUR 190 mn in Q3), we do not foresee leveragedeclining going forward. Ineos has in the past stated that it does not intend to accelerate debt repayments beyond the requirements set out in its loan documentation. While the earnings call has eased concerns with regard to a rumored covenant breach triggering a tightening inspreads, potential covenant breaches remain a concern with respect to the company'selevated leverage. Ineos' total debt remains at around EUR 8.3 bn, translating into a leverage of total debt to EBITDA (as calculated by UniCredit) of around 4.8x, which we expect to remain stable by FYE 2008. Moreover, we do not like the continuously outspokencommitment to shareholder value as demonstrated by its M&A activity on top of the overallslow progress in debt reduction.

Main risk factors Main risks remain a weakening in demand, volatile raw material and energy costs, which arelikely to further squeeze margins in its chemicals businesses, reliability issues, furtheracquisitions and dividend payments.

Things to watch ● Feedstock volatility and margin pressure; M&A activity and dividends

● October 24: Q3 trading statement; November 17: final Q3 results


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CAPITALIZATION

Senior Credit Facilities Borrower Ineos Holding Limited, Ineos US Finance LLC Senior Credit Facility Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Tranche A EUR 1,180 + USD 466 12/12 14 semi annual

installments beginning 12/06

2.25% (margin grid) 0.5%

Tranche B EUR 990 + USD 732 12/13 9 semi annual installments beginning

12/06

2.75% (margin grid) 0.5%

Tranche C EUR 990 + USD 732 12/16 10 semi annual installments beginning

12/06

3.25% 0.5%

Tranche D/ Borrowing Base Facility

EUR 830 + USD 564 12/15 (D)/ 12/12 (BB)

Bullet 2.25% increasing to 2.5% after 12 months and to 2.75% thereafter / Tranche D: 3.75%

0.5%

Revolving Credit Facility EUR 800 12/12 Bullet 2.25% (margin grid) 0.75% Securitization Facility EUR 1,500 n.a. Bullet n.a. n.a. Proceeds from the Securitization facility were used to repay the Borrowing Base Facility

Covenants Standard covenant package with respect to incurrence of additional debt, merge or consolidate, investments, make restricted payments, sell, lease or dispose of assets, enter into joint venture transactions, etc. In addition, the senior facilities require Ineos to comply with a minimum cash flow to net debt service ratio, minimum EBITDA to consolidated net finance charges, maximum net financial indebtedness to EBITDA ratio and a maximum level of capex per year. Notes Issuer Ineos Group Holdings plc. Senior Notes EUR 1,750 02/16 Bullet Coupon 7.875% Senior Notes USD 750 02/16 Bullet Coupon 8.5% Senior Notes EUR 160 12/11 Bullet Coupon 9.125%


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BOND DOCUMENTATION – INEGRP 7.785% EUR 1,750 MN 02/15/16 / INEGRP 8.5% USD 750 MN 02/15/16

Issuer Ineos Group Holdings plc Call/Put Call Schedule EUR Notes: On or after 02/15/11: 103.938%, 02/15/12: 102.625%, 02/15/12: 101.313%, 02/15/14: 100.0%

USD Notes: On or after 02/15/11: 104. 25%, 02/15/12: 102.833%, 02/15/12: 101.417%, 02/15/14: 100.0% Equity claw back On or prior to February 15, 2009, 35% from a rights offering at 107.875% (EUR) /108.5% (USD) Make whole clause On or prior to August 15, 2010, Bund +50 bp Change of control 101% Guarantees Jointly and severally guaranteed on an unsecured basis from subsidiaries representing more than 85% of FY 2004

consolidated EBITDA. Security Junior pledge of 100% of the shares of Ineos Holding Limited Ranking – Equal to all senior indebtedness and senior to all existing and future subordinated indebtedness

– Subordinated to secured indebtedness Certain Covenants Limitation on Debt Fixed Charge Coverage Ratio of at least 2.0x. Most important carve-outs:

– Indebtedness under the senior credit facilities not to exceed EUR 7 bn, less net cash proceeds from asset sales, aggregate principal amount of public debt secured by a lien

– Indebtedness under the borrowing base facility not to exceed EUR 1.3 bn at any time – Capital lease obligations and purchase money obligations not exceeding EUR 200 mn – Additional indebtedness not exceeding EUR 100 mn

Limitation on Sale of Certain Assets No asset sales unless – 75% of the disposal proceeds are received in cash and the issuer receives at least the fair market value – and application of the net proceeds within 365 days after receipt to debt reduction, to make investments into

assets or properties. Investments may be temporarily invested pending the final application. If disposal proceeds are greater than EUR 25 mn, issuer will apply proceeds to the repayment of the notes.

Limitation on Restricted Payments Restricted payments are possible if pro-forma of the restricted payment no event of default has occurred and the aggregate amount does not exceed the sum of: – 50% of cumulative consolidated net income earned from the date of the indenture, less 100% of a net loss. – Equity proceeds; – Conversion of debt to equity proceeds, Most important carve-out/exceptions: – 100% of the proceeds in case of disposition or repayment of any investment constituting a restricted payment,

plus the fair value re-designation of an unrestricted subsidiary into a restricted subsidiary, 100% of the cash proceeds from the sale of an unrestricted subsidiary, dividends received from an unrestricted subsidiary.

– dividends and loans and advances to make such dividends in respect to a public offering not to exceed 6% of the net cash proceeds from a public offering if consolidated fixed charge coverage ratio is equal or greater than 2.75x

– Additional Restricted Payments not to exceed EUR 25 mn. Limitations on Transactions with Affiliates Resolution of disinterested director if transaction is greater than EUR 25 mn.

Fairness opinion if transaction is greater than EUR 50 mn. Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering Yes


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Business Description – INEOS Group Holdings Plc Ineos Group Holdings (www.ineos.com) is the third largest chemical company measured by turnover. Following the acquisition of BP's Innovene, the company has become a leading producer of a broad variety of Polyolefins. It is also active in refining with a daily distillation capacity of 410,000 barrels of crude oil. Apart from commodity-end chemicals such as olefins, it is also active in specialty chemicals (Fluor, Silica, Melamines). The group was formed by a number of acquisitions over the last few years, which it has subsequently turned around by significantly lowering the cost base. Today, Ineos operates more than 70 manufacturing facilities in Europe and North America. Ineos' main shareholder is James Ratcliff with a shareholding of 56.7%, other directors 14.1% and other shareholders 29.2%.


Refining26.8%

O&P North America

8.6%

Chemical Intermediates

37.1%

O&P Europe27.5%



Refining19.2%

O&P Europe23.7%

Chemical Intermediates

46.2% O&P North America10.9%




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B+ Stable Down: FOCF significantly negative; Up: Delivery on cost savings, upcycle persist longer than anticipated or slump is more modest

Moody's B1 Stable Down: FFO + interest/Interest < 2.0x, weakening FCF; Up: FCF/Debt in high single digits, sustained reduction in leverage closer to 4x

Fitch withdrawn

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

INEGRP 7.875% 2/15/2016

B-s/ B3s/-- EUR 1,750 2/15/2011 (103.94)

INEGRP 8.5% 2/15/2016

B-s/ B3s/-- USD 750 2/15/2011 (104.25)

BOND STRUCTURE

Ineos Group Ltd.

Ineos InvestmentHoldings Ltd.

Ineos IntermediateHoldings Ltd.

Ineos GroupHoldings Plc

IneosHoldings Ltd.

Ineos US Finance

Noteholders

Operatingsubsidiaries

Senior Credit Facilities


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PROFIT AND LOSS (INEOS GROUP HOLDINGS PLC)

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eSales 2,236 2,530 17,835 4,958 26,587 13,559 27,516 15,790 30,543Cost of goods and services sold -1,834 -2,130 -16,355 -4,353 -24,600 -12,254 -25,228 -14,755 -28,557Distribution expenses -162 -152 -211 -202 -424 -270 -532 -283 -580Administration -66 -46 -493 -83 -499 -225 -439 -228 -428Other operating income/expenses -25 18 -333 -16 -143 -16 -111 -35 -75EBITDA reported 231 298 1,280 410 1,674 1,210 2,091 854 1,652EBIT reported 150 221 443 303 922 795 1,205 490 902Adj. EBIT (bef. pension interest) 179 224 780 418 1,094 825 1,338 546 996Income from investments 1 1 7 -4 0 16 19 7 10Interest result -75 -63 -637 -89 -665 -351 -751 -361 -750Other financial items 3 -2 23 -33 -63 0 -3 0 0Discontinuing operations 2 1 0 0 0 0 0 0 0EBT reported 79 158 -164 178 194 459 470 135 162Extraordinary result 0 0 0 0 0 5 0 -1 -1Taxes on income -40 -8 0 -91 -79 -150 -145 -42 -51Net income 39 151 -164 87 115 314 325 92 111


in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eFixed assets 721 652 635 6,472 7,256 7,025 6,796 6,496 6,236 thereof goodwill -282 -217 -169 408 403 374 400 381 381Cash & cash equivalents 109 153 80 858 660 789 951 515 515Total assets 1,383 1,400 1,587 15,125 13,771 14,546 13,831 14,047 13,702Equity incl. minorities 86 179 281 358 405 700 587 498 514Pension provisions 40 40 41 325 407 385 393 346 346Other provisions 30 11 33 273 372 365 511 491 491Financial liabilities 866 761 681 9,004 8,694 8,486 8,220 8,251 7,862 short term (<1 year) 80 111 93 151 194 217 197 221 221 long term (>1 year) 786 651 589 8,853 8,501 8,269 8,024 8,030 7,641Net working capital 129 112 237 2,127 2,868 2,122 2,959 2,574 3,456

CASH FLOW

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eFFO (Funds from operations) 158 328 273 303 996 858 1,354 387 743Change in working capital -19 -134 -134 149 133 -361 91 -421 -150Operating cash flow 139 195 139 452 1,128 497 1,445 -34 593CAPEX -48 -55 -62 -153 -498 -252 -639 -290 -610Free cash flow 91 140 77 299 630 245 805 -324 -17Dividends 0 -10 -40 0 -100 0 -25 0 0Acquisitions/disposals -5 1 0 -7,323 -628 18 -220 -91 -10FCF after extraordinary items 87 131 37 -7,024 -98 263 560 -415 -27

DEBT ADJUSTMENTS

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eFor pensions 62 67 65 367 526 519 490 471 468For operating leases 29 10 19 48 46 46 227 227 227Others* 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (INEOS GROUP HOLDINGS PLC)

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eEBITDA margin rep. 10.3% 11.8% 7.2% 8.3% 6.3% 8.9% 7.6% 5.4% 5.4%EBITDA margin adj. 12.2% 12.1% 9.1% 10.7% 7.0% 9.2% 8.1% 5.8% 5.7%EBIT margin rep. 6.7% 8.7% 2.5% 6.1% 3.5% 5.9% 4.4% 3.1% 3.0%EBIT margin adj. 8.0% 8.9% 4.4% 8.4% 4.1% 6.1% 4.9% 3.5% 3.3%Return on capital (before tax) 7.5% 16.8% -20.2% 2.3% 2.8% 6.2% 5.2% 6.2% 1.8%


2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eEBITDA rep. 231 298 1,280 410 1,674 1,210 2,091 854 1,652EBITDA adj. 274 306 1,626 531 1,859 1,246 2,228 912 1,751FFO rep. 158 328 273 303 996 858 1,354 387 743FFO adj. 171 333 285 310 1,009 864 1,359 390 748Net debt rep. 757 608 602 8,146 8,035 7,697 7,269 7,736 7,347Net debt adj. 848 685 686 8,560 8,607 8,262 7,985 8,433 8,042Total debt 866 761 681 9,004 8,694 8,486 8,220 8,251 7,862EBITDA net interest cover rep. 2.9 4.8 2.0 4.6 2.5 3.4 2.8 2.4 2.2EBITDA gross interest cover rep. 2.9 4.6 2.0 4.0 2.4 3.4 2.7 2.4 2.1EBIT net interest cover rep. 1.9 3.5 0.7 3.4 1.4 2.3 1.6 1.4 1.2EBIT net interest cover adj. 2.2 3.5 1.2 4.4 1.6 2.3 1.7 1.5 1.3FFO rep. / total debt rep. 18.2% 43.1% 40.1% 3.4% 11.5% 12.9% 16.5% 10.7% 9.5%FFO rep. / net debt rep. 20.9% 54.0% 45.4% 3.7% 12.4% 14.2% 18.6% 11.4% 10.1%FFO adj. / net debt adj. 20.1% 48.6% 41.6% 3.6% 11.7% 13.4% 17.0% 10.5% 9.3%FOCF rep. / total debt rep. 10.5% 18.3% 11.3% 3.3% 7.2% 6.5% 9.8% 8.5% -0.2%FOCF rep. / net debt rep. 12.0% 23.0% 12.8% 3.7% 7.8% 7.1% 11.1% 9.1% -0.2%RCF rep. / net debt rep. 20.9% 52.4% 38.8% 3.7% 11.1% 14.2% 18.3% 11.1% 10.1%RCF adj. / net debt adj. 20.2% 47.1% 35.8% 3.6% 10.6% 13.4% 16.7% 10.2% 9.3%Total debt rep. / EBITDA rep. 3.7 2.6 0.5 22.0 5.2 4.6 3.9 4.8 4.8Net debt rep. / EBITDA rep. 3.3 2.0 0.5 19.9 4.8 4.2 3.5 4.5 4.4Net debt adj. / EBITDA adj. 3.1 2.2 0.4 16.1 4.6 4.1 3.6 4.5 4.6FFO rep. / net interest rep. 3.0 6.2 1.4 4.4 2.5 3.4 2.8 2.1 2.0FFO rep. / gross interest rep. 3.0 6.0 1.4 4.0 2.4 3.4 2.7 2.1 2.0Capex / sales 2.1% 2.2% 0.3% 3.1% 1.9% 1.9% 2.3% 1.8% 2.0%Capex / depreciation 58.4% 70.9% 7.4% 144.1% 66.3% 60.8% 72.1% 79.7% 81.3%

CAPITAL STRUCTURE

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008eTotal debt / capitalization rep. 90.9% 80.9% 70.8% 96.2% 95.6% 92.4% 93.3% 94.3% 93.9%Net debt / net capitalization rep. 89.8% 77.2% 68.2% 95.8% 95.2% 91.7% 92.5% 93.9% 93.5%Net debt / net capitalization adj. 92.9% 81.8% 72.8% 96.4% 96.8% 93.6% 94.2% 95.8% 95.4%Net working capital / sales 5.8% 4.4% 1.3% 42.9% 10.8% 7.8% 10.8% 8.7% 11.3%Fixed assets / sales 32.2% 25.8% 3.6% 130.5% 27.3% 25.7% 24.7% 21.8% 20.4%


Comment FY 2008Sales growth Higher pricing, Acquisitions 11.0%EBITDA growth Continuing margin pressure -21.0%EBIT growth Continuing margin pressure -25.1%Capex incl. acquisition Increasing despite tight control 810.0Change in working capital Feedstock related w/c build-up -150.0Funds from operations (FFO) Benefits from cost savings 743.3


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Rhodia (BUY) Investment rationale We change our hold recommendation on Rhodia bonds to buy. While Rhodia's

increasing shareholder focus amid a more challenging environment is among the keyrisks for the credit, we take comfort from its prudent financial profile and the expectedbenefits from the sale of carbon credits. Owing to the challenging credit market environment, we see little risk for a larger-than-expected acquisition at this point in time, despite the shift in Rhodia's focus towards growth and shareholder remuneration, following the significant deleveraging over the past few years. Overall, management seems comfortable with the current leverage and no longer views debt reduction as a strategic priority.Operationally, we expect demand to remain healthy, while margin pressure owing to escalating raw material and energy costs (butadiene, benzene), which rose by EUR 78 mn in Q2 2008 alone, is expected top persist. However, ample cash balances and a realignedstrategic business set-up support Rhodia's continuing confidence for FY 2008. For the current business year, the company expects EBITDA to be within a band of plus/minus 5% from the FY 2007 level. Apart from operating performance, carbon emission rights (CER) remainanother credit driver for Rhodia. In 2007, Rhodia's recurring EBITDA from the sale of CERs was EUR 135 mn. For 2008, it already sold forward CERs worth EUR 182 mn at an average price of EUR 15.2/ton. Beyond 2008, Rhodia confirmed its guidance for 13 million tons ofCERs p.a., the sale of which should partly mitigate the risks associated with the more aggressive stance towards acquisitions and a weakening in the overall trading environment.

Recent developments Rhodia closed the disposal of its Isocyanates business to the Perstorp Group. The business generated EUR 39 mn in EBITDA in FY 2007 and was previously included in Rhodia's Organic unit, which will cease to exist. Assuming a multiple of 5-6x, the EV could be anything around EUR 195 mn to EUR 234 mn.

CREDIT METRICS DEVELOPMENT

EBITDA margins mirror input cost inflation H1 witnessed an increase in leverage

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8%

10%

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14%

16%

18%

2000 2001 2002 2003 2004 2005 2006 H1 07 2007 H1 080.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0EBITDA margin adj. EBITDA gross interest cover adj. (RS)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2000 2001 2002 2003 2004 2005 2006 H1 07 2007 H1 080.0

1.0

2.0

3.0

4.0

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8.0

9.0FFO adj. / net debt adj. Net debt adj. / EBITDA adj. (RS)



Rhodia reported a strong set of Q2 2008 results. Sales were up 5% like-for-like to EUR 1,227 mn, driven by remarkably firmer pricing (+8%) on marginally better volumes. Recurring EBITDA reached EUR 187 mn as reported by Rhodia, with sales price increases (EUR +95 mn) fully offsetting the surge in raw feedstock costs (EUR +78 mn) as well as parts of theadverse FX movements (EUR +23 mn). Marginally better volumes and fixed cost reduction contributed to the 1% improvement in EBITDA to EUR 187 mn in absolute terms, whilemargins slipped to 15.2% versus 15.8% y-o-y. Operating profit in EBIT terms was up 16% like-for-like to EUR 115 mn. Cash flow generation, too, held up well with FFO of EUR 114 mn

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in the quarter (up 12%), but operating free cash flow of EUR 15 mn was negative as a result of higher working capital requirements on the back of raw material price increases. Net debtincreased to EUR 1,609 mn from EUR 1,505 mn in Q1 and leverage in terms of net debt to EBITDA continued to trend upwards, reaching 2.3x following 2.1x in Q1 and 2.0x at FYE2007, which we partly blame on the seasonality of the business. FFO to net adj. debt remained stable nevertheless, owing to a good cash flow performance standing at 16.5%.

Liquidity Rhodia's liquidity rests on cash on balance sheet, available credit facilities as well asoperating cash flow. Apart from EUR 387 mn in cash on balance sheet, the company's EUR530 mn RCF remained undrawn as of H1, according to Rhodia and served as liquidity back-up. It also has two securitization programs in place with a total volume of EUR 235 mn (plusGBP 15 mn) and USD 100 mn in Europe and North America, which should be largely drawnat H1 2008. Short-term debt amounted to EUR 327 mn, while current maturities are believedto be limited given the company's back-ended financing structure.


We were positively surprised by Rhodia's strong operating performance in Q2, especially given significant headwind from the raw material front, which Rhodia was able to fully compensate for by price increases. In its earnings call, the company stressed its confidence to achieve its FY 2008 targets by reiterating its outlook. Recurring EBITDA is expected to come in "at a band of" around 5% of the 2007 level as further rising raw material and energy costs are expected to be offset by price increases as the company pursues a"price over volumes" strategy. Demand levels remain satisfactory in most of Rhodia's businesses and especially in Europe, while the company does see a softening in the US. In itsenergy segment, Rhodia will further benefit from the sale of CERs with 92% of the 13mn mt for 2008 already sold forward at an average price of EUR 15.2/t (or roughly EUR 182 mn). With the market price for CERs breaching the EUR 20/t mark and a confirmed 13 mn mt p.a. until 2013 confirmed as available for sale, Rhodia will further benefit from the disposal ofCERs over the next couple of years. The disposal of its Isocyanates unit is expected to be closed in H2 and will, together with expected free cash flow generation (further supported byseasonal cash collection in H2), lead to a reduced leverage by FYE 2008, which might, however, be short-lived. Given limited maturities under Rhodia's back-ended financing structure (according to comments in its call, a bond buyback does not seem to be on the agenda) and no drawings under its EUR 600 mn RCF, excess funds are more likely to be applied to external growth projects or accelerating shareholder remuneration. We have in thepast voiced our concerns that, with the renewed confidence in its business portfolio andleverage at levels which management considers reasonable (leverage in terms of net debt adj. to EBITDA of 4.3x according to UniCredit's model), the risk for larger-than-expected transactions has increased. In this context, we also point to the weak stock price performanceof the company over the past couple of months. However, given the ongoing turmoil in financial markets prevents Rhodia from pursuing bigger acquisitions at present, in our view.

Main risk factors The main short-term risks to our model include a significant acceleration of shareholderremuneration, i.e. higher dividend or larger-than-expected acquisitions, a significant deterioration in the economic environment for polyamides or escalating raw material costs.Longer term, price fluctuations for carbon emission rights remain a risk factor (for 2008around 90% were sold forward).

Things to watch ● Raw material prices, in particular benzene; shareholder remuneration and M&A activity

● November 6, 2008: Q3 2008 results


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CAPITALIZATION

Senior Credit Facilities Borrower Rhodia S.A. Senior Credit Facility Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Multi-currency Credit and Guaranty Facility 300 06/08 Bullet Depends on currency

45% of margin

Other Covenants Long-term net assets to long-term net debt must be greater than 1x (tested every 6 months); Early repayment clauses (e. g. change of control); other typical financial covenants like limitation on asset disposals Notes Issuer Rhodia S.A. Outstanding Amount (in EUR mn) Maturity Amortization schedule Coupon Senior notes 1 06/10 Bullet 10.5% Senior notes USD 4 06/10 Bullet 10.25% Senior Notes 1,100 10/13 Bullet EURIBOR + 275 bp Convertible 595 01/14 Bullet 0.5% Other Indebtedness (as of FYE 2007) Outstanding bilateral facilities of EUR 97 mn Financial lease liabilities of EUR 3 mn Receivables securitization program of EUR 114 mn Other debt of EUR 6 mn; Other notes of EUR 25 mn


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BOND DOCUMENTATION – SENIOR 10/15/13 FLOAT EURIBOR +275 BP

Issuer Rhodia S.A. Call/Put Call Schedule On or after October 15, 2007: 102%; 2008: 101%; 2009 and thereafter 100% Equity claw back No Make whole clause No Change of control 101% Guarantees No; if a restricted subsidiary enters into a guarantee of debt of Rhodia S.A., the restricted subsidiary must also

guarantee the notes Security No Ranking – Equal to all of Rhodia's existing and future indebtedness that is not subordinated to the notes

– Structurally subordinated to all of the existing and future indebtedness of the operating subsidiaries (e. g. sales receivables program) as well as secured debt of Rhodia

Certain Covenants Limitation on Debt and Issuance of Preferred Stock

Fixed charge coverage ratio of at least 2x Most important carve-out/exceptions: – Indebtedness and letters of credit of company and subsidiaries of up to EUR 1,000 mn less aggregate amount of

asset sales – Incurrence of CLO, mortgage finance, purchase money obligations up to the greater of EUR 200 mn or 5% of

consolidated net assets – Issuance of preferred stock by a restricted subsidiary provided that restricted subsidiary continues to be a

restricted subsidiary – General Basket EUR 250 mn

Limitation on Merger, Consolidation of sale of certain assets

Restrictions on merging with another entity or disposing of substantially all of its assets in one transaction Most important carve-out/exceptions: – Rhodia is the surviving entity or the buyer is located in the EU, Canada or the U.S. – The acquirer takes over all of Rhodia's obligations

Limitation on Restricted Payments – 50% of consolidated net income (minus 100% of such negative amount) plus – Equity proceeds plus – Net reduction of Investments that are not permitted investments Most important carve-out/exceptions: – Dividend payments if other covenants are meet – Purchase of equity of employees of up to EUR 10 mn p. a. – General basket of a total of EUR 50 mn

Limitations on Transactions with Affiliates Certificate of senior financial officer and a member of the executive board if consideration is between EUR 20 mn to EUR 50 mn Fairness opinion and board resolution if transaction greater than EUR 50 mn

Fall away/ Suspension Covenants Yes Negative pledge Yes Anti Layering No

Source: Offerin circular, UniCredit Global Research

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Business Description – Rhodia Rhodia, (www.rhodia.com) is a French-based specialty chemical company which was spun-off from Rhone-Poulenc in 1998. Rhodia's product portfolio is grouped along the business lines performance Materials (including Polyamid, Acetow), Functional Chemicals (Silcea, Novecare) and Organics & Services (Organics, Eco Services, Energy Services). The group ranks among the largest producers of poylamid 6.6 (global #2) and polyamid-based engineering plastics (#3) and also commands leading position in most businesses it operates in. It had around 16,000 employees in FY 2007 and is listed at the Euronext Stock exchange in Paris.


Polyamide38.9%

Novecare18.3%

Eco Services4.3%

Energy Services4.0%

Organics16.6%

Corporate0.2%

Acetow8.7%

Silcea9.1%


RECURRING EBITDA BY SEGMENT (FY 2007)

0

100

200

300

400

500

600

700

800

Pol

yam

ide

Ace

tow

Nov

ecar

e

Silc

ea

Eco

Ser

vice

s

Org

anic

s

Ene

rgy

Ser

vice

s

(in E

UR

mn)

FY 2007

FY 2006




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB Stable Down: negative FOCF, FFO to debt < 20%, deterioration of polyamide market; Up: FFO to debt sustainably > 20% and positive FOCF, demonstration of resilience in adverse market conditions

Moody's Ba3 Positive Up: FCF / adj. debt in high mid single digits, Down: Net adj. debt/ EBITDAR > 6x

Fitch BB- Positive The positive outlook reflects the material improvement of credit stats; expected positive FCF in FY2007

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

RHA Float +275 bp 10/15/2013

BBs/ B1p/BB-p EUR 1,100 10/15/2007 (102)

BOND STRUCTURE

Rhodia Noteholders

OperatingSubsidiaries


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PROFIT AND LOSS (RHODIA)

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 5,453.0 5,146.0 4,956.0 5,261.0 2,793.0 5,556.0 2,671.0 5,111.5 5,162.6Cost of goods and services sold -4,742.0 -4,408.0 -4,139.0 -4,261.0 -2,218.0 -4,437.0 -2,162.0 -4,130.1 -4,171.4Distribution expenses 0 0 0 0 -265.0 0 0 0 0R&D expenses -187.0 -138.0 -104.0 -103.0 -46.0 -96.0 -37.0 -92.0 -87.8Administration -612.0 -513.0 -523.0 -518.0 0 -517.0 -256.0 -511.2 -505.9Other operating income/expenses 0 -275.0 -124.0 -20.0 -15.0 -58.0 -8.0 -25.0 -25.0EBITDA reported 436.0 310.0 434.0 669.0 394.0 743.0 351.0 649.3 672.5EBIT reported -88.0 -188.0 66.0 359.0 249.0 448.0 208.0 353.3 372.5Adj. EBIT (bef. pension interest) -13.4 98.8 282.8 441.5 310.4 480.7 255.0 459.5 478.8Income from investments -95.0 3.0 0 0 0 0 1.0 0 0Interest result -122.0 -223.0 -363.0 -315.0 -204.0 -291.0 -100.0 -210.0 -225.0Other financial items -128.0 -44.0 -69.0 10.0 1.0 -1.0 2.0 -10.0 -10.0Discontinuing operations 0 -78.0 -196.0 -45.0 68.0 58.0 4.0 50.0 0EBT reported -433.0 -530.0 -562.0 9.0 114.0 214.0 115.0 183.3 137.5Extraordinary result -771.0 0 0 0 0 0 0 0 0Taxes on income -142.0 -102.0 -53.0 57.0 -50.0 -83.0 -37.0 -73.3 -55.0Net income -1,346.0 -632.0 -615.0 66.0 64.0 131.0 78.0 110.0 82.5


in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 3,272 2,839 2,701 2,288 2,242 2,202 2,043 2,106 2,181 thereof goodwill 437 226 244 225 222 207 194 207 207Cash & cash equivalents 766 653 967 501 428 511 494 569 569Total assets 6,529 5,566 5,646 5,153 4,527 4,478 4,584 4,543 4,700Equity incl. minorities 275 -521 -666 -628 -244 -368 -320 -248 -201Pension provisions 644 1,038 1,269 1,325 1,112 1,246 1,150 1,138 1,138Other provisions 426 322 377 381 402 390 363 403 403Financial liabilities 3,333 3,020 3,028 2,469 2,084 1,986 2,103 2,011 2,110 short term (<1 year) 1,447 770 1,053 447 421 311 452 422 422 long term (>1 year) 1,886 2,250 1,975 2,022 1,663 1,675 1,651 1,589 1,688Net working capital -56 306 288 593 532 376 604 467 538

CASH FLOW

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) 146 105 210 244 147 413 233 364 433Change in working capital -135 -98 -72 -142 -73 0 -157 -91 -72Operating cash flow 11 7 138 102 74 413 76 273 361CAPEX -233 -248 -286 -311 -158 -324 -138 -330 -330Free cash flow -222 -241 -148 -209 -84 89 -62 -57 31Dividends -22 0 0 -2 -3 -3 -25 -25 -30Acquisitions/disposals 50 545 75 141 269 256 -2 100 -100Share buy back/issues 0 447 576 36 0 -2 0 0 0FCF after extraordinary items -194 751 503 -34 182 340 -89 18 -99

DEBT ADJUSTMENTS

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions 966 1,086 1,318 1,321 1,247 1,291 1,257 1,253 1,253For operating leases 66 95 107 120 120 130 130 130 130Others* 979 846 353 10 10 243 243 243 243


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PROFITABILITY RATIOS (RHODIA)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 8.0% 6.0% 8.8% 12.7% 14.1% 13.4% 13.1% 12.7% 13.0%EBITDA margin adj. 9.6% 11.9% 13.4% 15.1% 16.5% 14.4% 15.4% 15.3% 15.6%EBIT margin rep. -1.6% -3.7% 1.3% 6.8% 8.9% 8.1% 7.8% 6.9% 7.2%EBIT margin adj. -0.2% 1.9% 5.7% 8.4% 11.1% 8.7% 9.5% 9.0% 9.3%Return on capital (before tax) -5.8% -16.4% -12.6% 2.4% 12.3% 9.7% 17.2% 8.1% 7.7%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 436 310 434 669 394 743 351 649 673EBITDA adj. 524 612 664 795 462 803 412 783 806FFO rep. 146 105 210 244 147 413 233 364 433FFO adj. 159 120 223 257 154 440 247 391 460Net debt rep. 2,567 2,367 2,061 1,968 1,656 1,475 1,609 1,442 1,541Net debt adj. 4,578 4,394 3,839 3,419 3,032 3,139 3,239 3,068 3,167Total debt 3,333 3,020 3,028 2,469 2,084 1,986 2,103 2,011 2,110EBITDA net interest cover rep. 3.6 1.4 1.2 2.1 1.9 2.6 3.5 3.1 3.0EBITDA gross interest cover rep. 2.3 1.3 0.9 1.5 1.5 1.8 2.1 2.8 2.7EBIT net interest cover rep. -0.7 -0.8 0.2 1.1 1.2 1.5 2.1 1.7 1.7EBIT net interest cover adj. -0.1 0.4 0.8 1.4 1.5 1.6 2.4 2.1 2.0FFO rep. / total debt rep. 4.4% 3.5% 6.9% 9.9% 12.0% 20.8% 23.7% 18.1% 20.5%FFO rep. / net debt rep. 5.7% 4.4% 10.2% 12.4% 15.1% 28.0% 31.0% 25.2% 28.1%FFO adj. / net debt adj. 3.5% 2.7% 5.8% 7.5% 8.5% 14.0% 16.5% 12.7% 14.5%FOCF rep. / total debt rep. -6.7% -8.0% -4.9% -8.5% -16.2% 4.5% 17.4% -2.8% 1.5%FOCF rep. / net debt rep. -8.6% -10.2% -7.2% -10.6% -20.4% 6.0% 22.7% -3.9% 2.0%RCF rep. / net debt rep. 4.8% 4.4% 10.2% 12.3% 14.8% 27.8% 29.5% 23.5% 26.1%RCF adj. / net debt adj. 3.0% 2.7% 5.8% 7.5% 8.4% 13.9% 15.7% 11.9% 13.6%Total debt rep. / EBITDA rep. 7.6 9.7 7.0 3.7 2.9 2.7 3.0 3.1 3.1Net debt rep. / EBITDA rep. 5.9 7.6 4.7 2.9 2.3 2.0 2.3 2.2 2.3Net debt adj. / EBITDA adj. 8.7 7.2 5.8 4.3 3.7 3.9 4.3 3.9 3.9FFO rep. / net interest rep. 2.2 1.5 1.6 1.8 1.7 2.4 3.3 2.7 2.9FFO rep. / gross interest rep. 1.8 1.4 1.4 1.5 1.5 2.0 2.4 2.5 2.7Capex / sales 4.3% 4.8% 5.8% 5.9% 5.7% 5.8% 5.2% 6.5% 6.4%Capex / depreciation 44.5% 49.8% 77.7% 100.3% 109.0% 109.8% 96.5% 111.5% 110.0%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. 92.4% 120.8% 128.2% 134.1% 113.3% 122.7% 117.9% 114.1% 110.5%Net debt / net capitalization rep. 90.3% 128.2% 147.7% 146.9% 117.3% 133.2% 124.8% 120.8% 115.0%Net debt / net capitalization adj. 101.0% 123.8% 134.7% 138.5% 114.3% 128.2% 115.2% 122.8% 111.1%Net working capital / sales -1.0% 5.9% 5.8% 11.3% 10.3% 6.8% 11.1% 9.1% 10.4%Fixed assets / sales 60.0% 55.2% 54.5% 43.5% 43.4% 39.6% 37.6% 41.2% 42.2%


FY 2008 FY 2009Sales growth Asset disposals -8.0% 1.0%EBITDA growth Asset disposals and feedstock costs impact -12.6% 3.6%EBIT growth Asset disposals and feedstock costs impact -21.1% 5.5%Capex incl. acquisition Includes investments in Asia 430 430Change in working capital Raw materials to impact w/c -91 -72Funds from operations (FFO) Lower cash outs for restructuring 364 433


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Consumer Tough times for consumer goods companies in the EU and the US...

During the summer months, consumer sentiment in Western Europe and in the USdropped to the lowest levels in years. The slight pullback from August was far from beingable to absorb the shocks of the prior months: In June and July 2008, the University of Michigan Consumer Sentiment Index reached the lowest level since February 1992. In July, EU consumer confidence fell to -20, a level not seen in 14 years and the outlook for the remainder of 2008 remains weak. Persisting high energy costs and food prices in combination with declining real estate values will continue to affect consumers' budgets for durableconsumer goods over the next few months. In addition, recent developments on financialmarkets (e.g. Lehman's filing for chapter 11) will hamper a recovery of consumer confidence.Hence, the likelihood of a recession is increasing.

… while the bad "R" word is tightening its grip on the real economy

During Q2 2008, the resilience of the economy in the eurozone came to an end and markets were caught off guard by the magnitude of the economic downturn. GDP in the eurozone declined by 0.2% q-o-q and the second half of 2008 should hardly be better (UniCredit estimates 0.1% q-o-q in Q3 and 0.1% q-o-q in Q4). Following months of resilience, the real economy is beginning to show the impact from the worsened financial supply and the more challenging market conditions as well as due to the price hikes of energy costs. Themain question is how private consumption will react to the reduced pressure on prices, accelerating wage growth, higher short-term borrowing costs and the deteriorating employment dynamics.

CONSUMER SENTIMENT IN THE EU AND THE US

European markets US vs. EU

-60

-50

-40

-30

-20

-10

0

10

20

Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08

France Germany UK Italy EU 25

50

70

90

110

130

150

Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08-25

-20

-15

-10

-5

0USA Consumer Conf. Index EU Consumer Confidence (RS)


Diversification and credit profile remain the essential factors

At least the key drivers for all downside risks remained stable: 1. The better the regional diversification of a company, the better it will weather the economic challenges. 2. Financial conservatism and a sound credit profile will provide companies with continued access toexternal funding sources, even during the current environment. In our covered universe, Hornbach is well prepared to cope with the difficult market environment, thanks to its conservative financial strategy and its international focus. ESCADA's international set-up is good, but the company is also exposed to fashion risk. Last but not least, Head suffers thehighest liquidity pressure among the "Consumers" corporates included in this publication.

Carmen Hummel (HVB) +49 89 378-12252 [email protected]

Rocco Schilling (HVB) +49 89 378-15449 [email protected]

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ESCADA AG (HOLD) Investment rationale We changed our recommendation for the ESCADA 04/2012 bond to hold from sell

reflecting the recent changes in the group. Apart from changes in the management board, Wolfgang and Michael Herz acquired a significant minority stake in ESCADA via a capital increase of EUR 50 mn. We think that the newly established management team has enoughcharisma, spirit and visionary thinking to make ESCADA fashion "fashionable". However, one should keep in mind that the fashion business needs more time than other industries untilpositive results are visible (we assume up to 18 months). ESCADA's image urgently needs a re-branding, which is obviously an extremely hard nut to crack: To date, the company did not manage, despite repeated attempts, to create a must-have product, especially in the accessories business, which is the royal league in luxury (and which generates the highestmargins in fashion).

Recent developments In June, ESCADA announced drastic changes in its management board, thesupervisory board, its shareholder structure and the financial structure:

– Jean Marc Loubier (CEO since June 2007) and Beate Rapp (board member ofESCADA since 1995) left the company

– Dr. Bruno Sälzer took over as ESCADA's CEO as of July 1. Dr. Werner Lackass alsobecame a board member. Both Mr. Lackass and Mr. Sälzer were board members of Hugo Boss AG (Mr. Lackass: 10/1997-03/2008; Mr. Sälzer: 11/1995-02/2008) and have an outstanding track record and an excellent reputation in the fashion industry. Both leftHugo Boss earlier this year as a result of deep disagreement with Hugo Boss' major shareholder, Permira, on the financial strategy going forward and the excessiveshareholder remuneration plans.

– Wolfgang and Michael Herz acquired a significant minority stake in ESCADA via acapital increase of EUR 50 mn (the stake of Wolfgang and Michael Herz in ESCADA could be up to 20%). Wolfgang and Michael Herz are part of the well-known entrepreneurial German Herz family, which a.o. controls maxingvest ag (previously:Tchibo AG), which, in turn, holds a majority stake in the listed Beiersdorf AG.

– Wolfgang Herz joined ESCADA's supervisory board and Dr. Reinhard Pöllath, a Munich-based lawyer with close links to maxingvest ag (a.o. he is heading maxingvest ag'ssupervisory board) became ESCADA's new supervisory board chairman. Martin Kuhn resigned from his post on the supervisory board.

Latest results recap ESCADA published disappointing Q2 2007/08 results on poor performance at PRIMERA (especially BiBA retail chain) pushing leverage up (which also suffered due to a higherworking capital build-up). Q2 2007/08 (vs. Q2 2006/07) sales dropped 14.1% to EUR 296 mn. Thus, ESCADA reviewed its EBITDA target for FYE 2007/08 to EUR 37 mn (FYE 2006/07 EUR 88 mn). Due to high working capital requirements, cash flow generation for H12007/2008 worsened, with free operating cash flow of EUR -18 mn (H1 2006/07: EUR 25 mn). Credit metrics weakened, with adj. net debt to EBITDA (LTM) of 4.1x at H1 2007/08 (FYE2006/07: 3.3x) and adj. FFO to EBITDA (LTM) of 11.2% (15.9%). The results publication,however, was rather a non-event in light of the massive changes in management,shareholders and financial structure, announced almost simultaneously.

Liquidity ESCADA's liquidity improved significantly after the cash injection. In June, ESCADA announced a capital increase of EUR 50 mn by the subscription of Wolfgang and Michael Herz. Furthermore, the EUR 90 mn credit facility which was due in December 2008 was

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extended until December 2009, providing some relief to the company's liquidity.

CREDIT PROFILE SHOULD REMAIN BROADLY STABLE

0%

4%

8%

12%

16%

20%

24%

28%

04/05 05/06 H1 06/07 06/07 H1 07/08 07/08e 08/09e0

1

2

3

4

5

6

7FFO adj. / net debt adj.Net debt adj. / EBITDA adj. (RS)

0%

4%

8%

12%

16%

20%

24%

04/05 05/06 H1 06/07 06/07 H1 07/08 07/08e 08/09e0.0

0.8

1.6

2.4

3.2

4.0




Rating pressure should take a breather after the cash injection, but ESCADA has todemonstrate operating improvements soon. As a reaction to the profit warnings issued earlier this year, ratings were downgraded both by Moody's (from B1 positive outlook to B2watch negative) and by S&P (from BB- stable to B+ negative). Moody's ratings could come under further pressure if debt to EBITDA exceeds 6x (FYE 2006/07: 4.7x) while S&P's rating requires an adjusted EBITDA interest cover ratio above 2.5x (1.6x LTM at April 30, 2008). The negative outlooks reflect agencies' expectation that the operating performance will remainunder pressure. Referring to the timing of a potential turnaround, we think that the extensionof the loan (December 2009) is a good guideline for this. We assume that the company has toensure a positive trend within the next 12-14 months, prior to the next extension date.

Model assumption We recently updated our model and anticipate the cash injection to bring the credit profile deterioration to a halt. FY 2007/08 (ending October) will though not be funny for investors. We anticipate sales to fall roughly 12% y-o-y (ESCADA's guidance: decline by a low double-digit percentage figure) while higher costs (energy, personnel) should additionallyweigh on profits. We expect EBITDA of around EUR 34 mn (ESCADA's guidance: EUR 31mn). However, there is the likelihood that the current (lowered) guidance is more conservativein connection with the CEO change, just to make sure that any potential negative event isbeing avoided. ESCADA Group has to reach an EBITDA of EUR 18 mn in the second half ofthe year, which is almost half the prior-year level (EUR 31 m). Despite the major cash injection, ESCDADA's credit profile should be affected by the profitability deterioration. We anticipate FYE 2007/08 (vs. FYE 2006/07) adj. FFO to net debt of 12.5% (15.9%) and adj. net debt to EBITDA of 4.3x (3.3x).

Things to watch ● September 23: Q3 2007/08 results and conference call

● Management's achievements regarding an operational turnaround


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CAPITALIZATION

Senior Credit Facilities Borrower ESCADA AG Senior Credit Facility Initial Amount (in EUR) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Revolver 90 mn 12/08 Bullet fixed margin based on EONIA

(Euro Over Night Index Average); floating rate interest based on EURIBOR or LIBOR

Notes Issuer ESCADA AG Senior Notes 200 mn 04/12 Bullet Coupon 7.5% Other Indebtedness n.a. Available Credit Lines EUR 90 mn due in December 2009


BOND DOCUMENTATION – ESCADA 04/01/12

Issuer ESCADA AG Call/Put Call Schedule On or after April 1, 2009: 103.75%; 2010: 101.875; 2011 and thereafter: 100% Equity claw back Prior to April 1, 2008: up to 35% at 107.5% Make whole clause Prior to April 1, 2008: Bund plus 50 bp Change of control 101% Guarantees Unconditionally guaranteed on a senior unsecured basis by the Subsidiary Guarantors

Security None Ranking Senior unsecured

Certain Covenants Limitation on Debt Fixed Charge coverage ratio: 2.5x; Credit Facility not to exceed EUR 90 mn Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash, the assumption

of debt or replacement of assets and is within 365 days applied for debt reduction or invested in replacement assets. Excess Proceeds exceeding EUR 10 mn used to redeem notes and pari passu debt at par

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of: – 50% of consolidated net income (minus 100% of such negative amount), – Equity proceeds; – Conversion of debt to equity proceeds, – Proceeds in case of disposition or repayment of any investment constituting a restricted payment (the lesser of the

return of capital with respect to such investment and the initial amount of such investment); Limitations on Transactions with Affiliates Board resolution if transaction greater than EUR 5 mn

Fairness opinion if transaction greater than EUR 15 mn Fall away/ Suspension Covenants Yes Negative pledge Yes Anti Layering Yes


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Business Description – ESCADA AG Munich, Germany-based ESCADA Group is an international luxury fashion company for women's designer fashion. The ESCADA Group consists of the operations under the ESCADA brand (fashion, accessories and the license business) and the businesses at the PRIMERA group, encompassing the labels apriori, BiBA, cavita, Laurèl. The company has a truly global sales distribution, with FY 2006/07 sales being derived 29% from Germany (with the major part being generated by the PRIMERA unit), 26% from other European countries, 19% from the US, 14% from Asia and 12% from other countries. The company has ca. 4,000 employees. Shareholder structure (July 2008): R. Aksenenko 20.9%, Ley GmbH 8.0%, Michael and Wolfgang Herz ca. 25%, remainder free float.

SALES BY SEGMENT (FY 2006/07)

ESCADACollection

38.9%PRIMERA

34.9%

Licenses0.3%Other

6.4%

ESCADA Sport15.7%

Accessoires3.8%


EBITDA BY SEGMENT (FY 2006/07)

ESCADA Collection

56.6%

ESCADA Sport16.4%

PRIMERA27.0%


DEBT MATURITY PROFILE 2006/07


ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B+ Negative Profitability improvements essential to maintain the rating

Moody's B2 Negative Up: Strengthening of credit metrics from further improvements in profits; Down: increasing leverage, deteriorating operating performance and CF generation

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

ESCADA 7.5% 4/1/2012

B2n/B+n/-- EUR 200 4/1/2009 (103.75)

BOND STRUCTURE

EscadaNoteholders


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PROFIT AND LOSS (ESCADA AG)

in EUR mn 01/02 02/03 03/04 04/05 05/06 H1 06/07 06/07 H1 07/08 07/08e 08/09eSales 773 621 625 649 695 344 686 296 604 610Raw materials used -280 -244 -241 -242 -249 -129 -238 -112 -220 -213Personnel costs -186 -159 -148 -145 -150 -74 -155 -74 -150 -152EBITDA reported 55 -46 42 65 74 38 68 19 34 49Depreciation and amortization -30 -28 -22 -20 -21 -10 -21 -12 -22 -22Other operating income/expenses -252 -264 -194 -197 -221 -104 -225 -91 -199 -195EBIT reported 25 -74 20 46 53 28 47 7 12 27Income from investments 2 0 3 1 2 0 2 0 2 0Interest result -19 -16 -16 -18 -18 -9 -18 -10 -19 -24Other financial items 0 -20 0 0 0 0 0 0 -2 0Discontinuing operations 0 0 0 0 0 0 0 0 0 0EBT 8 -110 6 29 37 19 31 -3 -7 3Extraordinary result 0 0 0 0 -12 0 -39 1 0 0Taxes on income -4 32 -2 -15 -18 -10 -19 -7 -10 -10Net income 4 -78 4 14 7 9 -27 -8 -17 -7


in EUR mn 01/02 02/03 03/04 04/05 05/06 H1 06/07 06/07 H1 07/08 07/08e 08/09eFixed assets 96 113 118 127 139 135 149 147 146 145 thereof goodwill 0 4 18 24 27 47 29 48 29 29Cash & cash equivalents 28 14 26 12 20 20 42 27 35 30Total assets 491 438 452 433 426 407 430 416 413 402Equity incl. minorities 85 74 89 99 110 119 82 79 110 120Shareholder loans 0 0 0 0 0 0 0 0 0 0Pension provisions 0 0 0 0 0 0 0 0 0 0Financial liabilities 187 223 234 220 208 213 206 216 209 224 short term (<1 year) 0 37 32 15 6 9 6 21 0 0 long term (>1 year) 0 186 202 205 203 203 200 195 0 0Net working capital 113 93 109 122 110 114 131 152 137 127

CASH FLOW

in EUR mn 01/02 02/03 03/04 04/05 05/06 H1 06/07 06/07 H1 07/08 07/08e 08/09eFFO (Funds from operations) 36 -41 26 42 52 33 27 17 12 15Change in working capital -2 40 -13 -2 -1 -8 32 -35 -6 10Operating cash flow 34 -1 13 40 51 25 59 -18 6 20CAPEX -23 -23 -19 -22 -31 -10 -34 -10 -40 -35Free cash flow 11 -23 -6 19 19 15 25 -28 -34 -15Dividends -3 -3 0 0 0 0 0 0 0 0Acquisitions/disposals 37 4 -13 -8 -3 0 2 -1 0 0Share buy back/issues 0 77 0 0 4 0 0 0 50 0FCF after extraordinary items 46 55 -18 11 20 15 27 -29 16 -15

DEBT ADJUSTMENTS

in EUR mn 01/02 02/03 03/04 04/05 05/06 H1 06/07 06/07 H1 07/08 07/08e 08/09eFor pensions 0 0 0 0 0 0 0 0 0 0For operating leases 244 236 231 218 241 241 250 240 240 225Others* 109 17 12 10 8 8 10 15 15 15


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PROFITABILITY RATIOS (ESCADA AG)

01/02 02/03 03/04 04/05 05/06 H1 06/07 06/07 H1 07/08 07/08e 08/09eEBITDA margin rep. 7.1% -7.4% 6.7% 10.0% 10.7% 10.9% 9.9% 6.5% 5.7% 8.1%EBITDA margin adj. 11.1% 8.8% 16.6% 18.7% 20.2% 20.7% 18.7% 17.6% 16.5% 18.8%EBIT margin rep. 3.2% -11.9% 3.2% 7.0% 7.6% 8.0% 6.9% 2.4% 2.0% 4.5%EBIT margin adj. 4.9% -1.7% 6.8% 9.7% 11.0% 11.5% 9.7% 6.5% 6.0% 8.2%Return on capital (before tax) 2.4% -30.2% 1.0% 8.6% 10.9% 13.4% 10.1% 5.6% -2.1% 1.0%


01/02 02/03 03/04 04/05 05/06 H1 06/07 06/07 H1 07/08 07/08e 08/09eEBITDA rep. 55 -46 42 65 74 38 68 19 34 49EBITDA adj. 86 55 104 122 141 71 128 52 100 114FFO rep. 36 -41 26 42 52 33 27 17 12 15FFO adj. 53 -3 65 82 95 55 68 37 54 58Net debt rep. 160 208 208 208 188 192 165 189 174 194Net debt adj. 513 462 452 436 437 442 425 444 428 433Total debt 187 223 234 220 208 213 206 216 209 224EBITDA net interest cover rep. 3.0 -3.0 2.6 3.6 4.1 4.3 3.8 1.9 1.8 2.1EBITDA gross interest cover rep. 2.6 -2.3 2.5 3.2 3.9 4.3 3.6 1.9 1.7 2.1EBIT net interest cover rep. 1.3 -4.8 1.2 2.5 2.9 3.1 2.6 0.7 0.6 1.1EBIT net interest cover adj. 0.9 -0.3 1.1 1.6 1.8 1.9 1.6 0.9 0.8 1.1FFO rep. / total debt rep. 19.0% -18.2% 11.0% 19.2% 24.8% 35.7% 13.1% 4.9% 5.9% 6.9%FFO rep. / net debt rep. 22.3% -19.5% 12.3% 20.4% 27.4% 39.4% 16.5% 5.6% 7.1% 7.9%FFO adj. / net debt adj. 10.4% -0.6% 14.4% 18.7% 21.7% 27.4% 15.9% 11.3% 12.5% 13.4%FOCF rep. / total debt rep. 6.1% -10.5% -2.4% 8.6% 9.4% 25.4% 12.2% -12.0% -16.3% -4.3%FOCF rep. / net debt rep. 7.1% -11.3% -2.7% 9.1% 10.4% 28.0% 15.2% -13.7% -19.6% -5.0%RCF rep. / net debt rep. 20.7% -20.8% 12.3% 20.4% 27.4% 39.4% 16.5% 5.6% 7.1% 7.9%RCF adj. / net debt adj. 9.9% -1.3% 14.4% 18.7% 21.7% 27.4% 15.9% 11.3% 12.5% 13.4%Total debt rep. / EBITDA rep. 3.4 -4.8 5.6 3.4 2.8 2.8 3.0 4.3 6.1 4.5Net debt rep. / EBITDA rep. 2.9 -4.5 5.0 3.2 2.5 2.6 2.4 3.8 5.1 3.9Net debt adj. / EBITDA adj. 6.0 8.4 4.4 3.6 3.1 3.1 3.3 4.1 4.3 3.8FFO rep. / net interest rep. 2.9 -1.6 2.6 3.3 3.8 4.8 2.5 2.7 1.6 1.6FFO rep. / gross interest rep. 2.7 -1.0 2.5 3.1 3.7 4.8 2.4 2.7 1.6 1.6Capex / sales 2.9% 3.6% 3.0% 3.3% 4.5% 3.0% 4.9% 3.3% 6.6% 5.7%Capex / depreciation 75.2% 81.0% 84.3% 110.1% 147.6% 104.0% 160.0% 81.0% 181.8% 159.1%

CAPITAL STRUCTURE

01/02 02/03 03/04 04/05 05/06 H1 06/07 06/07 H1 07/08 07/08e 08/09eTotal debt / capitalization rep. 68.7% 75.0% 72.5% 69.0% 65.5% 64.0% 71.7% 73.3% 65.5% 65.1%Net debt / net capitalization rep. 65.2% 73.7% 70.1% 67.7% 63.2% 61.7% 66.9% 70.6% 61.2% 61.7%Net debt / net capitalization adj. 85.7% 86.1% 83.5% 81.5% 79.9% 78.7% 83.9% 84.9% 79.6% 78.3%Net working capital / sales 14.6% 15.1% 17.4% 18.9% 15.9% 16.1% 19.0% 23.8% 22.7% 20.8%Fixed assets / sales 12.5% 18.2% 18.9% 19.6% 19.9% 19.1% 21.7% 23.1% 24.1% 23.8%


Comment FY 07/08e FY 08/09eSales growth Struggeling with consumers; fashion risk -12.0% 1.0%EBITDA growth Higher costs, recovery to be seen in FY 08/09 -49.8% 44.2%EBIT growth Higher costs, recovery to be seen in FY 08/09 -73.9% 123.4%Capex incl. acquisition Refurbishing program currently put on hold 40.0 35.0Change in working capital Business under pressure -6.3 10.0Funds from operations (FFO) Lower profitability 12.3 15.4


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Head (SELL) Investment rationale We keep our sell recommendation for the HEADHO 8.5% 02/14 bond as weakening

consumer sentiment will weigh on Head's H2 2008 results. Our opinion towards Head's credit story has not changed over the last few months and reflects the following issues: 1. the calculated recovery value is significantly below the current bond price; 2. the current poor financial profile due to the absent rebound of the winter sports business and 3. massive expected liquidity problems at the end of Q3 2008 owing to seasonal investments in workingcapital (WC) of EUR 20-25 mn in Q3 without additional cash inflows from any asset disposals.Given the company's high degree of dependency on consumer sentiment-related winter sports, an improvement of its business model is unlikely in the short-to-mid-term as the company is busy enough to avoid liquidity running dry over the next quarter. We calculate arecovery value range between 30 and 40, based on a cash position of EUR 20 mn as of June2008, assuming an EBITDA for FY 2008 of EUR 18 mn and calculating EUR 58 mn in senior debt including off-balance operating lease liabilities of EUR 9 mn as senior debt. Furthermore, we assume an EV/EBITDA (2008e) multiple of 6.0x including a discount of 30% vs. its peers,reflecting Head's higher business risk and its lower current and future profitability. Following the weak H1 2008, the bond price dropped around 5 points to 55. The HEADHO 14 is currently trading at around 57.5/62.5.

SEASONAL WINTER SPORTS BUSINESS EUR 20 MN IN WORKING CAPITAL NEEDS

0

5

10

15

20

25

30

35

Q1

05

Q2

05

Q3

05

Q4

05

Q1

06

Q2

06

Q3

06

Q4

06

Q1

07

Q2

07

Q3

07

Q4

07

Q1

08

Q2

08

Gro

ss p

rofit

EU

R m

n

Winter sports Racquets Diving Licencies

0

25

50

75

100

125

150

175

200

Q1

05

Q2

05

Q3

05

Q4

05

Q1

06

Q2

06

Q3

06

Q4

06

Q1

07

Q2

07

Q3

07

Q4

07

Q1

08

Q2

08

Q3

08e

Q4

08e

-40

-30

-20

-10

0

10

20

30

40Working capital FCF before dividend (RS)

Liquidity needs of ca. EUR 20 mn


Latest results recap Head's H1 2008 figures continued to disappoint and reflect the difficult situation of the company. During the first six months of FY 2008, Head was not able to recover the top-line to levels seen in H1 2006 as H1 2007 was a disaster given the poor winter sports season 2006/07. H1 2008 sales slightly declined by 0.9% to EUR 117.8 mn. Although H1 2008 sales in the winter sports business increased by almost 13% to EUR 23.3 mn, top-line was still 22% below the sales figure in H1 2006 under "normal weather conditions". H1 2008 gross profitdecreased to EUR 46 mn from EUR 47.3 mn associated with a declining gross margin of 39% (39.8%), mainly due to increased raw material prices and an unfavorable product mix in theWinter Sports and Racquets divisions. H1 2008 EBIT before restructuring costs and sharebased compensation items continued to deteriorate to EUR -13.3 mn from EUR -11.1 mn in the prior-year period. That said, credit ratios have increasingly weakened since FY 2006 as we calculate H1 2008 adj. net debt to adj. EBITDA of 9.0x (FY 2007: 7.4x) and adj. EBITDA gross interest coverage of 1.3x (1.5x). H1 2008 adj. FFO to adj. net debt stood at a poor -2.1% (0.9%). As usual, the outlook for H2 2008 provided during the conference call was very vague. Management stated that the order book for the winter sports season is almost completed and that Head was only able to recover one third of the sales volume it lost in FY

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2007. Needless to say that operating profit for FY 2008 will remain in the red.

Liquidity Head's liquidity is really tight and we have not yet seen the bottom! As of June 2008, the cash position excluding restricted cash of EUR 2.5 mn stood at EUR 20 mn, down from EUR45.8 mn in H1 2007 (H1 2006: EUR 54.4 mn) due to seasonal investments in working capital.The ongoing Q3 continues to burden Head's cash position as invoices are usually paid with a time delay of 4-5 months during Q1 2009. The main question still remains: Will Head be ableto finance its working capital needs in Q3? Without any asset disposals, we do not think so!For Q3 2008, we estimate a cash position excluding restricted cash of only EUR 2.0 mn,which will be on the razor's edge. In our view, only a successful sale-and-lease-back transaction and/or disposal of available-for-sale financial securities (H1 2008: EUR 8.2 mn) would prevent the company's liquidity from running dry. During the conference call, thecompany stressed that it is considering several financial transactions, including a sale-and-lease-back transaction. Nevertheless, we expect net cash inflows of around EUR 5-7 mn in Q4 2008, which will take some pressure off the company.


Even if Head can "reach the safe shore" when collecting its accounts receivable during Q1 2009, the fight for survival will start again in 2009. Without any cash injections, it will become very challenging (in other words: almost impossible) to survive FY 2009. As of June,the company reported unused credit lines of EUR 1.9 mn. We anticipate FY 2008 adj. EBITDA of EUR 19 mn (adj. EBITDA margin of 5.7%) and negative free cash flow of EUR 19 mn given investments in working capital of EUR 5 mn due to increasing sales volumescompared to FY 2007. Additional pressure might come from eventual restructuring effortsassociated with further cash needs (e.g. reallocation of production capacities, severance payments) and from other ski manufacturers (as Head is active as a contract manufacturer to improve its capacity utilization). We estimate unchanged poor credit metrics with an adj. net debt to EBITDA ratio of 8.8x and adj. FFO to net debt of 1.4% by FYE 2008. The bond documentation contains a main covenant (EBITDA to interest expenses of >2.0x) which willonly be verified in case of additional indebtedness. A covenant breach will not occur in case ofmissing the threshold given a weak performance of Head's business. However, even if leverage and interest cover will improve in FY 2009, backed by a (unlikely) positive businessenvironment and consumer sentiment, these ratios will be useless at the end of the day ifHead's liquidity were to run dry before credit ratios improve (either in Q3 2008 or in Q3 2009).Our recommendation is supported by the major shareholder's behavior as Mr. Eliasch (CEO)has not taken any steps to improve the alarming operating performance, possibly based on the fact that he is financially independent. We do not see refinancing needs for the existing credit lines as S&P stated that there are no financial covenants on Head's bank facilities.

Model assumptions/risks We revised our model, which is now based on the following assumptions: 1. Our model excludes a "green winter" in FY 2008 and FY 2009; 2. slight recovery of sales in FY 2008 (+2.8% y-o-y) and flat FY 2009 sales; 3. adj. EBITDA of ca. EUR 1 mn in FY 2008 and EUR 22.4 mn in FY 2009; 4. capex level of around 4% of sales over the next two years. Operatingperformance is driven by the following risks: 1. "green winter" in 2008 and/or 2009; 2.continuing weakening consumer confidence in Europe and the US; 3. termination of manufacturing contracts by third parties (ski equipment manufacturers).

Things to watch ● Event risk (opportunity): possible, but unlikely takeover bid for Head

● November 13, 2008: Q3 2008 figures

Rocco Schilling (HVB) +49 89 378-15449, [email protected]

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CAPITALIZATION

Notes Issuer HTM Sport- und Freitzeitgeräte AG Initial Amount (in EUR) Maturity Amortization schedule Senior Notes 135 02/14 Bullet Coupon 8.5% Other Indebtedness Bank and other financial liabilities in the amount of EUR 32.3 mn as of June 2008 Financial liabilities from sale & lease back agreement and mortgage agreement due in 2017 amounting to EUR 12.2 mn as of June 2008 Available Credit Lines Unused credit lines of EUR 1.9 mn as of June 2008


BOND DOCUMENTATION – HEADHO 8.5% 02/01/14

Issuer HTM Sport- und Freitzeitgeräte AG Call/Put Call Schedule On or after February 1, 2009: 104.25%; 2010: 102.83%, 2011: 101.417%, 2012 and thereafter: 100% Equity claw back Prior to February 1, 2007 up to 35% at 108.5% Make whole clause No Change of control 101% Guarantees On an unsubordinated and unsecured basis by two parent companies and seven subsidiaries of the issuer Security Notes are general unsecured obligations of the issuer Ranking – Senior in right of payment to all of the Issuer's existing and future debt that expressly provides that it is

subordinated in right of payment to the notes – Equal in right of payment with all of the Issuer's existing and future unsubordinated and unsecured indebtedness – Subordinated to all of the Issuer's existing and future secured debt to the extent of assets securing such assets

Certain Covenants Limitation on Debt Consolidated fixed charge coverage ratio of at least 2.0x

Most important carve-out/exceptions: – Credit facility indebtedness in total not to exceed the greater of (i) EUR 100 mn, (ii) sum of (a) 85% of total book

value of accounts receivables and (b) 50% of total book value of inventory, in each case less than EUR 100 mn – Acquired indebtedness not to exceed EUR 5 mn – Capitalized lease and purchase money obligations not to exceed EUR 15 mn – General Basket EUR 20 mn

Limitation on Sale of Certain Assets At least equal to fair market value and at least 75% in the form of cash/cash equivalents and is at 100% within 365 days applied for repayment of indebtedness and/or for investment in additional assets Excess proceeds exceeding EUR 10 mn used to redeem notes and pari passu debt at par

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of: – 50% of consolidated net income – Equity proceeds; – Conversion of debt to equity proceeds, – Amount equal to net reduction in other than permitted investments resulting from payments of interest on

indebtedness, dividends, return of capital, repayments of loans or advances or other transfers of assets to the company or any restricted subsidiaries and upon re-designation of an unrestricted subsidiary as a restricted company, the fair market value of such subsidiary

Most important carve-out/exceptions: – Purchase of capital stock of issuer/company from management of issuer/company not to exceed EUR 1 mn – Payments or distributions in respect of the company's capital stock not to exceed EUR 3 mn in any calendar year

(with unused amounts in any calendar year being carried over to succeeding calendar years) – General Basket EUR 8.5 mn

Limitations on Transactions with Affiliates – Board approval if transaction greater than EUR 2 mn; Fairness opinion if transaction greater than EUR 5 mn Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering No

Source: Company data, offering memorandum, UniCredit Global Research

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Business Description – Head Head is a global manufacturer and marketer of premium sports equipment and is organized into four divisions: Winter Sports, Racquet Sports, Diving and Licensing. The company produces alpine skis, snowboard equipment, bindings, racquets, boots as well as tennis, diving and badminton equipment. The company owns the brands Head, Penn, Tyrolia and Mares and is global # 3 in skis with a market share of ca. 15%, global # 1 in ski bindings and global # 3 in tennis racquets. Head NV has been listed on the Vienna Stock Exchange since September 2000. In March 2008, the company decided to terminate its listing on NYSE. Main shareholder is Head Sports Holding NV which holds a stake of 53.43%. Head Sports Holding is controlled by Mr. Johan Eliasch (CEO) and his family. Further stakes of 10% and 5.4% are held by Donald Smith & Co. Inc. and Aegis Financial Corp, respectively. The remaining shares are free float.

SALES BY REGION (2007)

Austria40.1%

Italy11.3%

Other (Europe)15.0%

Asia4.8%

North America28.7%


GROSS PROFIT BY SEGMENT (2007)

0

40

80

Winter Sports Racquet Sports Diving Licensing

EU

R m

n2005 2006 2007



<1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years >5 yearsFinancial debt 21.6 3.4 0.0 1.6 0.0 128.1

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P CCC+ Negative Rating pressure if cash will fall below expected level of ca. EUR 10 mn at the peak of required working capital in Q3

Moody's B3 Negative Rating pressure if financial needs exceed available funds, debt to EBITDA <7x or EBITA interest cover <1x over the next 12 months

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

HEADHO 8.5% 2/1/2014

CCCn/Caa1n EUR 135 2/1/2009 (104.25)

BOND STRUCTURE

Head HoldingUnternehmensbeteiligung GmbH

(parent guarantor, Austria)

HEAD NV(parent guarantor, Netherlands)

Shareholders

HTM Sport- undFreizeitgeräte AG (Austria) Noteholders

Operating guarantorsubsidiaries Non-guarantor subsidiaries


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PROFIT AND LOSS (HEAD)

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 375.0 359.6 366.8 119.0 321.0 117.8 330.1 329.5Cost of goods and services sold -235.8 -221.5 -222.6 -71.6 -196.9 -71.9 -203.6 -203.3Distribution expenses -94.2 -92.1 -92.9 -45.6 -94.3 -45.7 -92.6 -92.6R&D expenses 0 0 0 0 0 0 0 0Administration -36.4 -30.5 -30.3 -14.6 -30.1 -14.8 -29.0 -29.0Other operating income/expenses 2.6 0.2 -0.9 -1.3 -0.4 4.5 0 0EBITDA reported 26.9 32.6 34.7 -7.4 13.3 -3.7 17.9 17.7EBIT reported 11.2 15.7 20.0 -14.2 -0.7 -10.1 4.9 4.7Adj. EBIT (bef. pension interest) 10.6 16.1 23.9 -11.1 3.2 -13.3 3.1 6.5Income from investments 0 0 0 0 0 0 0 0Interest result -19.0 -10.7 -10.8 -5.1 -10.5 -5.6 -11.1 -10.9Other financial items -0.4 2.1 -0.3 -0.7 0.3 1.1 0 0Discontinuing operations 0 0 0 0 0 0 0 0EBT reported -8.2 7.1 8.9 -20.0 -10.9 -14.6 -6.2 -6.2Extraordinary result 0 0 0 0 0 0 0 0Taxes on income -22.9 -0.3 -4.5 3.9 -0.2 4.9 2.8 1.6Net income -31.1 6.7 4.4 -16.0 -11.2 -9.7 -3.4 -4.7


in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 76.3 78.2 76.7 72.7 73.3 75.1 74.0 72.9 thereof goodwill 3.1 3.2 3.1 3.1 2.9 2.7 2.7 2.6Cash & cash equivalents 47.7 49.5 43.6 48.8 30.3 22.5 13.1 8.8Total assets 430.4 432.3 422.6 400.4 389.3 367.0 377.8 372.1Equity incl. minorities 158.8 166.5 155.9 139.6 133.0 119.2 129.6 124.9Shareholder loans 0 0 0 0 0 0 0 0Pension provisions 15.8 16.4 15.7 15.5 15.2 14.9 15.2 15.2Other provisions 3.9 13.5 12.9 17.7 12.0 7.0 7.0 7.0Financial liabilities 178.2 161.4 158.0 155.1 154.8 156.3 156.0 155.0 short term (<1 year) 29.3 29.9 22.0 22.6 21.6 24.6 26.0 25.0 long term (>1 year) 148.9 131.6 136.0 132.4 133.2 131.7 130.0 130.0Net working capital 164.7 159.4 155.0 136.4 143.8 127.3 148.0 148.6

CASH FLOW

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) 5.3 15.4 17.9 -12.7 -1.6 -17.4 -0.4 9.3Change in working capital -2.2 15.7 6.8 20.0 0.9 12.7 -4.8 -0.6Operating cash flow 3.1 31.1 24.8 7.3 -0.6 -1.0 -5.2 8.7CAPEX -19.1 -15.3 -15.1 -5.6 -10.6 -8.4 -13.7 -11.9Free cash flow -16.0 15.9 9.7 1.7 -11.2 -9.4 -18.9 -3.2Dividends 0 0 0 0 0 0 0 0Acquisitions/disposals 6.7 8.0 0.1 1.7 2.1 1.9 0 0Share buy back/issues 1.2 0 -9.4 0 -6.7 0 0 0FCF after extraordinary items -8.1 23.9 0.4 3.4 -15.8 -7.5 -18.9 -3.2

DEBT ADJUSTMENTS

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions 15.8 16.5 15.7 15.4 14.8 14.5 14.7 14.7For operating leases 12.7 11.8 11.4 11.4 9.3 9.3 9.3 9.3Others* 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (HEAD)

2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 7.2% 9.1% 9.5% -6.2% 4.1% -3.2% 5.4% 5.4%EBITDA margin adj. 7.7% 9.9% 11.2% -2.5% 6.2% -4.6% 5.7% 6.8%EBIT margin rep. 3.0% 4.4% 5.4% -12.0% -0.2% -8.6% 1.5% 1.4%EBIT margin adj. 2.8% 4.5% 6.5% -9.4% 1.0% -11.3% 0.9% 2.0%Return on capital (before tax) -2.3% 1.5% 2.9% 2.7% -3.9% -0.8% -2.2% -2.2%


2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 26.9 32.6 34.7 -7.4 13.3 -3.7 17.9 17.7EBITDA adj. 28.7 35.6 41.2 -3.0 20.1 -5.5 19.0 22.4FFO rep. 5.3 15.4 17.9 -12.7 -1.6 -17.4 -0.4 9.3FFO adj. 7.7 18.0 20.5 -11.4 1.3 -16.0 2.4 12.2Net debt rep. 130.5 112.0 114.4 106.2 124.5 133.7 142.9 146.2Net debt adj. 159.0 140.3 141.5 133.1 148.6 157.6 167.0 170.2Total debt 178.2 161.4 158.0 155.1 154.8 156.3 156.0 155.0EBITDA net interest cover rep. 1.4 3.0 3.2 -1.4 1.3 -0.7 1.6 1.6EBITDA gross interest cover rep. 1.3 2.5 2.8 -1.2 1.1 -0.6 1.5 1.5EBIT net interest cover rep. 0.6 1.5 1.9 -2.8 -0.1 -1.8 0.4 0.4EBIT net interest cover adj. 0.5 1.4 2.0 -2.0 0.3 -2.2 0.3 0.5FFO rep. / total debt rep. 3.0% 9.6% 11.4% 8.1% -1.0% -4.0% -0.3% 6.0%FFO rep. / net debt rep. 4.1% 13.8% 15.7% 11.8% -1.3% -4.7% -0.3% 6.4%FFO adj. / net debt adj. 4.9% 12.8% 14.5% 11.7% 0.9% -2.1% 1.4% 7.2%FOCF rep. / total debt rep. -9.0% 9.8% 6.1% -8.6% -7.2% -23.3% -12.1% -2.1%FOCF rep. / net debt rep. -12.3% 14.2% 8.5% -12.6% -9.0% -27.3% -13.3% -2.2%RCF rep. / net debt rep. 4.1% 13.8% 15.7% 11.8% -1.3% -4.7% -0.3% 6.4%RCF adj. / net debt adj. 4.9% 12.8% 14.5% 11.7% 0.9% -2.1% 1.4% 7.2%Total debt rep. / EBITDA rep. 6.6 4.9 4.6 5.6 11.6 9.2 8.7 8.8Net debt rep. / EBITDA rep. 4.9 3.4 3.3 3.9 9.4 7.9 8.0 8.3Net debt adj. / EBITDA adj. 5.5 3.9 3.4 3.6 7.4 9.0 8.8 7.6FFO rep. / net interest rep. 1.3 2.4 2.7 -1.5 0.9 -2.1 1.0 1.9FFO rep. / gross interest rep. 1.3 2.2 2.4 -1.1 0.9 -1.8 1.0 1.8Capex / sales 5.1% 4.2% 4.1% 4.7% 3.3% 7.1% 4.2% 3.6%Capex / depreciation 126.4% 98.3% 103.7% 81.4% 75.5% 131.5% 105.6% 91.9%

CAPITAL STRUCTURE

2004 2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. 52.9% 49.2% 50.3% 52.6% 53.8% 56.7% 54.6% 55.4%Net debt / net capitalization rep. 45.1% 40.2% 42.3% 43.2% 48.3% 52.9% 52.4% 53.9%Net debt / net capitalization adj. 50.0% 45.7% 47.5% 48.8% 52.7% 56.9% 56.3% 57.6%Net working capital / sales 43.9% 44.3% 42.3% 38.5% 44.8% 39.8% 44.8% 45.1%Fixed assets / sales 20.4% 21.8% 20.9% 20.5% 22.8% 23.5% 22.4% 22.1%


Comment FY 2008 FY 2009Sales growth Recovery will strongly depend on consumer confidence and weather conditions 2.8% -0.2%EBITDA growth Weakening economic environment in FY 2008 34.1% -1.0%EBIT growth Not meaningful due to expected operating loss in 2008 and FY 2008 n.m. -3.7%Capex incl. acquisition Slightly decreasing capex levels and no acquisitions due to weak financials 13.7 11.9Change in working capital In line with increase of sales volume -4.8 -0.6Funds from operations (FFO) In line with operating performance -0.4 9.3


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Hornbach (BUY) Investment rationale We maintain our buy recommendation for the HBMGR 6.125% 11/14. We continue to

feel comfortable with management's prudent growth strategy and track recordregarding financial discipline, which ensures rating stability. We would not be surprised to see some divestment attempts from Kingfisher, which is a minority shareholder (25% plusone share). Kingfisher is suffering immense rating pressure, has recently committed to focuson credit profile improvements in order to maintain its investment grade rating. In this respect,the company is reconsidering its portfolio and divested Castorama Italy for GBP 0.5 bn with the proceeds to be fully used for debt reduction. As we do not have the feeling that Kingfisherintends to increase its presence on the (extremely tough) German market, we could wellimagine that it would try to divest this participation. However, we are quite relaxed concerning a potential divestment because: 1. we assume Kingfisher's participation is connected with certain conditions (e.g. consent of or pre-emption right to the Hornbach family, making a straight divestment difficult, 2. the Hornbach family owns a clear majority of the voting rights.

Market developments Western Europe's economies show a mixed picture. However, overall sentiment is weakening. The economic environment in Italy, Spain and the UK is impacted by rising cost of living, which casts a shadow on consumption. In France and Germany, economic fundamentals look healthier as these markets have not been impacted by a real estatedownturn yet. In contrast to Western European markets, Emerging Markets will continue to show strong market growth. Although Germany still remains Hornbach's core market with61% (FYE 2007/08) of total sales, the group continues to increase its geographical diversity.By opening a second store in Romania in Q1 2008/09, Hornbach continued its international expansion in Eastern Europe. Thus, the company will be able to benefit from strong Emerging Market growth, thus mitigating the market challenges in Western Europe.

Latest results recap On June 26, Hornbach published strong Q1 2008/09 results, with sales increasing 6.2% to EUR 739 mn and EBITDA jumping 28% to EUR 62 mn. Germany did surprisingly well, withHornbach beating the market (i.e. sales increase of 2.9% versus market growth of 0.6%). Netdebt was EUR 186 mn, significantly below the pre-year level (EUR 264 mn), mainly on a lower working capital build up and in the absence of new store openings. The groupgenerated 40% of its Q1 2008/09 sales outside Germany (Q1 2007/08: 38%). Despite theweaker development in Germany, Hornbach grew faster than the market and thus further gained market share. In the current financial year, Hornbach opened a store in Sweden and in Romania. Five new store openings are planned for FY 2008/2009.

CREDIT PROFILE DEVELOPMENT: OVERALL STABLE

0%

3%

6%

9%

12%

15%

18%

21%

03/04 04/05 05/06 06/07 Q1 07/08 07/08 Q1 08/090

1

2

3

4

5

6

7FFO adj. / net debt adj. Net debt adj. / EBITDA adj. (RS)

0%

4%

8%

12%

16%

03/04 04/05 05/06 06/07 Q1 07/08 07/08 Q1 08/090

1

2

3

4EBITDA margin adj. EBITDA net interest cover adj. (RS)


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For Q1 2008/09 (Q1 2007/08), we calculate adj. net debt to EBITDA (LTM) of 3.4x (3.9x) and adj. FFO to net debt of 18.2% (15.3%), which is a nice improvement versus the pre-year ratios. Management remains optimistic for the ongoing year and anticipates sales growth of amid single-digit range, while EBIT growth should exceed sales growth and as it should be above the level reached in FY 2007/08.

Liquidity Hornbach's liquidity and financial flexibility continue to be more than adequate. Q1 2008/09 (ending May) short-term debt maturities totaled EUR 26 mn, compared with cashbalances of EUR 263 mn. In addition, the group also had undrawn, committed bank lines ofmore than EUR 310 mn at FYE 2007/08. Debt maturities are almost entirely of long-term character. Moreover, the company has excellent access to bank financing and to capital markets.


Hornbach's credit ratios have to improve versus the previous year in order to avoid rating pressure. However, rating agencies' stable outlooks demonstrate a high level of faith in management's capabilities. S&P's stable outlook reflects the expectation that Hornbach willcontinue to grow faster than the domestic and European DIY markets, based on its superior concept and continued international expansion. To maintain current ratings, Hornbach should re-achieve adjusted FFO to lease-adjusted net debt of 15% (FYE 2007/08: 13%), and adjusted EBITDA net interest coverage of above 2.0x (2.8x). Moody's latest credit note from June 2008 stated that FYE 2007/08 credit ratios were in the Ba1 category. Due to thecontinuing challenging market conditions the DIY market is experiencing across Europe andthe relatively high financial leverage of the company, Hornbach's rating is one notch lower.

Model assumption/risks Hornbach's credit profile in FY 2008/09 will be broadly stable compared with FY 2007/08. We recently updated our model taking into account the weaker prospects. However,due to cost cuts and sale and lease-back transactions, credit metrics will remain stable. The higher operating cash flow generation will be used to finance store openings and thus capexwill be materially higher than in the previous year. Hornbach's general policy is to open 7 mega-markets p.a. on average. Hornbach forecasts FY 2008/09 capex of EUR 100-150 mn, which is markedly below what we had calculated in our model (EUR 200 mn). We anticipate a slight increase in net debt to EUR 311 mn from EUR 303 mn in FY 2007/08, reflecting a faster path of expansion (more store openings). Thus, we anticipate FYE 2008/08 adjusted net debt to EBITDA of 3.9x (4.0x) and adjusted FFO to net debt of 17% (FY 2007/08: 15.4%). Main risks to our model are more or fewer new store openings (prompting changes in the debt development) and a sharp deterioration of the economic environment in Europe.

Things to watch ● September 30: Q2 2008/09 results and analyst meeting

● Alliance with Kingfisher

● Progress (number) of store openings


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CAPITALIZATION

Notes Issuer HORNBACH-Baumarkt-Aktiengesellschaft Initial Amount (in EUR) Maturity Amortization schedule Coupon Senior Notes 250 11/14 Bullet 6.125% Other Indebtedness Unsecured borrowing note of EUR 80 mn priced at 6-month Euribor + a bank margin; EUR 200 mn syndicated credit facility with customary bank covenants like a minimum EBITDA to interest coverage. Available Credit Lines FYE 2007/08: EUR 317.5 mn unused credit lines


BOND DOCUMENTATION – HORN 6.125% 11/15/14

Issuer HORNBACH-Baumarkt-Aktiengesellschaft Call/Put Call Schedule On or after November 15, 2009: 103.063%; 2010: 102.042%; 2011: 101.021; 2012 and thereafter: 100% Equity claw back Prior to November 15, 2007 up to 35% at 106.125% Make whole clause Prior to November 15, 2009: Bunds + 50 bp Change of control 101% Guarantees On a senior basis, by subsidiaries accounting for 99.9% of consolidated sales, 100% of consolidated EBITDA, 82% of

consolidated assets, 87.8% of consolidated financial liabilities and 91.1% of total liabilities (as of August 31, 2004) Security No Ranking – Equal to all of the issuer's existing and future indebtedness that is not subordinated to the notes,

– Structurally subordinated to all existing and future indebtedness of non-guarantor subsidiaries (EUR 67.7 mn as of August 31, 2004) and secured indebtedness of issuer and guarantors (EUR 295 mn as of August 31, 2004)

Certain Covenants Limitation on Debt Fixed charge coverage ratio of at least 2.25x

Most important carve-out/exceptions: – Indebtedness of up to EUR 150 mn – Indebtedness represented by subsidiary guarantees – Indebtedness under currency arrangements in the normal course of business – Indebtedness arising by mortgage or capital lease financing of up to EUR 5 mn – General Basket EUR 10 mn

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash, the assumption of liabilities or replacement of assets and is within 360 days 100% applied for debt reduction, for capex or for acquisition of a permitted businesses Most important carve-out/exceptions: – Excess proceeds of up to EUR 10 mn – Excess Proceeds exceeding EUR 10 mn have to be used to offer to redeem notes and pari passu debt at par

Limitation on Restricted Payments – 50% of consolidated net income (minus 100% of such negative amount) plus – Equity proceeds plus – Net reduction of Investments that are not permitted investments

Limitations on Transactions with Affiliates Board resolution if transaction greater than EUR 2 mn Fairness opinion if transaction greater than EUR 10 mn



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Business Description – Hornbach Hornbach (www.hornbach-holding.de) headquartered in Bornheim/Landau, Germany, is the country's sixth largest operator of home improvement superstores. It also is active in several neighboring countries. At FYE 2006/07, Hornbach owned 91 DIY stores in Germany and 33 in eight other European countries. Hornbach will continue to grow by opening around 7 new megastores p.a. on average. Hornbach employs around 12,000 people. It is publicly listed but the Hornbach family owns a clear majority of voting rights. Among the 35 family members (and Hornbach stakeholders), a contract exists, saying that a family member can only sell his or her stake with the consent of at least 70% of the owners with voting power. Another major shareholder with 25% of the voting rights is Kingfisher.

SALES BY REGION (FY 2007/08)

Germany61.1%

Rest of Europe38.9%


EBITDA BY REGION (FY 2007/08)

Germany74.2%

Rest of Europe25.8%




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB Stable FFO to lease-adjusted net debt of 15%, and coverage of net interest plus full rents by EBITDAR of at least 2x to retain current rating

Moody's Ba2 Stable Adjusted debt to EBITDA below 4x and interest cover greater than 2.5x could lead to upward pressure; Adjusted debt to EBITDA above 6x and interest cover below 1.5x could lead to downward pressure

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

HORN 6.125% 11/15/2014

BB-s/ Ba3s/-- EUR 250 11/15/2009 (103.06)

BOND STRUCTURE

HornbachHolding AG

NoteholdersHornbach

Baumarkt AG

Guarantors

100% of EBITDA99.9% of sales

Kingfisher Plc

Non-GuarantorsGuarantee

80%

25% + 1 share

5.5%

Ordinary Shareholders(free float)

14.5%


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PROFIT AND LOSS (HORNBACH)

in EUR mn 01/02 02/03 03/04 04/05 05/06 06/07 Q1 07/08 07/08 Q1 08/09 08/09eSales 1,439.9 1,627.5 1,923.0 2,094.4 2,234.2 2,391.7 696.0 2,469.4 739.2 2,592.8Raw materials used -921.4 -1,058.2 -1,237.2 -1,331.4 -1,435.8 -1,531.3 -425.8 -1,572.0 -454.3 -1,602.4Personnel costs -222.3 -255.6 -257.5 -285.3 -367.4 -383.8 -102.8 -399.9 0 -363.0EBITDA reported 118.3 103.4 126.9 152.3 136.7 160.5 48.5 141.7 62.2 180.7Depreciation and amortization -53.5 -57.1 -62.3 -61.3 -66.5 -64.3 -16.2 -65.5 -13.8 -75.2Other operating income/expenses -177.9 -210.3 -301.5 -325.4 -294.3 -316.2 -118.9 -355.8 -222.7 -446.7EBIT reported 64.8 46.3 64.6 91.0 70.2 96.1 32.3 76.1 48.4 105.5Interest result -18.5 -21.1 -21.0 -23.3 -26.6 -23.3 -5.1 -20.4 -4.9 -28.0Other financial items 0 0.2 0.2 0.4 0 0 0 0 0 0EBT 46.3 25.4 43.8 68.0 43.6 72.9 27.2 55.8 43.5 77.5Extraordinary result 0 -4.5 1.1 0 0 0 0 0 0 0Taxes on income -16.5 -6.5 -16.9 -24.7 -18.6 -12.2 -7.7 -9.1 -11.8 -15.5Net income 29.9 14.5 28.0 43.3 24.9 60.7 19.5 46.6 31.7 62.0


in EUR mn 01/02 02/03 03/04 04/05 05/06 06/07 Q1 07/08 07/08 Q1 08/09 08/09eFixed assets 589 664 638 635 612 616 583 569 568 609 thereof goodwill 4 4 3 4 4 4 4 4 4 4Cash & cash equivalents 50 23 49 143 72 193 216 167 263 167Total assets 1,020 1,093 1,162 1,274 1,286 1,331 1,411 1,351 1,470 1,439Equity incl. minorities 350 350 363 399 415 471 492 516 550 564Pension provisions 0 0 0 0 0 0 0 0 0 0Financial liabilities 355 416 415 542 516 488 480 470 449 478 short term (<1 year) 67 128 129 40 106 31 27 42 26 30 long term (>1 year) 288 288 287 502 410 458 453 428 423 448Net working capital 121 123 139 218 301 205 234 292 221 323

CASH FLOW

in EUR mn 01/02 02/03 03/04 04/05 05/06 06/07 Q1 07/08 07/08 Q1 08/09 08/09eFFO (Funds from operations) 81 68 94 106 82 122 38 126 46 165Change in working capital -20 -31 -48 19 -66 75 13 -35 67 -45Operating cash flow 62 36 46 124 16 197 51 67 113 120CAPEX -98 -125 -65 -71 -134 -81 -23 -103 -13 -200Free cash flow -36 -89 -19 53 -117 116 28 -36 100 -80Dividends -13 -13 -13 -13 -13 -13 0 -14 0 -14Acquisitions/disposals 67 -1 32 2 86 34 0 41 0 85Share buy back/issues 0 0 0 2 3 0 0 5 0 0FCF after extraordinary items 17 -103 1 44 -42 136 28 -4 100 -9

DEBT ADJUSTMENTS

in EUR mn 01/02 02/03 03/04 04/05 05/06 06/07 Q1 07/08 07/08 Q1 08/09 08/09eFor pensions 0 0 0 0 0 0 0 -1 -1 -1For operating leases 496 550 594 613 710 765 765 799 799 843Others* 0 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (HORNBACH)

01/02 02/03 03/04 04/05 05/06 06/07 Q1 07/08 07/08 Q1 08/09 08/09eEBITDA margin rep. 8.2% 6.4% 6.6% 7.3% 6.1% 6.7% 7.0% 5.7% 8.4% 7.0%EBITDA margin adj. 12.9% 10.3% 11.2% 11.7% 11.1% 11.4% 11.1% 11.2% 12.6% 11.4%EBIT margin rep. 4.5% 2.8% 3.4% 4.3% 3.1% 4.0% 4.6% 3.1% 6.5% 4.1%EBIT margin adj. 7.6% 5.9% 6.7% 7.1% 6.3% 7.1% 7.4% 6.8% 9.3% 7.3%Return on capital (before tax) 6.6% 3.3% 5.6% 7.2% 4.7% 7.6% 8.5% 5.7% 8.7% 7.4%


01/02 02/03 03/04 04/05 05/06 06/07 Q1 07/08 07/08 Q1 08/09 08/09eEBITDA rep. 118 103 127 152 137 160 49 142 62 181EBITDA adj. 186 167 215 245 248 272 77 277 93 296FFO rep. 81 68 94 106 82 122 38 126 46 165FFO adj. 105 84 119 141 123 160 47 169 57 196Net debt rep. 306 393 367 398 443 295 264 302 186 311Net debt adj. 802 943 961 1,012 1,153 1,060 1,029 1,100 984 1,153Total debt 355 416 415 542 516 488 480 470 449 478EBITDA net interest cover rep. 6.4 4.9 6.0 6.5 5.1 6.9 9.5 7.0 12.7 6.5EBITDA gross interest cover rep. 5.9 4.7 5.9 6.2 4.4 5.2 6.9 4.8 8.6 5.0EBIT net interest cover rep. 3.5 2.2 3.1 3.9 2.6 4.1 6.3 3.7 9.9 3.8EBIT net interest cover adj. 1.6 1.3 1.6 1.7 1.4 1.7 2.1 1.7 2.7 1.7FFO rep. / total debt rep. 22.9% 16.2% 22.7% 19.5% 15.9% 24.9% 25.1% 26.8% 29.8% 34.6%FFO rep. / net debt rep. 26.6% 17.2% 25.7% 26.5% 18.5% 41.2% 45.6% 41.5% 72.0% 53.2%FFO adj. / net debt adj. 13.1% 8.9% 12.4% 13.9% 10.6% 15.0% 15.3% 15.4% 18.2% 17.0%FOCF rep. / total debt rep. -10.2% -21.3% -4.5% 9.8% -22.8% 23.8% 42.1% -2.6% 2.1% -16.6%FOCF rep. / net debt rep. -11.8% -22.6% -5.1% 13.3% -26.5% 39.3% 76.4% -4.0% 5.1% -25.6%RCF rep. / net debt rep. 22.4% 13.9% 22.2% 23.2% 15.5% 36.7% 40.6% 37.1% 64.7% 48.7%RCF adj. / net debt adj. 11.4% 7.5% 11.0% 12.6% 9.5% 13.8% 14.1% 14.2% 16.8% 15.8%Total debt rep. / EBITDA rep. 3.0 4.0 3.3 3.6 3.8 3.0 3.1 3.3 2.9 2.6Net debt rep. / EBITDA rep. 2.6 3.8 2.9 2.6 3.2 1.8 1.7 2.1 1.2 1.7Net debt adj. / EBITDA adj. 4.3 5.6 4.5 4.1 4.6 3.9 3.9 4.0 3.4 3.9FFO rep. / net interest rep. 5.4 4.2 5.5 5.5 4.1 6.2 8.5 7.2 10.4 6.9FFO rep. / gross interest rep. 5.1 4.1 5.4 5.3 3.6 4.9 6.4 5.3 7.4 5.6Capex / sales 6.8% 7.7% 3.4% 3.4% 6.0% 3.4% 3.3% 4.2% 1.7% 7.7%Capex / depreciation 182.1% 218.0% 103.6% 116.3% 201.3% 126.0% 143.8% 156.7% 92.8% 266.0%

CAPITAL STRUCTURE

01/02 02/03 03/04 04/05 05/06 06/07 Q1 07/08 07/08 Q1 08/09 08/09eTotal debt / capitalization rep. 50.4% 54.4% 53.3% 57.6% 55.4% 50.9% 49.4% 47.7% 45.0% 45.9%Net debt / net capitalization rep. 46.6% 53.0% 50.2% 50.0% 51.6% 38.5% 35.0% 37.0% 25.3% 35.6%Net debt / net capitalization adj. 69.6% 73.0% 72.6% 71.7% 73.5% 69.2% 67.7% 68.0% 64.1% 67.1%Net working capital / sales 8.4% 7.5% 7.2% 10.4% 13.5% 8.6% 9.6% 11.8% 8.8% 12.5%Fixed assets / sales 40.9% 40.8% 33.2% 30.3% 27.4% 25.8% 24.0% 23.0% 22.6% 23.5%


Comment FY 08/09Sales growth 13 new stores until FYE 2008/09 5.0%EBITDA growth Recovery anticipated from FY 2008/09 on 27.5%EBIT growth Improved cost structures (before one-offs) from FY 07/08 on 38.6%Capex incl. acquisition Capex will increase due to store openings 200Change in working capital Expansion-driven growth -45Funds from operations (FFO) Recovery anticipated from FY 2008/09 on 165


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General Industries

2008: Asset price Inflation Industrials: waiting for the third leg of the crisis

The infection of the real economy by the credit crisis is the major threat for the HY universe in the coming quarters, with cyclical companies being the major victims of thethird leg of the crisis. Besides the potential threat of a consumer recession, the revisedgrowth outlook is obviously a burden for the industrial sector as a whole. However, thegood news is that, at least so far, Asian economies held up pretty well. This supportsthose companies that are well-diversified from a geographical perspective and do not only rely on the US economy.

Record oil prices and a weak USD

Regarding the longer-term impact of the recent shocking events in financial markets (e.g.Lehman default), we fully agree with Alan Greenspan who said that the collapse of thesubprime-mortgage market "is probably a once in a century event" that will lead to the failure of more firms. "There's no question that this is in the process of outstripping anything I'veseen, and it is still not resolved.'' We agree. A crisis that destroys three major US Wall Streetfirms (Bear Stearns, Lehman and Merrill Lynch) and triggers billions of losses will have animpact on the real economy. It is only a matter of time until this will trigger a severe wave of defaults also among non-financials and the more cyclical industrials are clearly on the front lines.

LOWER GROWTH, WEAKER USD & HIGHER OIL PRICES

GDP, real (in %, y-o-y) Q1 2008 Q2 2008 Q3 2008 Q4 2008Euroland 0.7 0.2 0.7 1.0US 1.2 1.3 0.8 1.2Exchange Rate EUR-USD 1.55 1.58 1.55 1.49Commodities Oil price 113 100 105 100Inflation Forecast Euroland 3.4 3.2 2.5 2.1


Industry fundamentals Weakening outlook for logistics companies

Demand for logistics solutions should decelerate in the second half of 2008 aseconomic growth is slowing. The main driver for demand in the logistics industry is economic growth, with trade volumes normally growing at a multiple of real GDP (i.e. 1.5-2.0x). Further important growth drivers include the trend towards globalization as well asoutsourcing. With our economists forecasting a softening in the economic conditions for 2008(real GDP growth of 3.7% after 4.8% in 2007) as well as 2009 (3.4%), top-line growth prospects for logistics companies should weaken in the coming months. In this context, companies with a complete offering of services, i.e. sea freight, airfreight (currently, a shift away to other means of transport is visible), freight forwarding as well as contract logistics, with a global network (or at least strong positions in niche areas), good key account management and efficient IT solutions will be better positioned. Generally, contract logisticsservices are, however, less exposed to the economic development than freight forwardingactivities. Another key concern in the industry remains rising fuel costs, which companies try to pass on to customers but with a certain time lag.

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FRAGMENTED INDUSTRY IN CONTRACT LOGISTICS... ...AND AIRFREIGHT FORWARDING

0%

1%

2%

3%

4%

5%

6%

7%

8%

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Sch

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UTi

Wor

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Mar

ket s

hare

200

7

0%

2%

4%

6%

8%

10%

12%

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Agi

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Mar

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in 2

007

Source: Kühne & Nagel, UniCredit Global Research

North American construction markets remain weak… … outlook less bright for FY 2008

So far, the slowdown in the North American construction markets could be offset bygrowth in other emerging markets, mainly Eastern Europe, but trading conditions inthe construction and construction-related industries are becoming increasingly challenging. Spillover effects from the housing crisis, higher energy prices and inflationconcerns will increasingly burden construction output in the European markets. The UK andthe Spanish markets are among the hardest hit in Europe, showing a significant decline inhouse prices and housing starts, while there are now signs of improvement in Germany. With major Western European markets showing a significant downturn, the overall outlook becomes increasingly clouded, with output expected to decrease in FY 2008. According toEuroconstruct, European construction output will drop by 0.3% in 2008 following a slowdownto 2.7% in 2007, despite very healthy growth rates in Eastern European markets of 9.7%. However, there, too, a slowdown is expected for FY 2009 and beyond.

TOTAL CONSTRUCTION OUTPUT UNTIL 2010

Western Europe Eastern Europe

1.8

1.3

3.6

1.7

-0.8

-0.2

1.3

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2004 2005 2006 2007 2008 2009 2010

(%)

6.8 6.77.7 7.5

9.7

8.17.4

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010

(%)

Source: Euroconstruct, UniCredit Global Research

Jana Arndt, CFA (HVB), +49 89 378-13211 / [email protected] Dr. Philip Gisdakis (HVB), +49 89 378-13228 / [email protected] Jochen Schlachter (HVB), +49 89 378-13212 / [email protected]

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Bombardier (BUY) Investment rationale We maintain our buy recommendation on BOMB issues, preferring the BOMB Floater

which seems particularly attractive on a YTW basis. Under our assumption that thecompany will further reduce its outstanding gross indebtedness, the likelihood that it will useits call option (in 11/2008) for the Floater seems high and the bond hence offers the most value. The company's credit profile trend remains positive, supported by a robust fundamentaloutlook as well as management's strong commitment to regaining an investment grade rating.Further rating upgrades require additional improvements in Bombardier's financial metrics which, however, we expect to materialize in FY 2009 and beyond on the back ofmanagement's continued focus on enhancing its margins and cash flows. In addition, thestrong order backlog provides relatively good revenue and cash flow visibility. While overallwe currently view the credit as a rather "defensive" play in the HY universe, the main riskremains the company's relatively large cyclical exposure to commercial aircraft and to the US (35% of group revenues were generated in North America in FY 2008). This is, however,mitigated by the continuing solid order momentum and increasing demand from emergingmarkets, with the revenue share from markets outside Europe and North America increasing towards 30% (vs. 7% in FY 2004).

Recent developments In July, Bombardier launched its C-Series aircraft program, hence entering the 100- to 149-seat commercial aircraft market. Launch customer is Lufthansa, which signed a letter of interest for up to 60 aircraft (approximate list price of each aircraft is USD 46.7 mn). Inaddition, the company mentioned ongoing discussions with further potential buyers. Theprogram costs are estimated at USD 3.2 bn, whereof Bombardier assumes one-third, with the remainder being financed by key suppliers and governments (repayable investments with thegovernment of Canada and Québec as well as Northern Ireland and British GovernmentDepartments). Entry into service is expected in 2013. Generally, the C-series will benefit from technological enhancements which should result in less fuel burn and, in turn, also in a longerflight range, while also offering improved cabin design and hence passenger comfort. Overall,we expect the company to finance its program share out of its generated cash flows. However, project and development risks as well as the risk of cost overruns naturally persist.

BOMBARDIER'S TARGET IS TO REDUCE DEBT IN ORDER TO IMPROVE ITS GLOBAL LEVERAGE METRICS

Bombardier's global leverage metrics and targets

0

1

2

3

4

5

6

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adj

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d ne

t in

tere

st ra

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uste

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EB

ITD

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Adj

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d de

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djus

ted

tota

l ca

pita

lizat

ion

ratio

FYE 2007/08 H1 2008/09 Target 2011

0%

5%

10%

15%

20%

25%

30%

35%

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

H1

09

2008

/09e

2009

/10e

0

1

2

3

4

5

6

7

8

9FFO adj. / total debt adj. Total debt adj. / EBITDA adj.


Latest results recap Bombardier released a set of strong quarterly figures. Executing the strong order backlog, revenues increased in the quarter by 22.0% to USD 4,932 mn while EBITDA before special items improved by 44.7% to USD 495 mn to a margin of 10%. The improving operatingperformance was mainly due to improved selling prices for business aircraft in the Aerospace

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Segment as well as scale effects. Cash flow generation in the quarter was negativelyimpacted by a working capital-related cash outflow while the prior-year period benefited from a working capital release. Hence, after also taking into account increasing investments (capexof USD 120 mn vs. USD 46 mn), free operating cash flow was down from USD 630 mn toUSD 78 mn despite the better operating result. During the quarter, the company could further reduce its net debt position from USD 124 mn to USD 86 mn, bringing adjusted net leveragedown from 1.2x at the end of Q1 to 1.1x. Also, total debt went down slightly in the quarter from USD 4,419 bn to USD 4,363 mn, resulting in an adjusted total leverage of 3.4x vs. 3.7x.

Liquidity Bombardier continues to benefit from a strong liquidity position. At the end of July, the company reported a healthy cash pile of USD 4,277 mn which compares to negligible upcoming debt maturities until FY 2013. In addition, we expect the company to continuously generate solid cash flows that should cover working capital needs as well as the increasingcapex requirements in the future. Furthermore, Bombardier will have access to USD 1.3 bn in restricted cash balances, currently being used as collateral for its letter of credit facility, incase it returns to an investment grade rating.


The credit profile trend remains positive for Bombardier and could result in thecompany's return to an investment grade rating in the short-to-medium term. Top-line growth should be supported by a strong order backlog of USD 57.2 bn and ongoing sounddemand for the company's products as seen in Q2 with 175 new aircraft net orders (187 in theprior-year period) in the Aerospace segment and an increase in orders received by 62% toUSD 2.1 bn in the Transportation segment. Reflecting the weakening business environmentfor airline operators, commercial aircraft net orders, however, fell strongly from 84 to 11 netorders in the quarter. In contrast, order activity remained surprisingly strong in the business jetmarket. While activity is expected to slow down in the coming quarters, the book-to-bill ratio is still assumed to be around 1x. At the bottom line, Bombardier remains committed to furtherprofitability improvements and we assume that it will use its generated free cash flow mainlyto reduce gross indebtedness, which will be supportive for its financial profile. Improvements of the latter will also be one of the main triggers for potential further positive rating actionstowards the company's target of an investment grade rating. According to S&P, a positiverating action would require Bombardier to improve its financial metrics by further reducing debt and maintaining strong cash flow. Similarly, Moody's requires retained cash flow to debtmetrics comfortably in excess of 20% (15.8% at FYE 2008), debt to EBITDA approaching 3x (4.3x) and EBIT/Interest above 2.75x (1.7x). In addition, we expect rating agencies to closelywatch how the company will weather a downturn in its cyclical businesses. Overall, for FY2009, we estimate a reduction in adj. total debt to adj. EBITDA from 3.9x to 2.6x.

Main risks Major risks to our model include a greater-than-expected cyclical weakening in the US,affecting business aircraft, and project risks related to the C-Series aircraft program.

Things to watch ● December 4, 2008: Q3 FY 2009 results

● Order development

● Development C-Series program

Jana Arndt, CFA (HVB) +49 89 378-13211 [email protected]

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CAPITALIZATION

Senior Notes Issuer Bombardier Inc., Quebec Bonds Amount Maturity Coupon Call BOMB USD 550 mn 05/12 6.75% Makewhole call at +37.5 bp BOMB EUR 790 mn 11/13 EURIBOR+31

2.5 bp First Call 11/15/08 at 102

BOMB USD 500 mn 05/14 6.3% Makewhole call at +37.5 bp BOMB USD 385 mn 11/14 8% First Call 11/15/10 at 104 BOMB EUR 800 mn 11/16 7.25% First call 11/15/11 at 103.625 BOMB CAD 150 mn 12/26 7.35% Call any time at higher of

Canadian Yield +15 bp or at 100

BOMB USD 250 mn 05/34 7.45% Make whole call at +45 bp Other Indebtedness USD 186 mn, including capital lease obligations amounting to USD 102 mn (at FYE 2007/08) Credit facilities and their maturities (in USD mn) at July 31, 2008 Amounts committed Amounts available Maturity (FY)New letters of credit facility 6,705 656 2012Credit support The indenture governing BC’s long-term debt provides for a covenant and a “keep-well” arrangement from the Corporation. Bombardier

Inc.’s keep-well agreement provides for minimum ownership of 51% in BC and for the injection of equity in the event that certain minimum net worth levels are not met or if a fixed charge coverage ratio falls below 1.2. Finally, this keep-well provides for the undertaking by the Corporation to maintain the existing cross-default provision in the indenture governing the Corporation’s CAD 150 mn (USD 127 mn) debentures due in 2026, as well as to provide for similar cross-default provisions in all of its future debt issuances.

Financial covenants Under its New letters of credit facility, Bombardier is subject to various financial covenants, including requirements to maintain (as defined in the related agreements): – a minimum EBITDA to fixed charges ratio of 3.5x at the end of each fiscal quarter; – a maximum adjusted gross debt-to-capitalization ratio of 70% at the end of each fiscal quarter until April 30, 2008, and 65%

thereafter; and – a maximum adjusted net debt to EBITDA ratio of 2.5 to 1 as at July 31, 2008; and 2.0 to 1 as at October 31, 2008 and at the end of

each fiscal quarter thereafter.

Source: Company Reports, Bloomberg, Fitch, UniCredit Global Research

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BOND DOCUMENTATION – BOMB 7.25% 11/15/16

Issuer Bombardier Inc. Call/Put Call Schedule On or after November 15, 2011: 103.625%, November 15, 2012: 102.417%, November 15, 2013: 101.208 and

November 15, 2014 and thereafter: 100% Equity claw back Prior November 15, 2009 up to 35% at 107.25% Make whole clause Prior to November 15, 2011: 2011 Bund Rate plus 50 bp Change of control Put at 101% Guarantees No Security No Ranking The notes will be direct, unsecured senior obligations of Bombardier and will rank equal in right of payment (“pari

passu”) with all other unsecured and unsubordinated indebtedness and other obligations of Bombardier. The notes in each series will rank among themselves equally without preference or priority. The notes are not obligations of any of Bombardier’s subsidiaries.

Certain Covenants Limitation on Debt – Consolidated fixed charge coverage ratio of 2.0x

– Will not permit any subsidiary, other than a finance subsidiary or subsidiary guarantor, to incur any debt other than excluded subsidiary debt would exceed the greater of USD 1.6 bn and 10% of Bombardier’s consolidated assets.

Most important carve outs/exceptions: (a) Debt provided that: i. debt amount does not exceed the cost of construction, acquisition or improvement of the

property or assets acquired, constructed or leased together with the reasonable costs of acquisition; and ii. debt amount does not exceed the greater of USD 500 mn and 3.0% of Bombardier’s consolidated assets

(b) Obligations of Capital Lease Obligations and from any Securitization Program; (c) Any Project debt and guarantees (d) Acquired Debt for Borrowed Money does not exceed USD 200 mn in the aggregate (e) Guarantees in the ordinary course of business in respect of the obligations of suppliers or customers or in respect

of Customer Sales Financing Transactions; (f) General basket USD 1.5 bn

Limitation on Sale of Certain Assets Most important carve outs/exceptions: – Consideration at least Fair Market value and at least 75% of the consideration received consists of cash or cash

equivalents – Net cash proceeds must be used within 365 days to permanently repay debt or to invest in replacement assets or

any combination thereof – When aggregate amount of excess proceeds exceeds USD 200 mn, m ake an offer to purchase from all holders

of note for 100 plus accrued interest Limitation on Restricted Payments – Aggregate amount of restricted payments does not exceed the sum of:

– 50% of consolidated net income for the period from November 1, 2006 to the end of the most recent fiscal quarter ending prior to the date of such restricted payment plus 100% of the aggregate net cash proceeds of stock stale received by the Issuer plus conversion into capital stock plus net reduction in restricted investments

Most important carve outs/exceptions: – General basket: USD 200 mn

Limitations on Transactions with Affiliates – Board of directors with majority of disinterested directors or written opinion from independent financial advisor if transactions greater than USD 50 mn

Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering No


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BOND DOCUMENTATION – BOMB FLOATER 11/15/13

Issuer Bombardier Inc. Call/Put Call Schedule On or after November 15, 2008: 102.00%, November 15, 2009: 101.00%, November 15, 2010 and thereafter: 100% Equity claw back No Make whole clause No Change of control Put at 101% Guarantees No Security No Ranking The notes will be direct, unsecured senior obligations of Bombardier and will rank equal in right of payment (“pari

passu”) with all other unsecured and unsubordinated indebtedness and other obligations of Bombardier. The notes in each series will rank among themselves equally without preference or priority. The notes are not obligations of any of Bombardier’s subsidiaries.

Certain Covenants Limitation on Debt – Consolidated fixed charge coverage ratio of 2.0x

– Will not permit any subsidiary, other than a finance subsidiary or subsidiary guarantor, to incur any debt other than excluded subsidiary debt would exceed the greater of USD 1.6 bn and 10% of Bombardier’s consolidated assets.

Most important carve outs/exceptions: (a) Debt provided that: i. debt amount does not exceed the cost of construction, acquisition or improvement of the

property or assets acquired, constructed or leased together with the reasonable costs of acquisition; and ii. debt amount does not exceed the greater of USD 500 mn and 3.0% of Bombardier’s consolidated assets

(b) Obligations of Capital Lease Obligations and from any Securitization Program; (c) Any Project debt and guarantees (d) Acquired Debt for Borrowed Money does not exceed USD 200 mn in the aggregate (e) Guarantees in the ordinary course of business in respect of the obligations of suppliers or customers or in respect

of Customer Sales Financing Transactions; (f) General basket USD 1.5 bn

Limitation on Sale of Certain Assets Most important carve outs/exceptions: – Consideration at least Fair Market value and at least 75% of the consideration received consists of cash or cash

equivalents – Net cash proceeds must be used within 365 days to permanently repay debt or to invest in replacement assets or

any combination thereof – When aggregate amount of excess proceeds exceeds USD 200 mn, m ake an offer to purchase from all holders

of note for 100 plus accrued interest Limitation on Restricted Payments – Aggregate amount of restricted payments does not exceed the sum of:

– 50% of consolidated net income for the period from November 1, 2006 to the end of the most recent fiscal quarter ending prior to the date of such restricted payment plus 100% of the aggregate net cash proceeds of stock stale received by the Issuer plus conversion into capital stock plus net reduction in restricted investments

Most important carve outs/exceptions: – General basket: USD 200 mn

Limitations on Transactions with Affiliates – Board of directors with majority of disinterested directors or written opinion from independent financial advisor if transactions greater than USD 50 mn



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Business Description – Bombardier Inc. Bombardier Inc., headquartered in Montreal, is a global transportation company operating in aerospace and rail transportation. In the aerospace division, the company manufactures regional commercial aircraft (i.e. 36- to 70-seat turboprobs, 50- to 90-seat regional jets, 100-seat CRJ100 jets from 2009) and business aircrafts (Learjet, Challenger and Global family) and provides parts and services. The transportation division produces railway equipment, including rolling stock, locomotive, signaling systems. The Bombardier family holds indirectly 78.12% of the outstanding Class A shares (=10 votes per share) or 53.95% of all the voting rights attached to all the shares. Class B shares (=1 vote per share) are free float.

SALES BY LOCATION OF CUSTOMER (FY 01/2008)

United States31.8%

Germany7.1%

Canada3.8%

Rest of Europe26.9%

Asia and Oceania

9.8%

Rest of the world9.6%

UK11.1%


EBIT BY SEGMENT (FY 01/2008)

Aerospace 76.1%

Transportation23.9%



<1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years >5 yearsFinancial debt 11 mn 12 mn 12 mn 15 mn 598 mn 3.8 bn

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB+ Stable Up: Improving financial measures by further reducing debt and maintaining strong cash flow; Down: More aggressive set of financial targets, weakening liquidity position and free cash flow

Moody's Ba2 Positive Up: Retained cash flow to debt comfortably in excess of 20%, Debt to EBITDA approaching 3x, EBIT/Interest above 2.75x; Down: Weakening margins, suppressing retained cash flow to debt towards 15% or EBIT/Interest below 2x

Fitch BB+ Stable Ability to achieve margin targets which will be important in realizing the goal to reduce leverage, Uncertainty with regard to the success of the CSeries launch

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

BOMB 7.25% 11/15/2016

Ba2p/BB+s/BB+s EUR 800 11/15/2011 (103.625)

BOMB Float 11/15/2013

Ba2p/BB+s/BB+s EUR 800 11/15/2008 (102)

BOND STRUCTURE

BOMB 2013 EUR Notes

BOMB 2016 EUR NotesBombardier Inc.

Bombardier Finance Inc.Bombardier Corp

Bombardier Capital Inc.,

Massachusetts

Bombardier Aerospace

Bombardier Transportation

Bombardier Capital Funding

LP, Quebec


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PROFIT AND LOSS (BOMBARDIER INC.)

in USD mn 2003/04 2004/05 2005/06 2006/07 H1 08 2007/08 H1 09 2008/09e 2009/10e 2010/11eSales 15,201.0 15,546.0 14,726.0 14,882.0 8,008.0 17,506.0 9,721.0 20,131.9 20,937.2 21,355.9Cost of goods and services sold -14,179.0 -13,754.0 -12,719.0 -12,667.0 -6,653.0 -14,919.0 -7,944.0 -16,508.2 -17,189.4 -17,511.9R&D expenses 0 -148.0 -175.0 -173.0 -69.0 -139.0 -87.0 -161.1 -167.5 -170.8Administration 0 -859.0 -842.0 -929.0 -652.0 -1,096.0 -769.0 -1,530.0 -1,528.4 -1,494.9Other operating income/expenses -890.0 -721.0 -633.0 -560.0 -238.0 -612.0 -242.0 -563.7 -586.2 -598.0EBITDA reported 692.0 613.0 902.0 1,071.0 656.0 1,252.0 956.0 1,912.5 2,010.0 2,114.2EBIT reported 132.0 64.0 357.0 553.0 396.0 740.0 679.0 1,369.0 1,465.6 1,580.3Adj. EBIT (bef. pension interest) 659.6 434.6 646.9 811.2 491.1 1,053.9 701.8 1,520.8 1,617.5 1,682.2Interest result -231.0 -224.0 -207.0 -218.0 -141.0 -301.0 -57.0 -84.0 -17.0 68.0EBT reported -99.0 -160.0 150.0 335.0 255.0 439.0 622.0 1,285.0 1,448.6 1,648.3Extraordinary result 0 0 0 0 -162.0 0 0 0 0 0Taxes on income -121.0 38.0 -15.0 -92.0 -85.0 -122.0 -150.0 -359.8 -405.6 -461.5Net income -220.0 -122.0 135.0 243.0 8.0 317.0 472.0 925.2 1,043.0 1,186.8


in USD mn 2003/04 2004/05 2005/06 2006/07 H1 08 2007/08 H1 09 2008/09e 2009/10e 2010/11eFixed assets 8,366 8,351 5,469 6,344 6,547 7,134 7,102 7,090 7,296 7,512Cash & cash equivalents 1,214 2,344 2,917 2,648 2,998 3,602 4,277 3,602 3,602 3,602Total assets 19,277 20,130 17,482 18,577 19,155 22,120 23,428 22,040 22,657 23,104Equity incl. minorities 2,450 2,298 2,425 2,733 2,754 3,118 3,292 3,903 4,766 5,640Pension provisions 932 897 877 995 974 1,066 1,128 1,000 950 900Other provisions 0 0 0 0 321 276 377 276 226 126Financial liabilities 5,125 5,716 4,747 5,080 5,079 4,393 4,363 3,520 3,255 2,712Net working capital -2,937 -4,097 -2,447 -2,039 -2,113 -3,444 -3,851 -3,554 -3,262 -3,297

CASH FLOW

in USD mn 2003/04 2004/05 2005/06 2006/07 H1 08 2007/08 H1 09 2008/09e 2009/10e 2010/11eFFO (Funds from operations) 678 507 654 712 493 997 862 1,403 1,487 1,571Change in working capital -1,174 -27 100 179 49 1,336 -32 110 -292 35Operating cash flow -496 480 754 891 542 2,333 830 1,513 1,195 1,606CAPEX -297 -305 -329 -308 -87 -425 -214 -500 -750 -750Free cash flow -793 175 425 583 455 1,908 616 1,013 445 856Dividends -138 -146 -25 -28 -15 -30 -58 -140 -180 -313Acquisitions/disposals 1,281 807 1,663 -1,142 -58 -62 18 0 0 0Share buy back/issues 809 3 -14 -20 -52 -50 0 0 0 0FCF after extraordinary items 1,159 839 2,049 -607 330 1,766 576 873 265 543

DEBT ADJUSTMENTS

in USD mn 2003/04 2004/05 2005/06 2006/07 H1 08 2007/08 H1 09 2008/09e 2009/10e 2010/11eFor pensions 1,880 1,779 2,043 1,753 1,746 1,424 1,445 1,400 1,383 1,365For operating leases 676 676 489 452 452 479 479 479 479 479Others* 218 218 2 113 0 0 0 0 0 0


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PROFITABILITY RATIOS (BOMBARDIER INC.)

2003/04 2004/05 2005/06 2006/07 H1 08 2007/08 H1 09 2008/09e 2009/10e 2010/11eEBITDA margin rep. 4.6% 3.9% 6.1% 7.2% 8.2% 7.2% 9.8% 9.5% 9.6% 9.9%EBITDA margin adj. 8.6% 6.9% 8.6% 9.3% 9.7% 9.3% 10.4% 10.5% 10.6% 10.6%EBIT margin rep. 0.9% 0.4% 2.4% 3.7% 4.9% 4.2% 7.0% 6.8% 7.0% 7.4%EBIT margin adj. 4.3% 2.8% 4.4% 5.5% 6.1% 6.0% 7.2% 7.6% 7.7% 7.9%Return on capital (before tax) -1.3% -2.0% 2.1% 4.3% 7.7% 5.8% 12.6% 17.3% 18.1% 19.7%


2003/04 2004/05 2005/06 2006/07 H1 08 2007/08 H1 09 2008/09e 2009/10e 2010/11eEBITDA rep. 692 613 902 1,071 656 1,252 956 1,913 2,010 2,114EBITDA adj. 1,313 1,077 1,272 1,380 777 1,622 1,007 2,121 2,218 2,272FFO rep. 678 507 654 712 493 997 862 1,403 1,487 1,571FFO adj. 771 600 734 763 518 1,053 890 1,459 1,543 1,627Net debt rep. 3,911 3,372 1,830 2,432 2,081 791 86 -82 -347 -890Net debt adj. 6,685 6,045 4,364 4,750 4,278 2,693 2,010 1,797 1,515 954Total debt 5,125 5,716 4,747 5,080 5,079 4,393 4,363 3,520 3,255 2,712EBITDA net interest cover rep. 3.0 2.7 4.4 4.9 4.7 4.2 16.8 22.8 118.2 -31.1EBITDA gross interest cover rep. 2.1 1.9 2.5 2.9 2.7 2.4 4.8 5.1 6.6 9.6EBIT net interest cover rep. 0.6 0.3 1.7 2.5 2.8 2.5 11.9 16.3 86.2 -23.2EBIT net interest cover adj. 2.2 1.5 2.5 3.1 3.0 3.0 8.7 11.5 24.9 -83.6FFO rep. / total debt rep. 13.2% 8.9% 13.8% 14.0% 17.1% 22.7% 31.3% 39.8% 45.7% 57.9%FFO rep. / net debt rep. 17.3% 15.0% 35.7% 29.3% 41.7% 126.0% 1588.4% -1712.6% -428.6% -176.5%FFO adj. / net debt adj. 11.5% 9.9% 16.8% 16.1% 21.1% 39.1% 70.9% 81.2% 101.9% 170.5%FOCF rep. / total debt rep. -15.5% 3.1% 9.0% 11.5% 28.5% 43.4% 62.7% 28.8% 13.7% 31.6%FOCF rep. / net debt rep. -20.3% 5.2% 23.2% 24.0% 69.6% 241.2% 3181.4% -1236.7% -128.3% -96.2%RCF rep. / net debt rep. 13.8% 10.7% 34.4% 28.1% 40.3% 122.3% 1503.5% -1541.7% -376.7% -141.3%RCF adj. / net debt adj. 9.5% 7.5% 16.3% 15.5% 20.4% 38.0% 67.3% 73.4% 90.0% 137.7%Total debt rep. / EBITDA rep. 7.4 9.3 5.3 4.7 4.0 3.5 2.8 1.8 1.6 1.3Net debt rep. / EBITDA rep. 5.7 5.5 2.0 2.3 1.6 0.6 0.1 0.0 -0.2 -0.4Net debt adj. / EBITDA adj. 5.1 5.6 3.4 3.4 2.8 1.7 1.1 0.8 0.7 0.4FFO rep. / net interest rep. 3.9 3.3 4.2 4.3 4.5 4.3 16.1 17.7 88.5 -22.1FFO rep. / gross interest rep. 3.1 2.5 2.8 2.9 3.0 2.9 5.3 4.8 5.9 8.1Capex / sales 2.0% 2.0% 2.2% 2.1% 1.1% 2.4% 2.2% 2.5% 3.6% 3.5%Capex / depreciation 53.0% 55.6% 60.4% 59.5% 33.5% 83.0% 77.3% 92.0% 137.8% 140.5%

CAPITAL STRUCTURE

2003/04 2004/05 2005/06 2006/07 H1 08 2007/08 H1 09 2008/09e 2009/10e 2010/11eTotal debt / capitalization rep. 67.7% 71.3% 66.2% 65.0% 64.8% 58.5% 57.0% 47.4% 40.6% 32.5%Net debt / net capitalization rep. 61.5% 59.5% 43.0% 47.1% 43.0% 20.2% 2.5% -2.1% -7.9% -18.7%Net debt / net capitalization adj. 81.7% 81.0% 77.6% 70.6% 68.3% 49.4% 40.3% 33.9% 25.9% 15.6%Net working capital / sales -19.3% -26.4% -16.6% -13.7% -13.3% -19.7% -20.0% -17.7% -15.6% -15.4%Fixed assets / sales 55.0% 53.7% 37.1% 42.6% 41.4% 40.8% 37.0% 35.2% 34.8% 35.2%


Comment FY 2009 FY 2010 FY 2011Sales growth Strong top-line growth 15.0% 4.0% 2.0%EBITDA growth Profitability margin improvement according to plan 52.8% 5.1% 5.2%EBIT growth Profitability margin improvement according to plan 85.0% 7.1% 7.8%Capex incl. acquisition Increasing capex with start of Cseries 500 750 750Change in working capital Varies with order inflow 110 -292 35Funds from operations (FFO) Focus on cash flow generation 1,403 1,487 1,571


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Ceva Logistics (SELL) Investment rationale We change our recommendation for the Ceva Logistics bond issues from hold to sell

on weakening market fundamentals and as improvements in the company's financial profile should be limited in the short-term. Ceva released a mixed set of Q2 2008 figures, showing pleasing top-line growth momentum but weakening profit margins and cash flowgeneration, albeit partly impacted by one-off effects. While the company continues to strive for improving revenue growth and cash generation, the risk is increasing that the softeningeconomic conditions could impact its financials in the coming quarters. For 2008, we do notforesee meaningful improvements in Ceva's financial profile and improvements in subsequent years could be held back by its growth ambitions (organically as well as via bolt-on transactions). Although prospects are rather subdued in the short-term, we stick to our view that Ceva would be a good IPO candidate in the medium term once the private equity sponsordecides to exit. However, there could be better levels to entry at a later stage.

Recent developments Ceva is continuously focusing on implementing measures to push top-line growth towards its EUR 10 bn sales target by 2010. Positive effects in this respect are also expected from the recent reorganization of the group from an organizational set-up by services (i.e. contract logistics and freight management) into a regional structure with fourintegrated regions. Among others, the new structure should better leverage the growth potential of the combined businesses and provide for further synergy savings, according to the company.

The industry-wide antitrust investigation in the US, the EU and in New Zealand, in which Ceva is currently involved, is ongoing. Naturally, the outcome of the investigation as well as the potential fines remain uncertain at this early stage. To date, Ceva has already spent a quite impressive EUR 17.6 mn in legal costs, mainly for searching through documents at the EGL offices. According to management, spending on those activities is finally beginning to decline on a monthly run rate level. However, estimates of future expenses to support theinvestigations are difficult to make.

Latest results recap Ceva reported Q2 2008 results which revealed good top-line growth momentum whileprofit growth lagged behind. Reported figures in the quarter were again negatively impacted by the depreciation of the GBP and USD, with reported pro-forma revenues only increasing by 2.2% to EUR 1,596 mn. At constant exchange rates, top-line growth accelerated in the quarter with sales improving by 9.4%, mainly driven by Ceva's FreightManagement unit (+16.5%) while revenues advanced 4.1% in the Contract Logistics business. Revenue growth was largely attributable to new contract wins, also resulting fromthe cross-selling initiatives, with annualized wins in the quarter doubling from Q1 to EUR 226mn. It is also worth mentioning that the company has finally managed to outperform market growth in the quarter. Looking at the bottom line, pro-forma adjusted EBITDA dropped by 2.3% to EUR 92 mn at actual exchange rate, respectively improved by only 4.8% at constantexchange rates. Profit was negatively affected by a change in the product mix in the Freight Management business (i.e. the shift away from airfreight to road and sea), a delay in the passthrough of rising fuel costs as well as by costs associated with the entry into seven newcountries. Overall, the impact was more pronounced in the Freight Management businesswhile margins could be kept stable in the Contract Logistics business. Cash flow generationremained weak in the quarter, with the company using EUR 56 mn in cash (break-even in Q1). This was largely attributable to a working capital build-up (vs. a release in Q1) as well as sequential higher tax payments (due to the payment of a tax deferral from 2007). Hence, netdebt increased from EUR 2,283 mn at the end of Q1 to EUR 2,330 mn, with net leverage according to Ceva being up at 6.0x (vs. 5.7x in Q1 and the peak of 6.1x after completion ofthe EGL acquisition).

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Liquidity Ceva's liquidity remains adequate. At the end of Q2, the company reported a cash position of EUR 105 mn as well as headroom under its committed overdraft facilities of EUR 98 mn and EUR 57 mn under its committed guarantee facilities. This compares to short-term liabilities of EUR 137 mn at the end of Q2. Financial flexibility could be further supported bypotentially upcoming proceeds from property disposals (portfolio totaling EUR 150 mn) as wellas improving free cash flow generation in the coming years. Generally, Ceva currently benefits from a back-end loaded debt repayment schedule with moderate annual debtrepayments. The previous bridge loan, which was initially used for the financing of the EGL acquisition, was converted into a senior unsecured loan on August 2, with a final maturity in2015. The company had to pay USD 18.8 mn for the conversion (USD 8.9 mn already paid in Q2). The loan is priced at USD Libor + 5.25%, i.e. first pricing at 7.71% (plus 50 bp everythree months with the interest rate capped at 9.75%).


We expect leverage of the company to remain high in 2008, with improvements in subsequent years potentially held back by ongoing investments in businessexpansion. The risk remains that deteriorating trading conditions could lead to more pressureon the company's operating performance in the coming quarters and hence on its deleveraging potential. Although internal cash flow generation should benefit going forward asthe burden from the one-off cash outflows related to integration expenses or debt related feeswill diminish, the company's focus on growth, including bolt-on acquisitions, might prevent any meaningful debt reduction.

EGL AND CEVA: COMBINED REVENUES BY SERVICE CEVA IS FOURTH LARGEST LOGISTICS COMPANY

Air Forwarding26%

Ocean Forwarding

6%

Outbound Logistics

32%

After Market Logistics

12%

Inbound Logistics

12%

Manufacturing Process

4%

Customs Brokerage &

Other Logistics8%

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Model risks Main risks to our model are a significant deterioration of the current economic environment, a potential exit of the private equity sponsor, as well as more sizeable M&A transactions.

Things to watch ● Free cash flow development

● Future strategy of the private equity sponsor

● Antitrust investigations


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CAPITALIZATION

Senior Credit Facilities Borrower CEVA Group PLC and subsidiaries

Senior Credit Facility Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Facility fee Term loan 500 11/13 1% p.a. n.a. n.a. USD 425 2013 1% p.a. n.a. n.a. Revolving Facility 187 11/12 Bullet n.a. 0.50% p.a. Synthetic L/C Facility 179 11/13 Bullet n.a. n.a. Senior Unsecured Loan USD 1,000 2015 Bullet + 5.25% (+50 bp every 3 months) n.a. Covenants Maximum total senior secured leverage at 4x For raising additional debt, acquisitions etc. incurrence-based senior secured leverage of 3x debt to EBITDA Notes Issuer Ceva Group Plc

Senior Notes EUR 505 12/14 Bullet Coupon 8.5% Senior Subordinated Note EUR 225 12/16 Bullet Coupon 10% Second-priority senior secured notes

USD 400 09/14 Bullet Coupon 10%

Other Indebtedness PiK loan with a notional value of EUR 275 mn at CEVA Investments Ltd. (EUR 320 mn at the end of Q2 2008) Local indebtedness totaling EUR 52 mn at the end of Q2 2008


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BOND DOCUMENTATION – TNTLOG 8.5% 12/01/14 – SENIOR NOTES

Issuer Ceva Group Plc Call/Put Call Schedule On or after December 1, 2010: 104.25%; 2011: 102.125%; 2012 and thereafter: 100% Equity claw back Prior to December 1, 2009 up to 40% at 108.5% Make whole clause Prior to December 1, 2010, Bund plus 50 bp Change of control 101% (if more than 50% of the total voting power) Guarantees On a senior basis by certain of the wholly owned subsidiaries, which represented about 57% of net sales and 64% of

EBITDA at the time of the issuance Security No Ranking – Senior to future debt and other obligations that are subordinated to the senior notes

– Equal to all of the issuer's existing and future senior debt and other obligations s that are not subordinated to the notes,

– Subordinated to all existing and future secured debt to the extent of the value of the assets securing such debt and structurally subordinated to all obligations of each subsidiary that is not a guarantor of the senior notes

Certain Covenants Limitation on Debt/ Issuance of Disqualified Stock and Preferred Stock

Fixed charge coverage ratio of at least 2x (non-guarantor exception: not exceeding EUR 150 mn) Most important carve-out/exceptions: – Indebtedness under the Credit Agreement in the amount of EUR 1,005 mn plus an additional amount that does

not cause the secured indebtedness leverage ratio to exceed 3x – Indebtedness to finance the purchase of property/equipment provided that if the secured indebtedness leverage

ratio would be greater than 3x following that indebtedness the aggregate amount does not exceed the greater of EUR 100 mn and 4.25% of total assets

– Indebtedness to finance an acquisition provided that fixed charge coverage ratio test is met – Indebtedness of non-guarantor subsidiaries not exceeding the greater of EUR 100 mn and 4.25% of total assets – Indebtedness incurred on behalf of JV's not exceeding the greater of EUR 50 mn/2% of total assets – Indebtedness not exceeding 200% of the net cash proceeds from the sale of equity interests or subordinated

shareholder funding – General Basket: the greater of EUR 100 mn and 4.25% of total assets

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash equivalents (i.e. assumed liabilities/securities/designated non-cash consideration with fair market value not exceeding the greater of 1.5% of total assets and EUR 35 mn) and is within 15 months applied to debt reduction or invested in any businesses/replacement assets. Excess Proceeds exceeding EUR 20 mn used to redeem notes and pari passu debt at par

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of: – 50% of consolidated net profit (minus 100% of such negative amount), – Equity/subordinated shareholder funding proceeds; – Capital contribution proceeds, – Conversion of debt to equity/subordinated shareholder funding proceeds – Proceeds from the sale of restricted investments, sale of the capital stock of an unrestricted subsidiary or a

distribution from an unrestricted subsidiary); – Fair market value (if it exceeds EUR 20 mn) of the issuer's investment in any unrestricted subsidiary subsequently

designated as a restricted subsidiary Most important carve-out/exceptions: – Repurchase of equity held y employees or management not exceeding EUR 15 mn in any calendar year (unused

amounts being carried over to the subsequent calendar years subject to a maximum payment of EUR 30 mn in any calendar year)

– Investments in unrestricted subs. not exceeding the greater of EUR 25 mn and 1% of total assets – Dividend payments of up to 6% p.a. of the net proceeds received from a public offering of stock – General Basket: not exceeding the greater of EUR 50 mn and 2% of total assets

Limitations on Transactions with Affiliates General Basked EUR 10 mn, for transactions exceeding this amount only if: Terms are not materially less favorable Board resolution if transaction greater than EUR 20 mn



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BOND DOCUMENTATION – TNTLOG 10% 12/01/16 – SENIOR SUBORDINATED NOTES

Issuer Ceva Group Plc Call/Put Call Schedule On or after December 1, 2011: 105%; 2012: 103.333%; 2013: 101.667%, 2014 and thereafter: 100% Equity claw back Prior to December 1, 2009 up to 40% at 110% Make whole clause Prior to December 1, 2011, Bund plus 50 bp Change of control 101% (if more than 50% of the total voting power) Guarantees On a senior subordinated basis by certain of the wholly owned subsidiaries, which represented about 57% of net

sales and 64% of EBITDA at the time of the issuance Security No Ranking – Equal to future senior subordinated debt

– Subordinated to all of the issuer's existing and future senior indebtedness, including the senior notes and senior secured facilities

– Subordinated to all existing and future secured debt to the extent of the value of the assets securing such debt and structurally subordinated to all obligations of each subsidiary that is not a guarantor of the subordinated notes

Certain Covenants Limitation on Debt/ Issuance of Disqualified Stock and Preferred Stock

Fixed charge coverage ratio of at least 2x (non-guarantor exception: not exceeding EUR 150 mn) Most important carve-out/exceptions: – Indebtedness under the Credit Agreement in the amount of EUR 1,005 mn plus an additional amount that does

not cause the secured indebtedness leverage ratio to exceed 3x – Indebtedness to finance the purchase of property/equipment provided that if the secured indebtedness leverage

ratio would be greater than 3x following that indebtedness the aggregate amount does not exceed the greater of EUR 100 mn and 4.25% of total assets

– Indebtedness to finance an acquisition provided that fixed charge coverage ratio test is met – Indebtedness of non-guarantor subsidiaries not exceeding the greater of EUR 100 mn and 4.25% of total assets – Indebtedness incurred on behalf of JV's not exceeding the greater of EUR 50 mn/2% of total assets – Indebtedness not exceeding 200% of the net cash proceeds from the sale of equity interests or subordinated

shareholder funding – General Basket: the greater of EUR 100 mn and 4.25% of total assets

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash equivalents (i.e. assumed liabilities/securities/designated non-cash consideration with fair market value not exceeding the greater of 1.5% of total assets and EUR 35 mn) and is within 15 months applied to debt reduction or invested in any businesses/replacement assets. Excess Proceeds exceeding EUR 20 mn used to redeem notes and pari passu debt at par

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of: – 50% of consolidated net profit (minus 100% of such negative amount), – Equity/subordinated shareholder funding proceeds; – Capital contribution proceeds, – Conversion of debt to equity/subordinated shareholder funding proceeds – Proceeds from the sale of restricted investments, sale of the capital stock of an unrestricted subsidiary or a

distribution from an unrestricted subsidiary); – Fair market value (if it exceeds EUR 20 mn) of the issuer's investment in any unrestricted subsidiary subsequently

designated as a restricted subsidiary Most important carve-out/exceptions: – Repurchase of equity held y employees or management not exceeding EUR 15 mn in any calendar year (unused

amounts being carried over to the subsequent calendar years subject to a maximum payment of EUR 30 mn in any calendar year)

– Investments in unrestricted subs. not exceeding the greater of EUR 25 mn and 1% of total assets – Dividend payments of up to 6% p.a. of the net proceeds received from a public offering of stock – General Basket: not exceeding the greater of EUR 50 mn and 2% of total assets

Limitations on Transactions with Affiliates General Basked EUR 10 mn, for transactions exceeding this amount only if: Terms are not materially less favorable Board resolution if transaction greater than EUR 20 mn



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Business Description – Ceva Logistics Following the takeover of US-based EGL in August 2007, Netherland-based CEVA Logistics, formerly known as TNT Logistics, is today the fourth largest global logistics company. It offers contract logistics as well as freight forwarding services. The company is acting globally, with pro-forma revenues being generated to 46% in Europe, 31% in the Americas and 23% in Asia Pacific. In August 2006, TNT Logistics was bought by private equity firm Apollo Management and other co-investors from TNT N.V. in a leveraged buyout transaction.

PRO-FORMA REVENUES BY REGION (FY 2007)

Northern Europe25.1%

Americas31.0%

Asia Pacific22.7%

Southern Europe21.2%


PRO-FORMA REVENUES BY SECTOR (FY 2006)

Auto27.0%

Consumer & Retail14.0%

Tires3.0%

Hi-Tech Electronics

23.0%

Industrial3.0%

Media & Telecoms

14.0%

Oil & Gas2.0%

Pharma & Healthcare

3.0%

Government & Other11.0%




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B Stable Improving credit metrics, namely debt to EBITDA of 6x to 7x, Down: Failure to strenghten credit ratios in the medium term, insufficient liquidty, significant fines

Moody's B2 Stable Up: Sustainable improvements in operating margins and revenue growth together with an increase in internal cash flow generation and progressive de-leveraging below 5x; Down: Erosion in operating performance, no progress in de-leveraging, weakening in operating cash flow generation

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

TNTLOG 8.5% 12/1/2014

B3s/B-s EUR 505 12/1/2010 (104.25)

TNTLOG 10% 12/1/2016

Caa1s/CCC+s EUR 225 12/1/2011 (105)

BOND STRUCTURE

Guarantorrestricted

subsidiaries

CEVA Group Plc

Non-Guarantorrestricted

subsidiaries

Senior Secured Facilities

Second-Priority Senior Secured Notes

CEVA Investments Ltd

Apollo and equity investors

PiK loan

$ Senior Unsecured Loan

Senior NotesSenior Subordinated Notes


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PROFIT AND LOSS (CEVA LOGISTICS)

in EUR mn 2004 2005 2006 2007PF H1 08 2008e 2009e 2010eSales 3,302.2 3,352.1 3,494.6 6,294.9 3,096.0 6,515.2 6,678.1 6,978.6Raw materials used -1,863.5 -1,913.3 -2,043.6 -6,010.1 -2,030.0 -6,153.7 -6,274.4 -6,544.4Personnel costs -1,008.5 -996.7 -1,053.0 0 -736.0 0 0 0EBITDA reported 189.6 181.1 77.8 284.8 136.0 361.5 403.7 434.2Depreciation and amortization -79.4 -84.2 -89.1 -336.3 -78.0 -165.0 -170.0 -176.0Other operating income/expenses -240.6 -261.0 -320.2 0 -194.0 0 0 0EBIT reported 110.2 97.0 -11.3 -51.5 58.0 196.5 233.7 258.2Income from investments -1.9 -35.7 -2.4 2.6 0 0 0 0Interest result -50.2 -79.3 -76.5 -158.1 -104.0 -203.3 -201.0 -190.0Other financial items 0 0 0 24.3 0 0 0 0Discontinuing operations -31.1 -191.9 -6.4 0 0 0 0 0EBT 26.9 -210.0 -96.6 -182.7 -46.0 -6.8 32.7 68.2Taxes on income -46.8 -16.7 -9.6 -27.9 9.0 -42.0 -37.0 -39.0Net income -19.9 -226.7 -106.2 -210.6 -37.0 -48.8 -4.3 29.2


in EUR mn 2004 2005 2006 2007PF H1 08 2008e 2009e 2010eFixed assets 1,214 1,218 1,552 2,591 2,439 2,424 2,354 2,278Cash & cash equivalents 62 93 265 175 105 105 105 105Total assets 2,495 2,505 2,761 4,268 3,959 4,063 4,033 4,008Equity incl. minorities -423 -627 319 130 49 82 77 107Pension provisions 129 127 123 98 97 98 98 98Financial liabilities 1,614 1,466 1,237 2,551 2,435 2,406 2,373 2,294Net working capital -36 -330 51 232 220 217 230 241

CASH FLOW

in EUR mn 2004 2005 2006 2007PF H1 08 2008e 2009e 2010eFFO (Funds from operations) 144 176 2 124 -31 58 146 190Change in working capital -90 -107 72 17 19 15 -13 -11Operating cash flow 54 69 74 141 -12 73 133 179CAPEX -90 -76 -17 -82 -44 -100 -100 -100Free cash flow -36 -8 57 58 -56 -27 33 79Dividends 0 0 0 0 0 0 0 0Acquisitions/disposals 24 32 -89 -1,376 0 -10 0 0Share buy back/issues 0 0 295 73 0 0 0 0FCF after extraordinary items -12 25 263 -1,245 -56 -37 33 79

DEBT ADJUSTMENTS

in EUR mn 2004 2005 2006 2007PF H1 08 2008e 2009e 2010eFor pensions 129 127 123 99 99 90 90 90For operating leases 406 336 325 496 496 496 496 496Others* 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (CEVA LOGISTICS)

2004 2005 2006 2007PF H1 08 2008e 2009e 2010eEBITDA margin rep. 5.7% 5.4% 2.2% 4.5% 4.4% 5.5% 6.0% 6.2%EBITDA margin adj. 10.4% 9.8% 9.7% 8.7% 8.0% 8.5% 8.7% 8.7%EBIT margin rep. 3.3% 2.9% -0.3% -0.8% 1.9% 3.0% 3.5% 3.7%EBIT margin adj. 5.6% 5.5% 4.9% 1.5% 3.6% 4.3% 4.3% 4.5%Return on capital (before tax) 5.0% 2.1% -5.6% -7.8% -5.6% -0.3% 1.3% 2.8%


2004 2005 2006 2007PF H1 08 2008e 2009e 2010eEBITDA rep. 190 181 78 285 136 362 404 434EBITDA adj. 345 327 338 548 248 556 583 604FFO rep. 144 176 2 124 -31 58 146 190FFO adj. 226 234 80 238 29 172 260 304Net debt rep. 1,552 1,373 973 2,376 2,330 2,301 2,268 2,189Net debt adj. 2,087 1,836 1,420 2,970 2,925 2,886 2,853 2,774Total debt 1,614 1,466 1,237 2,551 2,435 2,406 2,373 2,294EBITDA net interest cover rep. 3.8 2.3 1.0 1.8 1.3 1.8 2.0 2.3EBITDA gross interest cover rep. 3.5 2.3 1.0 1.6 1.2 1.7 1.9 2.1EBIT net interest cover rep. 2.2 1.2 -0.1 -0.3 0.6 1.0 1.2 1.4EBIT net interest cover adj. 2.0 1.6 1.6 0.5 0.9 1.1 1.2 1.3FFO rep. / total debt rep. 8.9% 12.0% 0.2% 4.8% 2.7% 2.4% 6.1% 8.3%FFO rep. / net debt rep. 9.3% 12.8% 0.2% 5.2% 2.8% 2.5% 6.4% 8.7%FFO adj. / net debt adj. 10.8% 12.7% 5.6% 8.0% 7.1% 6.0% 9.1% 11.0%FOCF rep. / total debt rep. -2.2% -0.5% 4.6% 2.3% 1.3% -1.1% 1.4% 3.5%FOCF rep. / net debt rep. -2.3% -0.5% 5.9% 2.5% 1.3% -1.2% 1.4% 3.6%RCF rep. / net debt rep. 9.3% 12.8% 0.2% 5.2% 2.8% 2.5% 6.4% 8.7%RCF adj. / net debt adj. 10.8% 12.7% 5.6% 8.0% 7.1% 6.0% 9.1% 11.0%Total debt rep. / EBITDA rep. 8.5 8.1 15.9 9.0 7.6 6.7 5.9 5.3Net debt rep. / EBITDA rep. 8.2 7.6 12.5 8.3 7.3 6.4 5.6 5.0Net debt adj. / EBITDA adj. 6.1 5.6 4.2 5.4 4.6 5.2 4.9 4.6FFO rep. / net interest rep. 3.9 3.2 1.0 1.8 0.7 1.3 1.7 2.0FFO rep. / gross interest rep. 3.6 3.2 1.0 1.7 0.7 1.3 1.7 1.9Capex / sales 2.7% 2.3% 0.5% 1.3% 1.4% 1.5% 1.5% 1.4%Capex / depreciation 113.7% 90.8% 18.7% 24.4% 56.4% 60.6% 58.8% 56.8%

CAPITAL STRUCTURE

2004 2005 2006 2007PF H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 135.5% 174.8% 79.5% 95.1% 98.0% 96.7% 96.8% 95.6%Net debt / net capitalization rep. 137.5% 184.2% 75.3% 94.8% 97.9% 96.6% 96.7% 95.4%Net debt / net capitalization adj. 119.4% 142.2% 81.7% 95.8% 98.4% 97.3% 97.4% 96.3%Net working capital / sales -1.1% -9.9% 1.5% 3.7% 2.9% 3.3% 3.4% 3.5%Fixed assets / sales 36.8% 36.3% 44.4% 41.2% 32.0% 37.2% 35.2% 32.6%


Comment FY 2008 FY 2009 FY 2010Sales growth Moderate growth assumptions 3.5% 2.5% 4.5%EBITDA growth Focus on profitability improvements including synergies 26.9% 11.7% 7.5%EBIT growth Swing from negative to positive in 2008 n.m. 18.9% 10.5%Capex incl. acquisition Moderate capex requirements and bolt-ons 110 100 100Change in working capital Focus on working capital improvement 15 -13 -11Funds from operations (FFO) In line with operating performance 58 146 190


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El Paso Corp. (HOLD) Investment rationale We keep our hold recommendation for El Paso's euro-denominated bond (EP 7.125%

05/06/2009). We believe the group has made substantial progress in improving its creditprofile in the past few years and will benefit from a strong sector outlook, but that it is still notmature enough for an investment grade rating. The company continued with deleveraging activities in the first six months of 2008, also optimizing its upstream portfolio. Cash flowgeneration should improve due to stable growth in the pipeline segment and higher upstreamproduction and hydrocarbon prices. However, the necessary acquisitions in the E&P (Exploration & Production) segment will keep financial liabilities at high levels. Nevertheless,given the short duration of the bond, we believe all remaining uncertainties are alreadyreflected in the current price, trading at around 100.5/101.0.

Recent developments On June 25, S&P revised the outlook on its BB rating (senior unsecured) of El Pasofrom positive back to stable. The outlook change reflects the expectation that there will beno upgrade in the near term. S&P acknowledges that EP is currently benefiting from a high commodity price environment, but noted that the incremental cash flow is being directed toequity shareholders. Therefore, an improvement in credit metrics and an upgrade is not verylikely in the near term.

EBIT BY SEGMENT

Q2 2008 Q2 2007 % y-o-y H1 2008 H1 2007 % y-o-yPipelines 295 318 -7.2 676 682 -0.9E&P 304 235 29.4 546 414 31.9Marketing -153 5 n.m. -213 -130 63.8Power 12 16 -25.0 10 34 -70.6Others/Consolidation 41 -104 -139.4 80 -314 -125.5Total EBIT 499 470 6.2 1099 686 60.2


Latest results recap El Paso released better Q2 2008 figures, but below expectations. In Q2 2008, sales decreased by 3.8% y-o-y to USD 1,153 mn. Reported EBIT was USD 499 mn compared to EUR 470 mn in Q2 2007, but below expectations (USD 602 mn). The bulk of this increase inEBIT stems from the E&P business, which benefited from higher production and higher realized commodity prices. The Marketing segment realized a negative EBIT of USD 153 mn compared to an EBIT of USD 5 mn in Q2 2007. Performance of this division was affected by MTM losses on derivatives (intended to manage the price risk of upstream activities) andlosses related to the fair value of power contracts. The pipeline division slightly suffered from cost increases and lower throughput. On a six-month basis, EBIT still increased by 60% y-o-y, benefiting from a very strong first quarter.

FFO in H1 2008 was USD 1,285 mn, 23.2% higher than in H1 2007 (USD 1,043 mn). The company slightly reduced its net debt position by USD 344 mn to USD 12,185 mn as of June30, 2008 (USD 12.8 bn on an adjusted basis). The company benefited from favorable workingcapital movements, but also from asset disposals of around USD 660 mn. These disposals primarily consisted of oil properties located in the Gulf of Mexico and Texas Gulf Coastregions. Furthermore, the group sold its stakes in the New York Mercantile Exchange (NYMEX). All this leads to a FFO/net debt (adj.) figure of 19.3% as of June 30, 2008, which appears strong for the rating and marks a clear improvement compared to the ratio at FYE 2006 (13.5%) and FYE 2007 (16.9%).

Liquidity Despite huge capex plans, El Paso's liquidity seems to be sufficient for the next 12-18 months. As of June 30, 2008, the group had a cash position of USD 274 mn on its balance

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sheet, which we expect to remain at these levels throughout the next quarters. We note that EP has reduced all the debt outstanding on the USD 1.5 bn revolving credit facility. As FYE 2007, this facility had been drawn with approximately USD 0.8 bn.


In the E&P segment, earnings and production this year should be at least at FY 2007levels. Total hydrocarbon production in H1 2008 was 859 mn cfe/d (cubic feet per day) including 73 mn cfe/d from equity investment in Four Star, which is roughly the same level asin 2007 (862 mn cfe/d). For the remaining year, production shall remain at similar levels. However, effectively this means the lower end of the 2008 guidance (which was 860-920 mn cfe/d). For the following years until 2011, production should grow at a CAGR of 8%-12% p.a.. The reserve replacement ratio (excluding acquisitions) was 129% in FY 2007 leading to totalreserves of 3.1 tn cfe/d at FYE 2007. The asset disposal in March 2008 has reduced thisfigure to 2.8 tn cfe/d. This leads to a total reserve life of around nine years, which is very goodfor a non-investment grade rated company and we expect El Paso to maintain this ratio. We also note that El Paso has made good progress in maintaining its E&P lifting cost. Total E&Pcash cost only marginally increased to USD 1.88 per 1,000 cfe/d from USD 1.86 per 1,000cfe/d in FY 2006. Although many competitors are faced with substantial cost increases, El Paso expects lifting cost to remain in a range between USD 1.95 and USD 2.05 in FY 2008.

The second core segment of El Paso, Pipelines, should continue to generate strongand stable cash flows. The company operates the largest pipeline system in North America, which is geographically diversified and benefits from growing demand for natural gas.Although the division generated a slightly weaker result in H1 2008, the long-term growth target is still valid. El Paso targets EBIT in this segment to increase annually in a range between 4% and 6%. We regard this target as achievable, given investments of around USD1.8 bn in the past two years. Furthermore, El Paso plans new investments in this segment of USD 4.0 bn in the next few years. Currently, four new pipelines are under construction, which should become operational in the years 2010 and 2011.

Marketing and Trading will continue to be the most volatile segment in terms of EBIT.In the past, earnings figures were strongly affected by non-cash movements in price risk management accounts. Although the company already reduced its power trading positions in 2006 and 2007, we expect this trend to continue. The division is responsible for managing theoverall price risks, primarily through the use of natural gas and oil derivative contracts. Given the high volatility in hydrocarbon prices, MTM changes in these positions will always have acertain impact on the income statement.

We expect further write-offs on the remaining assets in the Power segment, but it seems this asset should now have reached the bottom. This should also give El Pasomore flexibility in negotiations with potential buyers. The Power segment makes up the rest ofthe former worldwide business of El Paso. The division is now limited to the remaining assets in Brazil, as El Paso sold the assets in Asia and Central America in Q1 2008. As of June 30,2008, the total exposure from these assets was USD 465 mn (of which USD 448 mn in equity investment and USD 17 mn in financial guarantees).

Overall, we expect El Paso's credit profile to continue to benefit from a favorable environment with high oil and gas prices, but currently do not see the company in theinvestment grade area. Our in-house economists' price forecast for the 2008 average price of WTI (West Texas Intermediate Crude Oil) is USD 115 per barrel (2009: USD 125).Regarding future production, we are not concerned about the revision of the guidance. Thecompany still forecasts stable production for this year. However, the pressure to replace maturing fields via acquisitions remains. Furthermore, efficiency improvements in the operating business could be offset by increasing exploration costs in maturing fields. ElPaso's exposure to storms and hurricanes remains high, although we are not aware of any damage during the current hurricane season. This exposure will also be reduced by the

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growing importance of onshore fields in the E&P business. Regarding El Paso's financial profile, we expect ratios to remain at their current levels, also due to high capex requirements in the Pipelines segment. For example, we expect the FFO/net debt (adj.) ratio to remainbetween 16% and 19% in the next few years.

CASH FLOW VS. CAPEX… …AND MARGINS

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

2003 2004 2005 2006 2007 2008e 2009e

in U

SD

mn

FFO (Funds from operations) CAPEX Free cash flow

0%

10%

20%

30%

40%

50%

60%

70%

80%

2002 2003 2004 2005 2006 2007 2008e 2009e0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

EBITDA margin adj.

EBITDA gross interest cover


Model assumptions We base our forecast on the following major assumptions: a) Revenue growth for the Pipelines assets of around 6% p.a.; b) US gas prices remain strong; c) Annual capex of USD2.5 bn.

Model risks Key risks to our model estimates are: a) Volatility in hydrocarbon prices affecting earnings and working capital; b) M&A activities; c) Operational risks such as hurricanes.


● Trading activities

● Production volumes and production costs

Christian Kleindienst (HVB) +49 89 378-12650 [email protected]

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CAPITALIZATION

Senior Credit Facilities Borrower El Paso Corporation and certain of its subsidiaries

Senior Credit Facility Initial Amount (in USD mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee USD 2.2 bn Credit Facilities consisting of : (1) Revolving Credit Agreement 1,500 11/12 Bullet + 1.25%/ LoC fee 1.375% 0.250%(2) Unsecured RCF 500 07/11 Bullet 2.34% (on the total amount) (3) Unsecured Credit Faciltiy (since 12/07) 500 2009 Bullet 1.58% (on the total amount) (4) Contingent LoC Facility (since 01/07) 250 03/09 Bullet LoC fee 1.66% Acquisition Facilities Subsidiary EPEP: RCF 1,000 08/10 Bullet 1.25%-1.875% 0.30%El Paso Pipeline Partners, RCF 750 11/12 Bullet 0.525% 0,125%Covenants The covenants of senior facilities Facility (1) require EP to keep the consolidated debt-to-EBITDA ratio at or below 5.5x (decreasing to 5.25x after 6/30/08) and to maintain a fixed charge coverage ratio (EBITDA-to-interest plus dividends) of at least 1.75x (increasing to 2x after 6/30/08). (1) is secured by EP's interests in El Paso Natural Gas Company (EPNG), Tennessee Gas Pipeline Company (TGP) and Colorado Interstate Gas Company (CIG); facilities (2), (3) and (4) are unsecured (4) Contingent LoC Facility: LoC are only available under the facility if the average NYMEX gas price strip for the remaining calendar months through March 2008 is equal or exceeds USD 11.75 mn Btu (British Thermal Units) Acquisition Facility EPEP: financial covenants on EBITDA interest coverage (>2.0x) and EBITDA debt ratio (<4.0x) Acquisition Facility EPPP: debt(EBITDA ratio of less than 5.0x for any four consecutive quarters and less than 5.5x for any three consecutive quarters Notes Issuer: El Paso Corporation & other issuers Senior Note EUR 500 mn 05/09 Bullet 7.125% Senior Notes (various) around USD 10,817 bn various Bullet various Other Indebtedness Several non-recourse project finance loans (however, mostly redeemed) Available Credit Lines Around USD 1,500 mn as of June 30, 2008


BOND DOCUMENTATION – EP 7.125 05/06/09

Issuer El Paso Corporation Call/Put Call Schedule No Equity claw back No Make whole clause No Change of control No Guarantees No Security No Ranking – pari passu with all other present and future unsecured and unsubordinated obligations

– structurally subordinated to secured indebtedness Certain Covenants Limitation on Debt No Limitation on Sale of Certain Assets No limitations on the disposal of individual assets, except of:

– limitation on sale and lease-back transactions, but only if the net proceeds of such a transaction exceed with certain adjustments a level of 15% of consolidated net tangible assets

– disposal of the whole business as an entirety Limitation on Restricted Payments No Limitations on Transactions with Affiliates No Fall away/ Suspension Covenants No Negative pledge Yes, but with several extinctions (e. g. for liens on any oil, gas and mineral processing plant, for liens necessary to

finance the purchase price of acquisitions, etc.) Anti Layering No

Source: Offering circular, UniCredit Global Research

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Business Description – El Paso Corp. El Paso Corp. (EP) is a diversified natural gas and power company and has the largest gas transmission network in the US. The company still suffers from its expansion into unregulated power ventures in the US and worldwide. The group has almost finalized its restructuring process and will focus on two core segments in the future. EP Pipelines, which owns and manages the interstate transmission businesses. EP Production includes the gas and oil exploration and production activities. There used to be three other divisions, but EP has divested most of these assets during the restructuring: The group has sold its Field Services division (midstream activities, including gathering, transportation and processing) and most of the assets of the Power segment.


Pipelines52.5%

Marketing and Trading21.0%

Power0.0%

Corporate & Other 2.0%

E&P 24.5%


OIL & GAS PROVED RESERVES BY REGION (FY 2007)

US onshore 62.7%

US offshore 28.7%

International 8.7%



<1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years >5 yearsFinancial debt 331 1,095 251 643 2,075 8,452

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB Stable Up: Debt repayment, improved E&P performance, strengthened credit metrics; Down: Greater-than-expected capital spending, weakening credit-protection measures, deteriorating liquidity

Moody's Ba3 Positive Acquisition debt paid down with proceeds from E&P sales, otherwise outlook change to stable

Fitch BB+ Stable Up: upstream operating results, strengthening credit measures; Down: Regulatory changes in North America, increased leverage or business risk, deteriorating margins

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

EP 7.125% 5/6/2009 Ba3p/ BB-s/BB+s EUR 500

BOND STRUCTURE

indirect stake partially over several levels

Debt amounts in USD mn

El Paso Exploration & Prod. 751

Southern Natural Gas Co. 1,134

Others 752

Colorado Interstate Gas Co. 575

Tennessee Gas Pipeline Co. 1,626

Total privileged debt USD 6.0 bn:

El Paso Corp.Holding company debt: 6,515

Noteholders

El Paso Natural Gas Co. 1,169

direct stake


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PROFIT AND LOSS (EL PASO CORP.)

in USD mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 4,783.0 3,359.0 4,281.0 2,220.0 4,648.0 2,422.0 5,400.0 5,788.0 5,966.0Raw materials used -1,168.0 -245.0 -238.0 -115.0 -245.0 -127.0 -286.2 -306.8 -316.2Personnel costs -1,565.0 -1,861.0 -1,319.0 -630.0 -1,333.0 -553.0 -1,512.0 -1,620.6 -1,670.5EBITDA reported 1,853.0 1,019.0 2,492.0 1,343.0 2,821.0 1,582.0 3,458.2 3,721.4 3,840.1Depreciation and amortization -2,039.0 -1,080.0 -1,065.0 -557.0 -1,176.0 -611.0 -1,318.0 -1,387.0 -1,414.7Other operating income/expenses -197.0 -234.0 -232.0 -132.0 -249.0 -160.0 -143.6 -139.2 -139.2EBIT reported -186.0 -61.0 1,427.0 786.0 1,645.0 971.0 2,140.2 2,334.4 2,425.4Income from investments 479.0 300.0 145.0 81.0 101.0 89.0 160.0 160.0 160.0Interest result -1,409.0 -1,161.0 -1,228.0 -514.0 -994.0 -454.0 -1,139.0 -1,216.9 -1,216.9Other financial items 0.0 0.0 -27.0 -287.0 -297.0 -16.0 0.0 0.0 0.0EBT -1,116.0 -922.0 317.0 66.0 455.0 590.0 1,161.2 1,277.5 1,368.5Extraordinary result -7.0 94.0 205.0 106.0 203.0 55.0 -49.0 0.0 0.0Taxes on income 116.0 331.0 9.0 -51.0 -222.0 -235.0 -325.1 -357.7 -383.2Net income -1,007.0 -497.0 531.0 121.0 436.0 410.0 787.1 919.8 985.3


in USD mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 21,544 17,717 18,385 19,303 20,968 21,031 22,508 24,298 24,948 thereof goodwill 421 0 0 0 0 0 0 0 0Cash & cash equivalents 2,117 2,132 537 309 285 274 196 220 258Total assets 31,383 31,840 27,261 22,818 24,579 25,226 25,743 27,238 27,791Equity incl. minorities 3,805 3,420 4,217 4,887 5,845 5,869 6,345 6,847 7,249Pension provisions 19,196 17,266 14,689 11,897 12,814 12,459 13,164 14,064 14,764Financial liabilities 955 984 1,360 440 331 1,236 681 1,581 2,281 short term (<1 year) 18,241 16,282 13,329 11,457 12,483 11,223 12,483 12,483 12,483 long term (>1 year) -187 -1,066 1,361 -891 -846 -1,189 -1,549 -1,411 -898Net working capital

CASH FLOW

in USD mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 1,738 846 1,929 1,043 2,115 1,285 2,105 2,323 2,265Change in working capital -422 -578 174 -178 -310 33 -103 -138 -513Operating cash flow 1,316 268 2,103 865 1,805 1,318 2,002 2,185 1,752CAPEX -1,651 -1,589 -2,164 -1,130 -2,495 -1,175 -2,500 -2,500 -2,500Free cash flow -335 -1,321 -61 -265 -690 143 -498 -315 -748Dividends -136 -427 -150 -75 -149 -87 -150 -158 -165Acquisitions/disposals 3,554 1,088 240 3,470 2,289 323 146 -298 -298Share buy back/issues 73 723 500 0 538 0 0 0 0FCF after extraordinary items 3,156 63 529 3,130 1,988 379 -502 -771 -1,211

DEBT ADJUSTMENTS

in USD mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions 98 105 0 -5 0 0 0 0 0For operating leases 318 182 87 87 108 264 108 108 108Others* 40 471 450 434 430 338 430 430 430


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PROFITABILITY RATIOS (EL PASO CORP.)

2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 38.7% 30.3% 58.2% 60.5% 60.7% 65.3% 64.0% 64.3% 64.4%EBITDA margin adj. 40.4% 45.8% 70.0% 62.0% 62.1% 66.7% 65.3% 65.4% 65.5%EBIT margin rep. -3.9% -1.8% 33.3% 35.4% 35.4% 40.1% 39.6% 40.3% 40.7%EBIT margin adj. -3.2% 11.8% 43.8% 35.6% 35.6% 40.6% 39.8% 40.5% 40.8%Return on capital (before tax) -6.9% -5.9% 1.1% 3.9% 3.5% 7.5% 5.1% 5.3% 5.5%


2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 1,853 1,019 2,492 1,343 2,821 1,582 3,458 3,721 3,840EBITDA adj. 1,932 1,540 2,998 1,376 2,887 1,615 3,524 3,787 3,906FFO rep. 1,738 846 1,929 1,043 2,115 1,285 2,105 2,323 2,265FFO adj. 1,785 909 1,986 1,072 2,170 1,305 2,160 2,378 2,320Net debt rep. 17,079 15,134 14,152 11,588 12,529 12,185 12,968 13,844 14,506Net debt adj. 17,534 15,892 14,689 12,104 13,067 12,787 13,506 14,383 15,045Total debt 19,196 17,266 14,689 11,897 12,814 12,459 13,164 14,064 14,764EBITDA net interest cover rep. 1.3 0.9 2.0 2.6 2.8 3.5 3.0 3.1 3.2EBITDA gross interest cover rep. 1.2 0.8 2.0 2.6 2.8 3.5 3.0 3.1 3.2EBIT net interest cover rep. -0.1 -0.1 1.2 1.5 1.7 2.1 1.9 1.9 2.0EBIT net interest cover adj. -0.1 0.3 1.5 1.5 1.6 2.1 1.9 1.9 2.0FFO rep. / total debt rep. 9.1% 4.9% 13.1% 14.3% 16.5% 18.9% 16.0% 16.5% 15.3%FFO rep. / net debt rep. 10.2% 5.6% 13.6% 14.7% 16.9% 19.3% 16.2% 16.8% 15.6%FFO adj. / net debt adj. 10.2% 5.7% 13.5% 14.5% 16.6% 18.8% 16.0% 16.5% 15.4%FOCF rep. / total debt rep. -1.7% -7.7% -0.4% -3.2% -5.4% -0.2% -3.8% -2.2% -5.1%FOCF rep. / net debt rep. -2.0% -8.7% -0.4% -3.3% -5.5% -0.2% -3.8% -2.3% -5.2%RCF rep. / net debt rep. 9.4% 2.8% 12.6% 13.3% 15.7% 18.0% 15.1% 15.6% 14.5%RCF adj. / net debt adj. 9.4% 3.0% 12.5% 13.2% 15.5% 17.5% 14.9% 15.4% 14.3%Total debt rep. / EBITDA rep. 10.4 16.9 5.9 5.2 4.5 4.1 3.8 3.8 3.8Net debt rep. / EBITDA rep. 9.2 14.9 5.7 5.1 4.4 4.0 3.7 3.7 3.8Net debt adj. / EBITDA adj. 9.1 10.3 4.9 4.2 4.5 4.1 3.8 3.8 3.9FFO rep. / net interest rep. 2.2 1.7 2.6 3.0 3.1 3.8 2.8 2.9 2.9FFO rep. / gross interest rep. 2.2 1.7 2.6 3.0 3.1 3.8 2.8 2.9 2.9Capex / sales 34.5% 47.3% 50.5% 50.9% 53.7% 48.5% 46.3% 43.2% 41.9%Capex / depreciation 171.6% 158.0% 206.7% 202.9% 212.2% 192.3% 189.7% 180.2% 176.7%

CAPITAL STRUCTURE

2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 83.5% 83.5% 77.7% 70.9% 68.7% 68.0% 67.5% 67.3% 67.1%Net debt / net capitalization rep. 81.8% 81.6% 77.0% 70.3% 68.2% 67.5% 67.1% 66.9% 66.7%Net debt / net capitalization adj. 82.5% 82.7% 77.7% 71.2% 69.1% 68.5% 68.0% 67.7% 67.5%Net working capital / sales -3.9% -31.7% 31.8% -21.9% -18.2% -24.5% -28.7% -24.4% -15.1%Fixed assets / sales 450.4% 527.4% 429.5% 473.7% 451.1% 433.6% 416.8% 419.8% 418.2%


Comment FY 2008 FY 2009 FY 2010Sales growth Will increase due to new investments, stable trend 16.2% 7.2% 3.1%EBITDA growth Stable trend after end of restructuring process 22.6% 7.6% 3.2%EBIT growth Stable trend after end of restructuring process 30.1% 9.1% 3.9%Capex incl. acquisition Includes investments in pipelines and new reserves 3,004 2,998 2,998Change in working capital Influenced by commodity prices -103 -138 -513Funds from operations (FFO) Stable trend due to new business mix 2,105 2,323 2,265


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Fresenius SE (BUY) Investment rationale We change our hold recommendation on Fresenius to buy given our expectation that,

driven by a sound operating momentum in its underlying business, Fresenius will de-leverage quickly after the closing of the USD 4.6 bn (EV) APP acquisition on September10. More specifically, we like the FREGR 13, which we have included in our model portfolio.The financing of the APP deal comprises a EUR 554 mn bond mandatory exchangeable into Fresenius Medical Care shares (roughly 6% of Fresenius stake in FMC), a EUR 289 mn rightsissue, USD 1.3 bn in high yield bonds and a USD 2.5 bn credit facility package. According tocompany sources, Fresenius wants to place a EUR 200 mn euro HY bond to refinance the USD 1.3 bn bridge facility, which, however, should already be well reflected in currentspreads. The bond is expected to be issued in the first week of October. All rating agenciesconfirmed their ratings at existing levels (BB for Fitch and S&P, Ba1 for Moody's), while reversing the outlooks to negative from stable. Fresenius released strong H1 2008 figures,showing strong organic growth while earnings were held back by currency effects.Fundamentally, we continue to like the name owing to its strong business momentum in all ofits business lines contributing to consistent earnings growth and predictable, non-cyclical cash flow streams. Adding APP's drug portfolio to its franchise will further boost Fresenius Kabi's presence in the fast growing intra venous drug market as well as expanding its footprint in theUS. Taking into account the exchangeable (and not treating it as debt) and the rights issue,we calculate a pro forma net leverage (not adjusted for pensions, leasing and contingencies) of around 3.6x. (Our model still assumes closing as of FYE 2008 and excludes APP's earnings contributions in FY 2008) This compares to a H1 reported leverage of 2.7x net debtto EBITDA and management's post acquisition leverage target of 2.5 – 3.0x in 2010.

Recent developments Moody's confirmed its Ba1 corporate family rating but revised the outlook to negative. The confirmation reflects the improvements in Fresenius' business profile with sizeable scaleand the recurring nature of revenue and cash flows. The negative outlook reflects theagency's expectation that Fresenius may not be able to restore credit metrics such as debt toEBITDA and CFO to debt back to levels commensurate with its Ba1 rating, i.e., towards 3.5x and 15%, respectively, over a 12 to 18 month time horizon.

On July 7, Fresenius announced the acquisition of APP Pharmaceuticals in order to enter the US market for generic intravenous drugs for an EV of USD 4.6 bn. Apart from a cash payment (USD 3.7 bn) and the assumption of debt (USD 940 mn), APP shareholders will receive a tradable Contingent Value Right (CVR of up to USD 980 mn) payable in Q2 2011. With the acquisition, Fresenius Kabi creates a global leader in the generic IV drugmarket and establishes a strong foothold in the US market. APP has grown strongly in the past – partly as a result of its good drug approval track record – with its EBITDA margin hovering in the 30-45% range in every year since 2001. Following sales of USD 647 mn and an EBITDA of USD 253 mn in FY 2007, APP with its Q2 earnings release revised its targets for 2008 upward, now expecting sales of USD 800-820 mn and an EBITDA of USD 320-350 mn for FY 2008. Kabi does not expect any cost synergies from the transaction. It also did not include top-line synergies from rolling out the newly acquired as well as its existing drug portfolio on an international basis. The company will be consolidated as of September 1, 2008.

Latest results recap Fresenius' final Q2 figures confirmed the preliminary figures announced in the course of the APP Pharmaceuticals acquisition. Q2 sales were EUR 2,912 mn (+3% y-o-y), EBITDA came in at EUR 515 mn (+3%) and EBIT was EUR 404 mn (+1%). H1 cash flowgeneration was impacted by higher working capital needs (EUR 143 mn) as a result of strong growth and acquisition-related outflows (EUR 224 mn), translating into a negative freeoperating cash flow of EUR 293 mn after dividend payments of EUR 218 mn. Leverage interms of net debt to EBITDA stood at 2.7x, up from 2.6x in Q1 (and FYE 2007). The company

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confirmed its guidance, saying it expects sales growth of 8%-10% and net income to rise by 10%-15%, both in constant currency terms for its "heritage" business.

CREDIT METRICS

EBITDA margins development Debt coverage

0

100

200

300

400

500

600

Q4

02

Q2

03

Q4

03

Q2

04

Q4

04

Q2

05

Q4

05

Q2

06

Q4

06

Q2

07

Q4

07

Q2

08

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%EBITDA FFO EBITDA margin

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2001

2002

2003

2004

2005

Q1

06

Q2

06

Q3

06

Q4

06

2006

Q1

07

Q2

07

Q3

07

Q4

07

2007

Q1

08

Q2

08

2.0

2.5

3.0

3.5

4.0

4.5



Liquidity Apart from the committed credit facilities for the APP deal and strong internal cash flow generation, the group had cash balances of EUR 341 mn at H1, and headroom of EUR 1.2 bn and around EUR 608 mn, respectively, under Fresenius' and FMC's RCF. Short-term maturities amounted to EUR 835 mn in H1 2008.


We view the APP acquisition as a good strategic fit which will slightly improve Fresenius business lines. Obviously, leverage is set to increase following the closing (September 10) ofthis strategic transaction, which was larger than what we had initially expected (we werelooking more at targets in the EUR 300 mn neighborhood) and again underscores Fresenius' opportunistic stance. From a fundamental perspective, however, we remain confident that the company will live up to its track record of de-leveraging large scale acquisitions. Management has set a leverage target of 2.5x-3.0x in 2010, which we believe should be achievable. However, de-leveraging should occur mostly through earnings growth rather than the actual repayment of debt, since cash flows from FMC accrue to the holding only via dividends. Operationally, we expect Fresenius to concentrate on the integration of the newly acquired assets and on the roll out of newly acquired and existing products through the Kabi franchise.Given limited headroom, there is little scope for further acquisitions. With respect to 2008, Fresenius' confirmed its fundamental outlook at its general meeting in May, expecting sales togrow by 8-10% and net income to rise by 10-15% (both in constant currency terms).

Main risks to our model The main risks to our model remain currency fluctuations, operating issues and further acquisitions mainly in the Helios segment. Our model reflects stable, non-cyclical cash-flow generation and favorable demographic trends benefiting its existing business units.

Things to watch ● Progress of de-leveraging, integration of APP and development of exchange rates



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CAPITALIZATION

Notes Issuer Fresenius AG Coupon Amount (in mn) Maturity Senior Notes 7.5% EUR 100 04/09 Senior Notes 5.0% EUR 500 01/13 Senior Notes 5.5% EUR 500 01/16 Other Indebtedness EUR 40 mn EIB variable interest Revolving Credit Facility, Maturity: 12/2019, option to convert into fixed interest loan EUR 96 mn EIB variable interest Term Loan, Maturity: 12/2019, option to convert into fixed interest loan Various Schuldschein/Euro notes totaling EUR 440 mn, EUR 42 mn PV capital Lease obligations


Senior Credit Facilities Borrower Fresenius Medical Care KGaA Senior Credit Facility Initial Amount (in USD mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Tranche A 1,550 2011 Amortizing 1.375% (margin grid) n.a. Tranche B 1,578 2013 Amortizing 1.375% (margin grid) n.a. Revolving Facility 1,000 2011 Bullet 1.375% (margin grid) n.a. Covenants Restriction of capital expenditure FY 2006: FY 2008: USD 600 mn, FY 2009: USD 700 mn, FY 2010/11: USD 700 mn Minimum Consolidated Fixed Charge Coverage: 1.2x over the life of the facilities Maximum Consolidated Leverage Ratio: Q4 2007: 4.0x, Q1-Q3 2008: 4.0x, Q4 2008: 3.5x, Q1-Q3 2009: 3.5x, Q4 2009 and thereafter: 3.0x Restriction on Dividends: FY 2008: USD 260 mn, FY 2009: USD 280 mn, 2010: USD 300 mn Notes Issuer FMC Finance USD 500 mn FREGR 6.875% 07/17 Issuer Fresenius Medical Care Trust Preferred Securities FMC Cap Trust IV 7.875% USD 225 06/2011 Bullet FMC Cap Trust V 7.375% EUR 300 06/2011 Bullet Other Indebtedness Account Receivable Facility, USD 650 mn EUR 90 mn EIB variable interest Revolving Credit Facility, Maturity: 07/2013, option to convert into fixed interest loan EUR 41 mn EIB variable interest Term Credit Facility, Maturity: 07/2013, option to convert into fixed interest loan EUR 90 mn EIB variable interest Term Loan, Maturity: 09/2014, option to convert into fixed interest loan EUR 200 mn Schuldschein loan, Maturity: 07/2009, EURIBOR plus margin (not disclosed)


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BOND DOCUMENTATION – FREGR 5% 01/31/13 AND FREGR 5.5% 01/31/16

Issuer Fresenius Finance B.V. Call/Put Call Schedule The 5.5% 01/31/16 issue is callable prior or on 01/31/11: 102.75%, 01/31/11: 102.75%, 01/31/12: 101.833%,

01/31/13: 100.92%, 01/31/14: 100.0% Equity claw back Prior to 2009 up to 35% of the notes Make whole clause Prior to 2013 in respect to the 2013 notes, Prior to 2013 in respect to the 2016 notes; both at Bund plus 50 bp Change of control 101% Guarantees Unconditional guarantees of Fresenius AG, Fresenius Kabi AG, Fresenius ProServe GmbH on a joint and several and

senior unsecured basis Security Guarantees only Ranking Equal in right to each other, subordinated to all senior indebtedness secured by liens on assets Certain Covenants Covenants do not apply for Fresenius Medical Care and its subsidiaries Limitation on Debt Consolidated Coverage ratio of at least 2.5x

Carve outs: – EUR 750 mn for working capital requirements, thereof only EUR 375 mn at subsidiaries – capital lease obligation to construct an asset up to EUR 100 mn

Limitation on Sale of Certain Assets – Receipt of the fair value as determined by the board and at least 70% thereof in cash – 100% of the cash receipt is applied to debt reduction or the acquisition of additional assets (within one year) or the

required redemption of notes. – Does not apply to asset sales if proceeds do not exceed EUR 20 mn on aggregate.

Limitation on Restricted Payments – Payments not exceeding 50% of consolidated net income of Fresenius AG and its subsidiaries (excluding Fresenius Medical Care and its subsidiaries), plus net cash proceeds from issuance of capital stock, plus the amount of a reduction of balance sheet debt by conversion into capital stock plus EUR 10 mn.

– Inability to incur additional indebtedness Limitations on Transactions with Affiliates Board resolution if transaction greater than EUR 5 mn



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BOND DOCUMENTATION – FREGR 7.375% 06/15/11

Issuer Fresenius Medical Care capital Trust V Call/Put Call Schedule No Equity claw back No Make whole clause No Change of control 101% Guarantees Fresenius Medical Care KGaA and material subsidiaries unconditionally guarantee on a joint and several and senior

subordinated basis Security EUR 300 mn liquidation amount of the trust's assets Ranking Pari passu with all other senior subordinated notes but subordinated to all senior indebtedness Certain Covenants Do not apply for Fresenius AG, Fresenius Kabi AG, Fresenius ProServe GmbH Limitation on Debt Consolidated Coverage ratio of at least 2.5x

Important carve outs: – Other Trust Preferred Securities as outlined above – capital lease obligation to construct an asset up to USD 200 mn – Accounts Receivables Securitization up to 85% of all reported receivables – Debt not exceeding USD 400 mn

Limitation on Sale of Certain Assets – Receipt of the fair value as determined by the board and at least 70% thereof in cash – 100% of the cash receipt is applied to debt reduction or the acquisition of additional assets (within one year) or the

required redemption of notes as outlined in the indenture. – Does not apply to asset sales if proceeds do not exceed EUR 20 mn on aggregate.

Limitation on Restricted Payments – Payments not exceeding 50% of consolidated net income of Fresenius Medical Care since January 1 2000, plus net cash proceeds from issuance of capital stock, plus the amount of a reduction of balance sheet debt by conversion into capital stock.

– Inability to incur additional indebtedness Limitations on Transactions with Affiliates Board resolution if transaction greater than EUR 5 mn



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Business Description – Fresenius Bad Homburg, Germany, based Fresenius SE (www.fresenius.se) is the world's leading provider in dialysis products and services through its listed subsidiary Fresenius Medical Care (www.fmc-ag.com), and infusion (including I.V. drugs) and nutrition therapies through its wholly-owned Kabi subsidiary. Its subsidiary Fresenius Vamed designs, plans and manages health care facilities and Fresenius Helios ranks among the leading private acute care hospital operators in Europe, especially Germany. Fresenius Biotech is focusing on the development of biopharmaceuticals. The unit has submitted its promising Removab drug for regulatory approval (expected H1 2009). Fresenius SE, which has 110,000 employees, has a market capitalization of around EUR 8.9 bn and its subsidiary FMC of EUR 11.2 bn as of September 2008.


Fresenius Medical Care

67.7%

Fresenius Kabi15.1%

Fresenius ProServe

17.2%



Fresenius Medical Care

68.8%

Fresenius Kabi19.6%

Fresenius ProServe

11.6%




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB Negative Up adj. debt/EBITDA of 3.0x ; FFO/debt of 20-25%

Moody's Ba1 Negative Up: CFO/Debt > 20%, Debt/EBITDA <2.75; Down: CFO/Net adjusted debt <15% and leverage above 3.5x

Fitch BB Negative Up: Reduced gross leverage, likelihood of debt financed M&A reduced; Down: major debt-financed acquisition, significant litigation payouts

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

FMEGR 7.375% 6/15/2011

B+/ B1/B+ EUR 300

FREGR 5.5% 1/31/2016

BB/ Ba2/-- EUR 500 1/31/2011 (102.75)

FREGR 5% 1/31/2013 BB/ Ba2/BB EUR 500

BOND STRUCTURE

FreseniusFinance

B.V.

Fresenius SE

Noteholders

100% 100%Senior Guarantee

FreseniusProServe

GmbH

FreseniusMedical Care(FMC) KGaA

36.9% 100%

Senior Guarantee

FreseniusKabi AG

FMCHoldings, Inc.

FMCDtld. GmbH

Trust Noteholders

Senior Subordinated Guarantee

100%SeniorSubord.

Note


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PROFIT AND LOSS (FRESENIUS)

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 7,507 7,064 7,271 7,889 10,777 5,592 11,358 5,710 11,860 13,055 14,403Cost of goods and services sold -5,071 -4,788 -4,895 -5,200 -7,351 -3,768 -7,680 -3,879 -8,065 -8,616 -9,477Distribution expenses -1,461 -1,374 -1,398 -1,571 -1,815 -960 -1,885 -957 -1,993 -2,193 -2,405R&D expenses -138 -121 -133 -149 -167 -84 -184 -93 -190 -209 -230EBITDA reported 1,178 1,106 1,160 1,289 1,843 977 2,029 998 2,063 2,517 2,810EBIT reported 837 781 845 969 1,444 780 1,609 781 1,613 2,037 2,290Adj. EBIT (bef. pension interest) 939 863 936 1,087 1,573 844 1,730 844 1,719 2,159 2,412Interest result -270 -249 -209 -203 -395 -185 -368 -167 -373 -513 -473Other financial items 0 0 0 0 0 0 0 0 -35 0 0EBT reported 567 532 636 766 1,049 595 1,241 614 1,205 1,524 1,817Taxes on income -210 -223 -253 -298 -414 -214 -448 -214 -422 -579 -690Net income 357 309 383 468 635 381 793 400 783 945 1,127


in EUR mn 2,002 2,003 2,004 2,005 2,006 H1 07 2,007 H1 08 2008e 2009e 2010eFixed assets 5,783 5,202 5,081 7,577 10,367 10,523 10,611 10,564 13,940 14,400 14,680 thereof goodwill 3,405 2,977 2,905 4,680 7,107 7,706 7,094 6,934 9,532 9,567 9,567Cash & cash equivalents 163 125 140 252 261 306 361 341 382 382 382Total assets 8,915 8,347 8,188 11,594 15,024 15,343 15,324 15,491 18,940 19,550 20,030Equity incl. minorities 3,369 3,214 3,347 5,130 5,728 5,895 6,059 6,073 6,582 7,287 7,813Pension provisions 224 216 228 305 310 310 270 279 290 290 290Other provisions 1,248 397 405 607 652 652 725 728 725 725 725Financial liabilities 3,284 3,023 2,735 3,502 5,872 5,909 5,699 5,805 8,603 8,408 8,237 short term (<1 year) 606 630 583 447 596 523 932 835 932 932 932 long term (>1 year) 2,678 2,393 2,152 3,055 5,276 5,909 4,767 4,970 7,671 7,476 7,305Net working capital 1,601 987 992 1,068 1,154 1,285 1,100 1,319 1,197 1,247 1,322

CASH FLOW

in EUR mn 2,002 2,003 2,004 2,005 2,006 H1 07 2,007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 760 627 720 781 1,045 582 1,458 624 1,453 1,625 1,847Change in working capital -63 149 131 -25 7 -29 -162 -143 -97 -50 -75Operating cash flow 697 776 851 756 1,052 553 1,296 481 1,356 1,575 1,772CAPEX -377 -322 -308 -353 -589 -297 -704 -332 -750 -800 -900Free cash flow 320 454 543 403 463 256 592 149 606 775 872Dividends -101 -114 -122 -132 -171 -188 -205 -218 -220 -240 -260Acquisitions/disposals -67 -57 -90 -1,584 -3,201 -162 -354 -224 -2,942 -340 -440Share buy back/issues 0 0 0 1,009 75 0 55 0 300 0 0FCF after extraordinary items 152 283 331 -304 -2,834 -94 88 -293 -2,255 195 172

DEBT ADJUSTMENTS

in EUR mn 2,002 2,003 2,004 2,005 2,006 H1 07 2,007 H1 08 2008e 2009e 2010eFor pensions 230 210 251 305 310 310 271 280 291 290 290For operating leases 887 690 774 997 1,100 1,100 1,049 1,100 1,106 1,049 1,049Others* 1,063 110 91 85 97 85 87 72 79 79 79


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PROFITABILITY RATIOS (FRESENIUS)

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 15.7% 15.7% 16.0% 16.3% 17.1% 17.5% 17.9% 17.5% 17.4% 19.3% 19.5%EBITDA margin adj. 18.7% 18.6% 18.9% 19.7% 19.8% 20.0% 20.4% 20.0% 19.8% 21.5% 21.5%EBIT margin rep. 11.1% 11.1% 11.6% 12.3% 13.4% 13.9% 14.2% 13.7% 13.6% 15.6% 15.9%EBIT margin adj. 12.5% 12.2% 12.9% 13.8% 14.6% 15.1% 15.2% 14.8% 14.5% 16.5% 16.7%Return on capital (before tax) 8.5% 8.5% 10.5% 8.9% 9.0% 11.5% 10.6% 12.1% 8.2% 9.7% 11.3%


2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 1,178 1,106 1,160 1,289 1,843 977 2,029 998 2,063 2,517 2,810EBITDA adj. 1,401 1,316 1,372 1,556 2,129 1,120 2,312 1,140 2,347 2,801 3,094FFO rep. 760 627 720 781 1,045 582 1,458 624 1,453 1,625 1,847FFO adj. 881 755 841 930 1,202 661 1,620 703 1,632 1,787 2,009Net debt rep. 3,121 2,898 2,595 3,250 5,611 5,603 5,338 5,464 8,221 8,026 7,855Net debt adj. 5,301 3,907 3,712 4,637 7,118 7,098 6,745 6,916 9,697 9,444 9,273Total debt 3,284 3,023 2,735 3,502 5,872 5,909 5,699 5,805 8,603 8,408 8,237EBITDA net interest cover rep. 4.4 4.4 5.6 6.3 4.7 5.3 5.5 6.0 5.5 4.9 5.9EBITDA gross interest cover rep. 4.0 4.0 5.2 5.8 4.4 5.3 5.1 6.0 5.2 4.7 5.6EBIT net interest cover rep. 3.1 3.1 4.0 4.8 3.7 4.2 4.4 4.7 4.3 4.0 4.8EBIT net interest cover adj. 2.6 2.7 3.3 3.6 3.1 3.5 3.7 3.8 3.7 3.5 4.2FFO rep. / total debt rep. 23.1% 20.7% 26.3% 22.3% 17.8% 19.6% 25.6% 25.8% 16.9% 19.3% 22.4%FFO rep. / net debt rep. 24.4% 21.6% 27.7% 24.0% 18.6% 20.6% 27.3% 27.5% 17.7% 20.2% 23.5%hi 16.6% 19.3% 22.6% 20.1% 16.9% 18.6% 24.0% 24.0% 16.8% 18.9% 21.7%FOCF rep. / total debt rep. 9.7% 15.0% 19.9% 11.5% 7.9% 13.3% 10.4% 9.7% 7.0% 9.2% 10.6%FOCF rep. / net debt rep. 10.3% 15.7% 20.9% 12.4% 8.3% 14.0% 11.1% 10.3% 7.4% 9.7% 11.1%RCF rep. / net debt rep. 21.1% 17.7% 23.0% 20.0% 15.6% 17.0% 23.5% 23.2% 15.0% 17.3% 20.2%RCF adj. / net debt adj. 14.7% 16.4% 19.4% 17.2% 14.5% 15.7% 21.0% 20.6% 14.6% 16.4% 18.9%Total debt rep. / EBITDA rep. 2.8 2.7 2.4 2.7 3.2 3.0 2.8 2.8 4.2 3.3 2.9Net debt rep. / EBITDA rep. 2.6 2.6 2.2 2.5 3.0 2.9 2.6 2.7 4.0 3.2 2.8Net debt adj. / EBITDA adj. 3.8 3.0 2.7 3.0 3.3 3.2 2.9 3.0 4.1 3.4 3.0FFO rep. / net interest rep. 3.8 3.5 4.4 4.8 3.6 4.1 5.0 4.7 4.9 4.2 4.9FFO rep. / gross interest rep. 3.6 3.3 4.2 4.5 3.5 4.1 4.7 4.7 4.6 4.0 4.7Capex / sales 5.0% 4.6% 4.2% 4.5% 5.5% 5.3% 6.2% 5.8% 6.3% 6.1% 6.2%Capex / depreciation 110.6% 99.1% 97.8% 110.3% 147.6% 150.8% 167.6% 153.0% 166.7% 166.7% 173.1%

CAPITAL STRUCTURE



Comment FY 2008 FY 2009 FY 2010Sales growth APP as of Dec 31, 2008 4.4% 10.1% 10.3%EBITDA growth APP as of Dec 31, 2008 1.7% 22.0% 11.7%EBIT growth APP as of Dec 31, 2008 0.2% 26.3% 12.4%Capex incl. acquisition Companies guidance, own estimates 3,702 1,150 1,350Change in working capital W/c build up due to sales growth -97 -50 -75Funds from operations (FFO) Earnings power to support cash flow generation 1,453 1,625 1,847


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Grohe (Buy FRN/Hold Sub) Investment rationale We have changed our recommendation on Grohe's FRN from hold to buy, given

expected further volume growth, announced price increases, structural improvementsin the company's cost structure as well as a reasonable level of asset protection through the senior note. However, we maintain our hold recommendation on thesubordinated bonds and are neutral in CDS. While we acknowledge the high-beta character of the name, owing to considerable leverage as well as slowing construction activity in many of its core markets, we believe that Grohe has coped well with the challenges in the past, showing ongoing sales and earnings growth, which is increasingly supported by volumegains. On the operating side, the company has made significant inroads in improving its cost structure, which should contribute to a continuing positive earnings and margin trend. With itsgood track record in pushing through price increases, we believe the company should be well prepared to recover the recent and future price hikes relating to energy and brass. In theabsence of further restructuring-related cash outflows (expected to subside in 2009), cash flow generation in operating free cash flow terms should rebound to sustainably positive territory, in our view. As key risks we identify Grohe's vulnerability to negative headlines, such as deteriorating macro fundamentals, especially in the Middle East and Eastern Europeangrowth markets, the antitrust fine (now expected for 2009) and further growth investments.

Y-O-Y GROWTH RATES FOR REGIONS… BRASS PRICE DEVELOPMENT

-40%

-20%

0%

20%

40%

60%

80%

100%

German

y

Rest o

f Euro

pe

France

Spain

North A

merica

Far Eas

t

Rest o

f worl

dTota

l

Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

8/1/

2004

12/1

/200

4

4/1/

2005

8/1/

2005

12/1

/200

5

4/1/

2006

8/1/

2006

12/1

/200

6

4/1/

2007

8/1/

2007

12/1

/200

7

4/1/

2008

8/1/

2008

US

D/M

T

CopperZincBrass

Source: Grohe, Bloomberg, UniCredit Global Research

Latest results recap Grohe delivered a good set of Q2 results, driven by solid volume growth and buoyant markets in Eastern Europe and the Middle East, which offset persisting weakness in the UK and North America. Q2 2008 sales were up 4.4% to EUR 258.2 mn, driven by priceincreases (+4.1%) and – following flat volumes in FY 2008 and only marginal growth of 1.2%in Q1 – more importantly volume gains of 4.0%. Together these developments more thancompensated for adverse currency effects (-3.7%). From a regional perspective, growth (in H1!) continued to be driven by Eastern Europe (+26.3%), the Netherlands (+13.9%) as well as the Middle East (not quantified), while sales dropped in North America (-29.4%), Spain (-13.1%), and the UK (-18.0%). On its home turf Germany, sales rose 4.9%, while the overall market according to management shrank by 3%. Grohe's normalized EBITDA rose 27.8% to EUR 58.4 mn after being adjusted for, among other things, restructuring expenses of EUR16.0 mn. Its EBITDA margin improved to 21.7% versus 19.0% y-o-y. The strong performance was partly the result of the significant improvements in its production efficiency, with its gross profit margin rising to 42.1% in the quarter from 36.9% y-o-y. Implemented price increases torecover feedstock cost inflation contributed as well. The cost savings in operations were partly offset by an increase in personnel expenses, which rose by EUR 3.5 mn y-o-y as Grohe

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accelerated spending on promotional and advertising expenses as well as salescommissions. H1 cash flow generation, however, remained weak owing in part to EUR 33.8 mn in restructuring-related outflows (vs. EUR 14.7 mn y-o-y) as well as the seasonal working capital build-up of EUR 53 mn (vs. EUR 13.2 mn y-o-y). Consequently, debt levels rose to EUR 1.1 bn on Grohe's operating cash outflow after capex of EUR 73.4 mn in H1, butleverage declined to 5.1x on a normalized EBITDA basis (compared to 5.4x at Q1 and 5.0x atFYE 2007) as a result of the strong improvement in profitability.

Liquidity Grohe's prime liquidity sources remain the EUR 47 mn in cash as well as EUR 141 mn headroom under existing lines of credit including its revolving credit facility as of H1.With short-term liabilities being limited (EUR 11 mn), no imminent debt maturities and our expectations of improving cash flow generation, we consider Grohe's liquidity to be safe. The verdict in the EU's antitrust probe (fine of up to EUR 100 mn) is now expected for beginning of 2009. The company's balance sheet shows a restructuring provision of EUR 63.8 mn as ofFYE 2007, which indicates a more reasonable expectation of a fine of around EUR 50-55 mn(and, unfortunately, more restructuring-related cash-outs), in our view. A fine in such an amount should evidently be comfortably covered by existing liquidity sources.

Expected credit profile development

Grohe's operating performance should benefit from further price increases as well as continuing volume growth. While management in the past was very enthusiastic aboutnewly launched innovative products, we have been waiting to see the announcementstranspire into tangible results. Grohe now put numbers behind its talk, with Q2 volume growth of 4.0% being in line with management's target of 3-4%. Growth was achieved despite a noticeable slowdown in key markets (the UK, Spain), with Grohe claiming market share gainsin most market it operates in. Backed by sound volume growth, Grohe will further raise pricesby on average 6.7% to recover cost increases mainly on the energy front, which shouldsupport both top-line as well as earnings in the medium term. In addition, Grohe has made significant inroads in improving its cost structure as evidenced by the gross margin increase. Currently, management is pursuing further cost savings (redundancies in its middlemanagement), aiming to slash overhead costs by 18% (FY 2007 administration costs EUR28.5 mn). Restructuring costs should wind down in 2009, according to statements in theearnings call. With respect to working capital, Grohe does not see a trend reversal, sayingthat it expects H1's DSO (51 days) and DSI (76 days) to return to levels more in line with those seen at FYE 2007 (42 and 63, respectively), which should benefit cash flow generationin H2. Overall, we expect a continuation of the company's positive credit profile trend (recentlyacknowledged by Moody's outlook revision to stable). We expect future growth to stem from emerging markets, where there is currently little evidence for a slowdown in demand. More on the negative side, we note that expansion investments (potentially new plant in Russia), the antitrust fine expected in early 2009, and further restructuring-related cash-outs are expected to burden cash flow generation likely until at least mid-2009.

Main risk factors Main risks to our model remain slowing volumes and failure to implement price increases amid rising input costs (mainly energy), additional working capital requirements, adverse FX movements, a higher-than-expected cartel fine, M&A and other growth-related investments.

Things to watch ● Development of volume and input costs; cash outflows for restructuring, the antitrust fine

and growth investments

● End of November 2008: Q3 2008 results


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CAPITALIZATION

Senior Credit Facilities Borrower Grohe Water Technology Verwaltungs AG Senior Credit Facility Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Revolving facility 150.0 07/11 Bullet 1.75%margin ratchet) 0.75%Covenants Priority security on certain assets; restriction on asset disposals; limitation of additional indebtedness; restricted payments Notes Issuer Grohe Holding GmbH Senior Notes 6 11/10 Bullet 11.5% Senior Notes 335 10/14 Bullet 8.625% Senior secured Floater 800 01/14 Bullet Euribor +287.5 bp Other Indebtedness Negligible


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BOND DOCUMENTATION – GROHE 8.625% 10/01/14

Issuer Grohe Holding GmbH Call/Put Call Schedule On or after October 1, 2009: 104.312%; 2010: 102.875%; 2011: 101.437; 2012 and thereafter: 100% Equity claw back Prior to October 1, 2007 up to 40% at 108.625% Make whole clause Prior to October 1, 2009 at bunds + 50 bp Change of control 101% Guarantees On a subordinated basis by Grohe Beteiligungs GmbH, Grohe AG and by restricted subsidiaries which represented

66.6% of consolidated sales, 82.8% of normalized EBITDA and 80.8% of total assets as of September 30, 2006, 2004Security – Second-priority interest in all of the issued share of intermediate holding company Glacier Zweite

– Second-priority security interest in the profit and loss pooling agreement between issuer and intermediate holding company Glacier Zweite

Ranking – Structurally subordinated to all existing and future secured indebtedness of the issuer – Subordinated to all senior existing and future indebtedness of the subsidiary guarantors – Equal to all senior subordinated existing and future indebtedness of the subsidiary guarantors that is not

subordinated to the notes Certain Covenants Limitation on Debt Fixed charge coverage ratio of at least 2.0x

Most important carve-out/exceptions: – Indebtedness and letters of credit of company and subsidiaries of up to EUR 900 mn less aggregate amount of

asset sales – Subordinated shareholder loans – Guarantees by the issuer or any restricted subsidiary – Non-recourse receivables financing – General Basket not exceeding the greater of a) EUR 40 mn and b) 6% of total tangible assets

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash, the assumption of liabilities or replacement of assets and is within 365 days 100% applied for debt reduction, capex or for acquisition of permitted businesses Most important carve-out/exceptions: – Excess proceeds of up to EUR 15 mn – Excess proceeds exceeding EUR 15 mn have to be used to offer to redeem notes and pari passu debt at par

Limitation on Restricted Payments – 50% of consolidated net income (minus 100% of such negative amount) plus – Equity proceeds plus – Up to EUR 7.5 mn p. a. of stock repurchases (e. g. stock options); unused amounts can be carried over to next

year up to EUR 15 mn – Dividends to cover various expenses arising in the course of business and management fees to parent – Up to EUR 10 mn for employee stock ownership plans – General basket for restricted payments is EUR 30 mn




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BOND DOCUMENTATION – GROHE FLOAT EURIBOR + 287.5 BP 01/15/14

Issuer Grohe Holding GmbH Call/Put Call Schedule On or after July 15, 2008: Equity claw back No Make whole clause Prior to July 15, 2008 at bunds + 50 bp Change of control 101% Guarantees On a senior basis by Grohe Beteiligungs GmbH, Grohe AG and by restricted subsidiaries which represented 66.6% of

consolidated sales, 82.8% of normalized EBITDA and 80.8% of total assets as of September 30, 2006, 2004

Security – First-priority interest in all of the capital stock held by the issuer and the restricted subsidiaries – Certain bank accounts of the issuer and certain restricted subsidiaries – Intellectual property rights of certain restricted subsidiaries – All intercompany receivables held by the issuer and certain receivables held by the restricted subsidiaries – Real property held by certain restricted subsidiaries

Ranking – Senior secured obligations of the issuer – Subordinated to the revolving credit facilities and all debt by non guarantor subsidiaries

Certain Covenants Limitation on Debt Fixed charge coverage ratio of at least 2.0x and senior secured debt to EBITDA of at least 5.5x


asset sales – Subordinated shareholder loans – Guarantees by the issuer or any restricted subsidiary arising in the normal course of business – Non-recourse receivables financing – General Basket not exceeding the greater of a) EUR 40 mn and b) 6% of total tangible assets

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash, the assumption of liabilities or replacement of assets and is within 365 days 100% applied for debt reduction, capex or for acquisition of permitted businesses Most important carve-out/exceptions: – Excess proceeds of up to EUR 15 mn – Excess proceeds exceeding EUR 15 mn have to be used to offer to redeem notes and pari passu debt at par

Limitation on Restricted Payments – 50% of consolidated net income (minus 100% of such negative amount) plus – Equity proceeds plus – Up to EUR 7.5 mn p. a. of stock repurchases (e. g. stock options); unused amounts can be carried over to next

year up to EUR 15 mn – Up to EUR 6 mn p. a. of the proceeds of an IPO – Dividends to cover various expenses arising in the course of business and management fees to parent – Up to EUR 10 mn for employee stock ownership plans – General basket for restricted payments is EUR 30 mn




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Business Description – Grohe Holding GmbH Grohe is Europe's largest manufacturer of sanitary fittings, concentrating on the medium and high-end of the sanitary products market. Products include faucets, showerheads, shower systems as well as sanitary technology products, such as flushing and installation systems. The company is active in Europe, with a strong presence in Germany. Grohe also exports its products to North America and the Middle and Far East. The company was bought by funds advised by B.C. Partners in December 1999. B.C. Partners in July 2004 sold Grohe to a fund advised by Texas Pacific Group (50%) and DLJ Merchant Banking Funds (50%).

EMPLOYEES BY REGION

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Germany Rest of Europe Overseas Total

FY 2004 FY 2005 FY 2006 FY 2007


SALES BY BUSINESS LINE (FY 2007)

Grohe Bathroom Fittings44.8%Grohe Kitchen

Faucets0.1%

Other Grohe Products

3.2%Grohe Sanitary Systems15.6%

Grohe Shower & Shower Systems36.2%



2007 2008 2009 2010 2011 >2011Financial debt 10 1 1 1 1 1,135

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B Stable EBITDA cash-interest coverage of around 2.5x; total pension-adjusted debt to EBITDA to improve to about 6.0x in 2006

Moody's B2 Negative Down: deterioration of liquidity; Total adjusted debt to EBITDA towards 7x for stable outlook

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

GROHE 8.625% 10/1/2014

CCC+s/ B3n/ -- EUR 335 10/1/2009 (104.31)

GROHE Float 1/15/2014

Bs/ B2n/ -- EUR 800 7/15/2008 (100)

BOND STRUCTURE

TPG Partners IV, LP

Senior securedfloating notesGROHE Float 14-08

DLJ Merchant Banking Funds

Grohe Holding GmbH

Grohe BeteiligungsGmbH

Grohe AG

Non-guarantorsubsidiaries

AdditionalSubsidiary Guarantors

Revolving Credit FacilityEUR 150 mn

Seniorguarantee

66.6% Sales82.8% EBITDA

80.8% Assets

GROHE 8.625% 10/14senior notes

Subordinated guarantee


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PROFIT AND LOSS (GROHE HOLDING GMBH)

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 889.1 911.2 865.3 939.2 512.6 1,016.7 526.5 1,067.6 1,083.6Cost of goods and services sold -515.4 -545.6 -548.7 -600.9 -312.8 -625.6 -305.2 -629.9 -639.3Distribution expenses -192.2 -201.0 -193.1 -210.3 -109.8 -216.1 -117.5 -243.4 -249.2Administration -31.9 -30.6 -28.4 -28.1 -14.3 -28.5 -13.5 -27.0 -28.5Other operating income/expenses -100.1 -216.6 -219.8 -137.6 -102.4 -273.7 -76.0 -138.1 -121.7EBITDA reported 156.1 72.2 32.0 109.7 45.4 10.3 78.7 159.2 174.8EBIT reported 49.3 -82.6 -124.6 -37.7 -26.7 -127.1 14.4 29.2 44.8Adj. EBIT (bef. pension interest) 88.7 40.9 12.4 35.0 29.9 74.5 49.6 90.2 105.9Income from investments 0.4 0.6 1.1 1.9 0.8 2.3 1.5 2.0 2.0Interest result -61.0 -80.2 -78.6 -83.1 -43.6 -87.9 -43.6 -88.0 -88.0EBT reported -11.3 -162.1 -202.1 -118.9 -69.6 -212.8 -27.7 -56.8 -41.2Extraordinary result 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Taxes on income -18.0 30.5 60.7 22.4 2.8 6.5 2.1 10.0 10.0Net income -29.3 -131.6 -141.4 -96.4 -66.8 -206.3 -25.6 -46.8 -31.2


in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 756 1,649 1,494 1,377 1,317 1,267 1,214 1,161 1,076 thereof goodwill 372 795 724 670 644 617 590 545 473Cash & cash equivalents 88 63 36 58 54 123 47 69 87Total assets 1,214 2,067 1,884 1,806 1,741 1,729 1,682 1,651 1,616Equity incl. minorities 4 360 225 124 58 0 0 -33 -33Shareholder loans 112 0 0 0 0 0 0 0 0Pension provisions 135 144 144 151 155 157 161 161 162Other provisions 170 341 291 215 198 268 233 233 183Financial liabilities 742 1,158 1,127 1,199 1,199 1,149 1,146 1,149 1,149 short term (<1 year) 54 24 13 0 58 14 11 11 11 long term (>1 year) 687 1,135 1,114 1,199 1,141 1,135 1,135 1,135 1,138Net working capital 252 273 240 237 233 93 161 127 115

CASH FLOW

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) 111 89 -41 23 18 -37 31 22 50Change in working capital -26 -23 48 -38 -14 177 -88 -34 13Operating cash flow 86 66 7 -14 4 140 -57 -12 63CAPEX -42 -40 -37 -33 -9 -24 -17 -40 -45Free cash flow 44 26 -30 -47 -5 116 -73 -52 18Dividends 1 0 0 0 0 0 0 0 0Acquisitions/disposals -3 0 33 7 0 1 0 0 0Share buy back/issues -229 0 0 -2 -1 0 0 0 0FCF after extraordinary items -187 26 2 -42 -6 117 -74 -52 18

DEBT ADJUSTMENTS

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions 163 160 160 162 164 164 166 166 166For operating leases 14 14 14 14 14 14 14 14 14Others* 0 0 0 0 0 50 50 50 50


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PROFITABILITY RATIOS (GROHE HOLDING GMBH)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 17.6% 7.9% 3.7% 11.7% 8.9% 1.0% 15.0% 14.9% 16.1%EBITDA margin adj. 22.4% 21.8% 19.9% 19.8% 20.2% 21.2% 22.0% 21.0% 22.1%EBIT margin rep. 5.5% -9.1% -14.4% -4.0% -5.2% -12.5% 2.7% 2.7% 4.1%EBIT margin adj. 10.0% 4.5% 1.4% 3.7% 5.8% 7.3% 9.4% 8.4% 9.8%Return on capital (before tax) -1.6% -10.7% -15.0% -9.1% -7.8% -18.7% -11.3% -5.3% -3.9%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 156 72 32 110 45 10 79 159 175EBITDA adj. 199 199 172 186 104 215 116 224 239FFO rep. 111 89 -41 23 18 -37 31 22 50FFO adj. 116 92 -38 27 19 -34 33 26 53Net debt rep. 653 1,095 1,090 1,141 1,145 1,025 1,098 1,080 1,062Net debt adj. 830 1,268 1,264 1,317 1,322 1,253 1,327 1,309 1,292Total debt 742 1,158 1,127 1,199 1,199 1,149 1,146 1,149 1,149EBITDA net interest cover rep. 2.6 0.9 0.4 1.3 1.0 0.1 1.8 1.8 2.0EBITDA gross interest cover rep. 2.4 0.9 0.4 1.3 1.0 0.1 1.8 1.8 1.9EBIT net interest cover rep. 0.8 -1.0 -1.6 -0.5 -0.6 -1.4 0.3 0.3 0.5EBIT net interest cover adj. 1.4 0.5 0.2 0.4 0.7 0.8 1.1 1.0 1.2FFO rep. / total debt rep. 15.0% 7.7% -3.6% 1.9% 1.7% -3.2% -2.1% 2.0% 4.3%FFO rep. / net debt rep. 17.0% 8.1% -3.8% 2.0% 1.7% -3.6% -2.2% 2.1% 4.7%FFO adj. / net debt adj. 13.9% 7.3% -3.0% 2.0% 1.8% -2.7% -1.5% 2.0% 4.1%FOCF rep. / total debt rep. 5.9% 2.2% -2.7% -3.9% 6.2% 10.1% 11.2% -4.5% 1.5%FOCF rep. / net debt rep. 6.7% 2.4% -2.8% -4.1% 6.5% 11.3% 11.7% -4.8% 1.7%RCF rep. / net debt rep. 17.2% 8.1% -3.8% 2.0% 1.7% -3.6% -2.2% 2.1% 4.7%RCF adj. / net debt adj. 14.0% 7.3% -3.0% 2.0% 1.8% -2.7% -1.5% 2.0% 4.1%Total debt rep. / EBITDA rep. 4.8 16.0 35.2 10.9 13.0 111.8 26.3 7.2 6.6Net debt rep. / EBITDA rep. 4.2 15.2 34.1 10.4 12.4 99.8 25.2 6.8 6.1Net debt adj. / EBITDA adj. 4.2 6.4 7.3 7.1 6.6 5.8 5.8 5.9 5.4FFO rep. / net interest rep. 2.8 2.1 0.5 1.3 1.4 0.6 1.7 1.3 1.6FFO rep. / gross interest rep. 2.7 2.1 0.5 1.3 1.4 0.6 1.7 1.2 1.6Capex / sales 4.7% 4.4% 4.3% 3.5% 1.7% 2.3% 3.2% 3.7% 4.2%Capex / depreciation 39.2% 25.8% 80.2% 190.2% 18.9% 127.0% 25.8% 147.1% 165.4%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. 99.4% 76.3% 83.3% 90.7% 95.4% 100.0% 100.0% 103.0% 103.0%Net debt / net capitalization rep. 99.3% 75.3% 82.9% 90.2% 95.2% 100.0% 100.0% 103.2% 103.2%Net debt / net capitalization adj. 102.9% 78.7% 85.8% 92.1% 96.4% 100.6% 100.4% 103.0% 103.0%Net working capital / sales 28.4% 30.0% 27.7% 25.3% 23.7% 9.2% 15.6% 11.9% 10.6%Fixed assets / sales 85.0% 180.9% 172.6% 146.6% 133.7% 124.6% 117.8% 108.8% 99.3%


Comment FY 2008 FY 2009Sales growth Price increases and volume growth offset currency effects 5.0% 1.5%EBITDA growth Not meaningful due to restructurings n.m. n.m.EBIT growth Not meaningful due to restructurings n.m. n.m.Capex incl. acquisition Slightly increasing 40 45Change in working capital Sales growth, restructuring outflows -34 13Funds from operations (FFO) Turnaround expected 22 50


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Heckler & Koch (BUY) Investment rationale We continue to have a buy recommendation for the HECKKO 9.25% 07/11 bond.

Although the bond trades slightly above par, we like the low cyclicality and high sales visibility of Heckler & Koch's ("HK") business. HK's contracted order book at Q2 2008 was at a record level of EUR 241.1 mn and the company had EUR 531.7 mn in awarded programs after it signed a large Middle Eastern country contract. Positive is also the good liquidity situation of the company (Q2 2008 cash of EUR 27 mn and no debt redemptions before July 2011). HK expects an improving 2008 performance. We note that the credit story is not the classic deleveraging story, however, bond issuance in 2004 was originally intended to fund thegrowth of its US business, which, however, did not materialize. Therefore, HK's sales focus is now to ensure to win all opportunities available and this has resulted in a large number of smaller orders. This positively increases the diversification of HK's cash flows and order book and should ensure that a revenue drop like in 2006 – due to the maturity of one large order –is not repeated. The company said that it would like to repay its HY bond with its first call on or after July 2008 at 104.625. However, we think that refinancing the bond on the loan market is currently not possible at reasonable conditions for the company. An exit of the twoshareholders is also rather unlikely for the time being, in our view, given that the absolute EBITDA and EV is still below its peak levels from 2003-2005.

REVENUES CONTINUE TO BE POSITIVE Q2 2008 ORDER BOOK AT RECORD LEVELS

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Latest results recap On July 24, Heckler & Koch released good H1 results with improving credit metrics. Revenues increased by 10.6% to EUR 75.2 mn and the EBIT margin improved to 17.0% vs. 9.6% y-o-y. The gross profit margin decreased slightly to 32.7% vs. 33.0% y-o-y due to changes in product & customer mix, increased raw material & energy costs and a slightlyincreased scrap & rework rate. Operating profit increased mainly due to the release of aprovision and a profit made on the disposal of unused machines shown as "held for sale". Reported EBITDA was EUR 5.6 mn vs. EUR 4.3 mn y-o-y. In H1, free cash flow was EUR -6.6 mn vs. EUR -2.4 mn y-o-y on an increase in working capital and capex. Reported net debt slightly increased to EUR 89.1 mn vs. EUR 85.8 mn q-o-q. FFO/net debt (adj.) improved to 8.5% vs. 7.5% y-o-y and net debt/EBITDA (adj.) improved to 4.5x vs. 5.3x in FY 2007, as pension debt increased by EUR 7 mn due to the change to IFRS accounting.

Liquidity The company had a cash position of EUR 27 mn at Q2 2008. Although HK has no bank facilities, it has no debt maturities before July 2011 and Q4 is usually free cash flow positiveeach fiscal year. S&P interestingly stated that its current rating assumes that adequate

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liquidity is maintained, reflected by a minimum cash balance of EUR 20 mn.

Company outlook/ credit profile development

As usual, HK provided no detailed guidance but expects an improving performance for FY 2008. Current campaigns are: (a) NATO and European programs (ongoing small armsprograms across all of Europe including new NATO countries, Euro-fighter/Typhoon cannon ammunition feed systems continue to be delivered for UK/Spanish/German and Italian requirements, further demand for the product will come from the recent sales of Eurofighter to Saud Arabia; UK, German and Spanish contract awards continue); (b) US Military and Lawenforcement (Department of Homeland Security pistol contract, grenade launchers for a range of military and law enforcement units, special forces rifles, under-slung grenade launchers for US Army expected to start delivery in late 2008, new bid for US Marines LightMachine Gun), and (c) Non-NATO (Middle East spare parts, machinery and MP 7, Mexico police rifles, UN Missions, South Asian country MP5). HK pursues four major campaigns which are closest to completion: (a) Large Middle Eastern country: contract signed, initial export licenses have been received for the first phase of this contract, further contract awardsexpected over the next 10 years; (b) Portugal: new tender issued in February 2008, bids opened March 2008 – only one other competitor made it through the process, however beingsubstantially more expensive; HK won technical competition the last time; award expected inQ3/Q4 2008; (c) Mexico: rifle contract with the Army unlikely to be signed in the near future, continuing contracts won with the Federal Police; (d) Greece: continuing delays mean no prospect of this contract being signed in the near future. HK is pursuing other future large campaigns (deliveries of the US Army grenade launcher are expected to start in early 2009, recent bid on a very large contract for the development of Future Soldier technology with theGerman Army (award expected in 2009/2010), and a bid for a large machine gun contract in France mid/late 2008). HK also has a number of medium/small orders, e.g. in Norway (two medium-sized contracts in 2007, expects further awards in 2008), the UK (continues to be the largest customer, ordering a range of products including medium machine guns, grenade launchers and rifles, just signed further contract for the re-manufacture of SA 80 rifles into drill and cadet rifles, the final batch of SA 80 combat rifles is expected to be contracted in 2008, large spares order is about to be signed with the UK MoD), new NATO countries (HK won a range of smaller contracts with new NATO members in 2007 for delivery in 2008/2009 and it expects to win more contracts in 2008). Concerning its US business, HK expects to start delivery of the Grenade Launcher in early 2009. It expects sales of rifles to smaller US Army Special Forces units to continue to grow, even under difficult circumstances. HK's lawenforcement business continues to grow and a small scale manufacture of pistols for the UScivil market has started. Despite all the mentioned orders, we do not believe that there will bea significant deleveraging at HK over the next few years without a successful meaningfulexpansion into the US defense market.

Model assumptions/risks For 2008, we assumed revenue growth of 8% p.a. and increased profitability margins.We estimated slightly positive free cash flow in FY 2008 on higher working capital and capex. Main risks are: the constant inflow of new smaller/medium-sized orders, potential restructuring outlays if new orders fail to materialize, continuously increasing raw material prices (especiallysteel), acquisition risk, exit of shareholders, the success of the US expansion strategy and the continuous access to export licenses for its products from the German government.



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CAPITALIZATION

Notes Issuer Heckler & Koch GmbH Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Senior Notes 120 2011 Bullet Coupon 9.25% Other Indebtedness n.a. Available Credit Lines n.a.


BOND DOCUMENTATION – HECKKO 9.25% 07/15/11 SENIOR NOTES

Issuer Heckler & Koch GmbH Call/Put Call Schedule On or after July 15, 2008: 104.625%, 2009: 102.313%, 2010 and thereafter: 100.00% Equity claw back Prior to July 15, 2007 up to 35% at 109.25% Make whole clause Yes Change of control 101% Guarantees Guaranteed by subsidiary guarantees

Security Notes are secured by a first priority security interest over the capital stock of the Issuer and the Note Proceeds Loan

Ranking Notes rank senior in right of payment to any of the Issuer's future indebtedness that is subordinated in right of payment to the notes; rank equally in right of payment with any of the Issuer's existing and future debt that is not subordinated in right of payment to the notes; and effectively be subordinated in right of payment to any of the Issuer's future indebtedness that is secured by liens on assets of the Issuer (other than the Note Proceeds Loan) to the extent of the value of the assets securing such debt.

Certain Covenants Limitation on Debt Consolidated Fixed Charge Coverage Ratio: 2.5x

Most important carve outs/exceptions: – Capitalized lease and similar debt not exceed EUR 5 mn – General basket of EUR 15 mn

Limitation on Sale of Certain Assets Most important carve outs/exceptions: – Not less than the fair market value of assets sold and at least 75% of disposal proceeds in cash or cash

equivalents – Net cash proceeds must be used within 360 days to repay secured pari passu debt of any restricted subsidiary or

reinvest in related business areas or – when aggregate amounts of excess proceeds exceeds EUR 5 mn, within 15 business days make an offer to

purchase from all holder of notes Limitation on Restricted Payments Aggregate amount of restricted payments does not exceed the sum of 50% of aggregate adjusted net income on

cumulative basis plus – aggregate net cash proceeds – debt reduction upon the conversion or exchange of such debt into capital stock – asset disposal proceeds

Limitations on Transactions with Affiliates Not less favorable to the company as in a comparable arms-length transaction with third parties > EUR 5 mn approved by supervisory board > EUR 7.5 mn with written opinion from investment banking firm, appraisal or accounting firm



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Business Description – Heckler & Koch GmbH Largest producer of military small arms for NATO countries (excl. US) with a dominant European market position. The company holds #1 market positions for the supply of assault rifles, (sub) machine guns and grenade launchers. It is the sole supplier of rifles to UK, Spanish and German armies. The group has approximately 700 employees. The manufacturing facilities are located in Oberndorf (Germany) and a new one in Columbia, Georgia (US). HKB is owned by two individual shareholders, Andreas Heeschen (majority owner of German detergent producer Luhns GmbH) and Keith Halsey (London weapons dealer).


Pistols25%

Rifles 27%Other products & services 28%

Sub-machine guns & machine

guns 16%

Development services 4%



Rest of the world37%

USA 14%

UK 20%

Germany 29%




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B- Stable Improve FFO/ND (incl. PIK) to 10% Moody's B2 Stable Restore Debt/EBITDA towards 5.5x Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

HECKKO 9.25% 7/15/2011

B-s/ B2s/-- EUR 120 7/15/2008 (104.63)

BOND STRUCTURE

HK Holding Inc.(United States)

EUR 120 mn Notes Heckler & Koch GmbH(Oberndorf, Germany)

Heckler & Koch Beteiligungs GmbH

(Germany)

Shareholders

Pledge of shares

EUR 100 mn PIK Loan

Pledge of shares


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PROFIT AND LOSS (HECKLER & KOCH GMBH)

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 152.6 156.9 123.7 68.0 147.9 75.2 159.7 162.9 166.2Raw materials used -60.5 -67.0 -52.8 -45.6 -64.7 -50.6 -70.3 -71.7 -73.1Personnel costs -38.7 -43.1 -42.3 -11.2 -41.8 -8.7 -39.1 -39.9 -40.7EBITDA reported 30.9 29.9 17.6 10.9 20.0 17.6 28.9 29.4 30.0Depreciation and amortization -22.9 -26.3 -24.9 -4.3 -23.8 -4.7 -25.7 -26.2 -26.8Other operating income/expenses -24.6 -17.0 -11.1 -0.4 -21.7 1.6 -22.0 -22.5 -22.9EBIT reported 8.6 3.7 -6.9 6.6 -3.5 12.9 3.2 3.2 3.3Interest result -4.4 -10.4 -9.8 -7.2 -9.7 -8.5 -9.6 -9.6 -9.6EBT 3.6 -6.8 -17.1 -0.6 -13.5 4.4 -6.4 -6.4 -6.3Extraordinary result -7.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Taxes on income -6.3 -6.5 -2.8 -0.8 -1.0 -1.8 -2.0 -2.0 -2.0Net income -10.2 -13.3 -19.9 -1.4 -14.5 2.6 -8.4 -8.4 -8.3


in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 161 144 124 116 109 154 131 116 101 thereof goodwill 0 0 0 0 0 60 84 64 44Cash & cash equivalents 61 52 38 36 38 27 41 48 55Total assets 294 282 259 248 245 303 291 285 280Equity incl. minorities 82 68 52 43 38 70 71 62 54Pension provisions 35 36 37 37 37 44 44 45 45Financial liabilities 120 120 120 120 120 116 120 120 120 short term (<1 year) 0 0 0 0 0 0 0 0 0 long term (>1 year) 120 120 120 120 120 116 120 120 120Net working capital 44 60 72 73 72 74 77 77 77

CASH FLOW

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 26 14 1 2 9 4 17 18 19Change in working capital -5 -16 -9 0 1 -5 -5 0 0Operating cash flow 22 -2 -8 2 9 -1 13 18 19CAPEX -9 -8 -8 -4 -10 -5 -11 -11 -12Free cash flow 12 -10 -16 -2 -1 -7 2 7 7Acquisitions/disposals -7 1 2 0 1 1 1 0 0Share buy back/issues 3 0 0 0 0 0 0 0 0FCF after extraordinary items 8 -9 -14 -3 0 -6 3 7 7

DEBT ADJUSTMENTS

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions 35 36 37 37 37 44 44 45 45For operating leases 1 3 3 3 3 3 3 3 3Others* 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (HECKLER & KOCH GMBH)

2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 20.2% 19.1% 14.2% 16.0% 13.5% 23.4% 18.1% 18.1% 18.1%EBITDA margin adj. 20.0% 20.9% 16.4% 18.3% 15.4% 25.8% 20.3% 20.3% 20.2%EBIT margin rep. 5.6% 2.4% -5.6% 9.7% -2.4% 17.2% 2.0% 2.0% 2.0%EBIT margin adj. 4.9% 3.8% -3.9% 11.5% -0.9% 19.1% 3.8% 3.8% 3.7%Return on capital (before tax) n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m.


2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 31 30 18 11 20 18 29 29 30EBITDA adj. 31 33 20 12 23 19 32 33 34FFO rep. 26 14 1 2 9 4 17 18 19FFO adj. 27 15 1 2 9 4 18 19 20Net debt rep. 59 68 82 84 82 89 79 72 65Net debt adj. 95 107 121 124 121 136 126 119 112Total debt 120 120 120 120 120 116 120 120 120EBITDA net interest cover rep. 7.0 2.9 1.8 1.5 2.1 2.1 3.0 3.1 3.1EBITDA gross interest cover rep. 5.4 2.6 1.6 1.4 1.8 1.8 2.6 2.6 2.7EBIT net interest cover rep. 2.0 0.4 -0.7 0.9 -0.4 1.5 0.3 0.3 0.3EBIT net interest cover adj. 1.7 0.6 -0.5 1.1 -0.1 1.7 0.6 0.6 0.6FFO rep. / total debt rep. 21.8% 11.9% 0.6% 6.4% 7.1% 9.4% 14.4% 15.3% 15.8%FFO rep. / net debt rep. 44.0% 21.0% 0.9% 9.1% 10.4% 12.2% 21.7% 25.5% 29.2%FFO adj. / net debt adj. 28.1% 14.0% 1.1% 6.7% 7.5% 8.5% 14.2% 15.9% 17.4%FOCF rep. / total debt rep. 10.3% -8.0% -13.3% -10.4% -0.5% 3.8% 1.7% 6.2% 6.1%FOCF rep. / net debt rep. 20.7% -14.1% -19.6% -14.8% -0.7% 4.9% 2.6% 10.3% 11.4%RCF rep. / net debt rep. 44.0% 21.0% 0.9% 9.1% 10.4% 12.2% 21.7% 25.5% 29.2%RCF adj. / net debt adj. 28.1% 14.0% 1.1% 6.7% 7.5% 8.5% 14.2% 15.9% 17.4%Total debt rep. / EBITDA rep. 3.9 4.0 6.8 4.5 6.0 4.3 4.2 4.1 4.0Net debt rep. / EBITDA rep. 1.9 2.3 4.6 3.2 4.1 3.3 2.8 2.4 2.2Net debt adj. / 25EBITDA adj. 3.1 3.2 6.0 4.2 5.3 4.6 3.9 3.6 3.3FFO rep. / net interest rep. 6.9 2.4 1.1 1.2 1.9 1.5 2.8 2.9 3.0FFO rep. / gross interest rep. 5.6 2.3 1.1 1.2 1.8 1.4 2.5 2.6 2.7Capex / sales 6.1% 5.2% 6.5% 6.2% 6.5% 7.0% 6.6% 6.8% 6.9%Capex / depreciation 169.1% 130.6% 163.3% 97.7% 252.6% 112.8% 183.7% 176.5% 170.2%

CAPITAL STRUCTURE

2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 59.5% 63.7% 69.9% 73.8% 76.1% 62.3% 63.0% 65.9% 69.0%Net debt / net capitalization rep. 42.1% 49.9% 61.3% 66.5% 68.4% 55.9% 53.0% 53.7% 54.6%Net debt / net capitalization adj. 47.8% 53.8% 61.6% 65.1% 66.3% 57.9% 56.0% 56.7% 57.5%Net working capital / sales 29.0% 37.9% 58.1% 51.8% 48.7% 47.5% 48.0% 47.0% 46.2%Fixed assets / sales 105.8% 91.5% 100.2% 83.0% 73.8% 99.4% 82.3% 71.3% 60.7%


Comment FY 2008 FY 2009 FY 2010Sales growth Some new orders in FY 2008 8.0% 2.0% 2.0%EBITDA growth Recovery in 2008 44.4% 2.0% 2.0%EBIT growth Recovery in 2008 n.m. 1.6% 1.6%Capex incl. acquisition Capex guidance 11 11 12Change in working capital Rather unchanged -5 0 0Funds from operations (FFO) Rather unchanged 17 18 19


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ISS (BUY) Investment rationale We change our recommendation for the ISSDC 05/16 and the ISSDC 09/10 from hold to

buy as we expect the company to show an ongoing robust performance, even in an increasingly shaky macroeconomic environment. We continue to like the credit story, in particular the company's broad diversification by customer, region and services as well as the defensive business features. While we would not regard ISS' business model as completelyresilient to an economic downturn, the increasing trend to outsourcing in such a marketenvironment as well as the company's flexible cost structure and asset light business strategy should be helpful in this respect. We also like the company's commitment to cash generation,stable operating margins and de-leveraging on a multiple basis, which was again demonstrated in the recently released Q2 results. Admittedly, leverage remains high at 6.1x at the end of Q2 but we expect the de-leveraging trend to continue slowly despite constantly pursued bolt-on transactions. Upside potential remains in the medium term in a potential IPOof the company, which is one of the most likely options for an exit of the private equitysponsor, in our view. In light of the present capital market conditions, the previous IPO plansare currently not on the agenda anymore.

Recent developments ISS implemented the next phase of its strategy called "The ISS Way". Basically, the plan confirms the previous direction of the company with a stronger focus on best practices and cross-border sales. An example of the latter is the already secured international IntegratedFacility Services contract with HP (size of about DKK 1 bn), which will be fully implemented inQ1 2009. As a main part of the strategy, the company is trying to build-up a critical mass in each region and country as well as within property services, office support, catering and security services. Financially, ISS priorities remain unchanged and relatively bondholderfriendly, i.e. the focus on cash conversion, operating margin, organic growth and de-leveraging on a multiple basis.

ISS continued to pursue its growth strategy. By the end of July, the company concluded 46 acquisitions, including six platform developers which are strategic acquisitions to build-up a regional presence or services. The acquired companies will contribute revenues of about DKK2,718 mn and were acquired at an average multiple of around 7.9x. Going forward, acquisitions will remain an important part of the company's strategy in particular in growthregions such as Latin America, Asia & CEE (which represented 8% of group revenues as ofH1 2008 and 20% of total organic growth in the first half) as well as in the US.

SOLID ORGANIC REVENUE GROWTH RATES IN H1 2008 MARGIN DEVELOPMENT IN THE FIRST HALF

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Nordic WesternEurope

CEE Asia LatAm Pacific USA Group

Organic Acquisition (net) Total

0%

1%

2%

3%

4%

5%

6%

7%

8%

Nordic WesternEurope

CEE Asia LatAm Pacific USA Group

H1 2007 H1 2008


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Latest results recap ISS reported good Q2 2008 results showing solid revenues and earnings growth.Organic sales growth was 5.6% in the quarter, further supported by 6% acquisition-related growth offset by negative currency effects of 2%. Overall, revenues increased by 10% to DKK17.4 bn, with solid growth in all regions. Despite the continuing acquisition activity, ISS'operating margin was stable y-o-y at 6.3%, but should seasonally increase in the second half of the year. Free operating cash flow generation also remained healthy, amounting to DKK 552 mn before acquisition-related outflows of DKK 855 mn as the company rigorouslypursues its expansion strategy. Leverage (seasonally adjusted pro-forma net debt/ PF adjusted EBITDA) stood at 6.06x vs. 6.14x at Q1 and 6.16x at FYE 2007 and at 4.66x through the EMTN notes.

Liquidity ISS' liquidity is adequate. At the end of Q2 2008, the company reported a cash pile of DKK1.4 bn which compares to DKK 1.4 bn in short-term maturities. In addition, it had DKK 606 mn available under its DKK 2.4 bn revolving credit facility as well as DKK 2.8 bn under its acquisition facilities. Overall, the company's debt maturities are modest until the EMTNsbecome due in 2010. In addition, expected positive free cash flow generation should supportthe company's financial flexibility. While current availability under the company's acquisitionfacilities should finance its acquisitions at least in 2008, potential liquidity needs could arise in2009 if the company continues its acquisition spree at the current pace (cash outs for acquisitions in 2007 totaled DKK 3 bn). However, we believe that the pace of external growthcould, however, be easily reduced if capital market conditions would impede access to furtherliquidity sources.


The fundamental outlook remains sound for the remainder of the year and into 2009.With the release of its Q2 figures, ISS reiterated its forecast for the full year, expectingrevenues in the continuing business and adjusted for exchange rate changes to increase by more than 10% (thereof 6% organically driven), which seems achievable given the trend seenso far. Margins are forecasted to be kept at stable levels vs. FY 2007. Generally, the companyshould be less affected by a more adverse weakening in the economy, with market trends such as outsourcing, the company's broad diversification and its flexible cost base working asoffsetting factors. With regard to the capital structure, we expect the slow de-leveraging on a multiple basis to continue in 2008 and beyond in line with the company's strategy, although ISS will continue to pursue M&A transactions (mainly bolt-ons). Overall, we believe that the credit profile trend remains positive.

Main model assumptions/risks While we expect absolute indebtedness to increase given the ongoing acquisition activities, we forecast a further slow improvement of ISS' credit metrics. For FY 2008, we expect adjusted net debt to adjusted EBITDA to fall from 5.7x at FYE 2007 to 5.6x y-o-y. For FY 2009 and FY 2010, we anticipate further improvements.

Main risks to our model relate to larger-than-expected M&A transactions, a more adverse impact of a weakening economy on the business of the company and an IPO.

Things to watch ● Acquisition activities and potential liquidity needs in 2009

● Free cash flow generation

● Organic revenue growth development


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CAPITALIZATION

Senior Credit Facilities Borrower ISS Global A/S Senior Credit Facility Initial Amount (in DKK mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Acquisition facility A 1,425 06/12 Amortizing 2.25% (margin ratchet) 0.75%Acquisition facility B 3,500 12/13 Bullet in 2 payments** 2.25% (margin ratchet) 0.75%Term Loan A 1,315 06/12 Amortizing 2% (margin ratchet) Term Loan B 13,142 12/13 Bullet in 2 payments** 2.375% (margin ratchet) Revolving Credit Fac. 2,437 06/12 Bullet 2.25% (margin ratchet) 0.75%Letter of Credit Fac. 500 06/12 Bullet 2.25% (margin ratchet) 0.75%Borrower ISS Holding A/S Second Lien EUR 600 06/15 Bullet 4.5% (margin ratchet) 0.75%Covenants For facilities at ISS Global financial covenants including net senior debt to pro-forma EBITDA, total net debt to pro forma EBITDA, EBITDA to total net cash interest, free cash flow to total debt service; Second lien does not benefit from financial covenants but includes limitation of additional indebtedness, restricted payments, transactions with affiliates, liens, asset sales, sale an lease-back transactions Notes Issuer ISS Global A/S Senior Notes EUR 850 09/10 Bullet 4.75% Senior Notes EUR 110 12/14 Bullet 4.5% Issuer ISS Holding A/S Senior Subordinated Notes EUR 454 05/16 Bullet 8.875% Other Indebtedness n/a

** June 2013 and December 2013 Source: Information memorandum, UniCredit Global Research

BOND DOCUMENTATION – ISSDC 4.75% 09/10; ISSDC 4.5% 12/14

Issuer ISS Global A/S Call/Put Call Schedule no Equity claw back no Make whole clause no Change of control no Guarantees no

Security no Ranking Senior unsecured obligations of ISS Global A/S Certain Covenants Limitation on Debt, asset sales no Limitation on Restricted Payments no Limitations on Transactions with Affiliates no Fall away/ Suspension Covenants no Negative pledge no Anti Layering no Cross default provision yes


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BOND DOCUMENTATION – ISSDC 8.875 05/16

Issuer FS Funding A/S Call/Put Call Schedule Fixed On or after May 15, 2011:104.438; 2012: 102.958; 2013: 101.479; 2014 and thereafter 100

Floater: On or after May 8, 2006: 102; 2007: 101; 2008 and thereafter: 100 Equity claw back Prior to May 15, 2009 up to 35% at 108.875 of fixed bonds Make whole clause Fixed: Prior to May, 15 2011 at bunds + 50 bp Change of control 101% Guarantees None

Security – Second-priority interest in all of the outstanding share capita of ISS – Second-priority security interest in all of the loans made to certain subsidiaries of ISS Global in the aggregate

amount of EUR 50 mn Ranking – Contractually subordinated to all existing and future senior indebtedness of the issuer

– Structurally subordinated to all subsidiary debt Certain Covenants Limitation on Debt Fixed charge coverage ratio of at least 2.0x

Most important carve-out/exceptions: – Indebtedness and letters of credit of company and subsidiaries of up to EUR 1,500 mn and acquisition facilities up

to EUR 725 mn – Capitalized leas obligations, mortgage financing, purchase money obligations, or debt incurred with acquisition of

development of property of up to the greater of a) EUR 50 mn and b) 1% of total assets – Subordinated shareholder loans – General Basket not exceeding the greater of a) EUR 50 mn and b) 1% of total assets

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash, the assumption of liabilities or replacement of assets and is within 365 days 100% applied for debt reduction or for acquisition of replacement assets Most important carve-out/exceptions: – For asset sales with a fair market value of greater EUR 15 mn resolution of board of directors – Excess proceeds exceeding EUR 25 mn have to be used to offer to redeem notes and pari passu debt at par

Limitation on Restricted Payments – 50% of consolidated net income (minus 100% of such negative amount) plus – Up to 6% of net cash proceeds p. a. of first IPO – Up to EUR 15 mn p. a. of stock repurchases; unused amounts can be carried forward up to a maximum of EUR

30 mn – General basket for restricted payments is EUR 35 mn


Fall away/ Suspension Covenants Yes Negative pledge Yes Anti Layering Yes


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Business Description – ISS ISS is one of the world's largest facility service groups, with market presence in Europe, Asia, South America, Australia and the US. It offers cleaning services, property services, catering services, office support services, security services as well as facility management. It has a over 100,000 customers both from the public as well as the private sector. ISS employs more than 440,000 people. The company was bought by funds advised by EQT and Goldman Sachs Capital Partners in March 2005.

SALES BY SERVICES (FY 2007)

Cleaning Services56.6%

Property Services24.7%

Security5.5%Catering

Services6.8%

Office Support Services

6.3%



Northern Europe26.0%

Western Europe59.0%

Latin America2.0%

Central and Eastern Europe

2.0%US

2.0%

Pacific5.0%

Asia4.0%


DEBT MATURITY PROFILE 2007E


ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB- Stable Further gradual improvement of credit metrics with adjusted debt to EBITDA declining towards 6x and EBITDA interest coverage increasing above 2x; Down: Change in acquisition strategy towards larger debt-financed acquisitions or a significant drop in organic growth rates

Moody's B2 Stable Positive rating pressure if Adj. Total Debt/EBITDA moves towards the 6.5x. Negative pressure if operating performance or liquidity concerns develop

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

ISSDC 4.75% 9/18/2010

Bs EUR 850

ISSDC 4.5% 12/8/2014 Bs EUR 500 ISSDC 8.875% 5/15/2016

Bs /Caa1s EUR 454 5/15/2011 (104.44)

BOND STRUCTURE

FS Equity A/S

ISS Global A/S

ISS A/S

ISS Holding A/S

FS Invest S.a.r.l II

FS Invest S.a.r.l

Goldmann Sachs Capital Partners

54%

other indebtedness

EQT44%

Operating Subsidiaries

Senior subord. notes

Management of ISS

2%

Medium Term Notes

Second LienTerm Loan B10

Senior FacilitiesTerm Loan B9


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PROFIT AND LOSS (ISS)

in DKK mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 36,165.0 40,355.0 46,440.0 55,772.0 30,755.0 63,922.0 33,734.0 70,618.1 77,649.0 85,031.5Personnel costs -24,414.0 -26,596.0 -30,592.0 -36,284.0 -19,986.0 -40,998.0 -21,972.0 -45,336.8 -49,773.0 -54,505.2EBITDA reported 2,544.0 2,698.0 2,955.0 3,764.0 2,012.0 4,484.0 2,180.0 4,943.3 5,513.1 6,037.2Depreciation and amortization -587.0 -617.0 -659.0 -745.0 -404.0 -845.0 -416.0 -950.0 -1,035.0 -1,135.0Other operating income/expenses -9,207.0 -11,061.0 -12,893.0 -15,724.0 -8,757.0 -18,440.0 -9,582.0 -20,338.0 -22,362.9 -24,489.1EBIT reported 1,957.0 2,081.0 2,296.0 3,019.0 1,608.0 3,639.0 1,764.0 3,993.3 4,478.1 4,902.2Income from investments 7.0 33.0 15.0 -17.0 3.0 8.0 0.0 0.0 0.0 0.0Interest result -252.0 -327.0 -549.0 -2,056.0 -1,421.0 -2,234.0 -1,276.0 -2,450.0 -2,600.0 -2,750.0Other financial items 20.0 -8.0 28.0 -295.0 0.0 -783.0 0.0 -250.0 -250.0 -250.0EBT 1,732.0 1,779.0 1,790.0 651.0 190.0 630.0 488.0 1,293.3 1,628.1 1,902.2Extraordinary result -863.0 -388.0 -333.0 -1,035.0 -374.0 -818.0 -363.0 -800.0 -800.0 -800.0Taxes on income -553.0 -554.0 -509.0 -425.0 82.0 -254.0 -191.0 -517.3 -618.7 -722.8Net income 316.0 837.0 948.0 -809.0 -102.0 -442.0 -66.0 -24.0 209.4 379.4


in DKK mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 14,366 18,861 34,994 38,500 39,888 39,630 40,387 42,395 45,447 48,502Cash & cash equivalents 2,281 3,707 1,863 2,275 1,485 2,664 1,456 2,664 2,664 2,664Total assets 23,385 30,805 46,456 52,253 55,076 55,348 55,576 59,374 63,637 68,191Equity incl. minorities 7,741 8,822 6,774 5,980 6,064 5,518 5,293 5,479 5,673 6,038Pension provisions 253 714 833 885 680 724 774 724 724 724Financial liabilities 7,065 11,170 24,685 28,640 30,957 31,921 32,362 33,821 36,148 38,460Net working capital -912 -1,448 -1,681 -2,341 -941 -1,743 -991 -2,046 -2,277 -2,556

CASH FLOW

in DKK mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 2,026 1,760 1,857 815 800 1,383 952 1,526 1,544 1,614Change in working capital 319 186 -234 50 -814 -44 -910 303 231 279Operating cash flow 2,345 1,946 1,623 865 -14 1,339 42 1,829 1,775 1,893CAPEX -403 -583 -549 -843 -328 -715 -272 -989 -1,087 -1,190Free cash flow 1,942 1,363 1,074 22 -342 624 -230 841 688 703Dividends -96 -183 -7,240 -8 -9 -14 -17 -15 -15 -15Acquisitions/disposals -1,016 -3,609 -1,303 -3,437 -2,292 -2,957 -1,148 -2,726 -3,000 -3,000Share buy back/issues 25 763 -219 0 0 178 0 0 0 0FCF after extraordinary items 855 -1,666 -7,688 -3,423 -2,643 -2,169 -1,395 -1,900 -2,327 -2,312

DEBT ADJUSTMENTS

in DKK mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions 253 714 833 856 680 661 678 661 661 661For operating leases 2,137 2,495 2,613 3,007 3,083 3,240 3,290 3,606 3,971 4,337Others* 0 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (ISS)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 7.0% 6.7% 6.4% 6.7% 6.5% 7.0% 6.5% 7.0% 7.1% 7.1%EBITDA margin adj. 9.3% 9.1% 8.7% 9.0% 8.5% 9.0% 8.3% 8.9% 9.0% 8.9%EBIT margin rep. 5.4% 5.2% 4.9% 5.4% 5.2% 5.7% 5.2% 5.7% 5.8% 5.8%EBIT margin adj. 6.0% 5.9% 5.6% 6.0% 5.8% 6.3% 5.8% 6.2% 6.3% 6.3%Return on capital (before tax) 11.6% 8.8% 5.6% 2.8% 5.1% 3.8% 6.7% 3.9% 4.5% 4.8%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 2,544 2,698 2,955 3,764 2,012 4,484 2,180 4,943 5,513 6,037EBITDA adj. 3,368 3,675 4,049 4,994 2,604 5,778 2,813 6,318 6,968 7,572FFO rep. 2,026 1,760 1,857 815 800 1,383 952 1,526 1,544 1,614FFO adj. 2,636 2,444 2,640 1,691 1,217 2,310 1,397 2,496 2,558 2,672Net debt rep. 4,784 7,463 22,822 26,365 29,472 29,257 30,906 31,157 33,484 35,796Net debt adj. 7,174 10,672 26,268 30,228 33,235 33,158 34,875 35,424 38,116 40,794Total debt 7,065 11,170 24,685 28,640 30,957 31,921 32,362 33,821 36,148 38,460EBITDA net interest cover rep. 10.5 8.3 5.4 1.8 1.4 2.0 1.7 2.0 2.1 2.2EBITDA gross interest cover rep. 6.9 6.3 4.4 1.7 1.4 1.9 1.7 1.9 2.0 2.1EBIT net interest cover rep. 8.1 6.4 4.2 1.5 1.1 1.6 1.4 1.6 1.7 1.8EBIT net interest cover adj. 4.8 4.1 3.2 1.4 1.1 1.6 1.4 1.6 1.6 1.7FFO rep. / total debt rep. 28.7% 15.8% 7.5% 2.8% 4.0% 4.3% 4.7% 4.5% 4.3% 4.2%FFO rep. / net debt rep. 42.3% 23.6% 8.1% 3.1% 4.2% 4.7% 5.0% 4.9% 4.6% 4.5%FFO adj. / net debt adj. 36.7% 22.9% 10.0% 5.6% 6.5% 7.0% 7.1% 7.0% 6.7% 6.5%FOCF rep. / total debt rep. 27.5% 12.2% 4.4% 0.1% 3.0% 2.0% 1.2% 2.5% 1.9% 1.8%FOCF rep. / net debt rep. 40.6% 18.3% 4.7% 0.1% 3.2% 2.1% 1.2% 2.7% 2.1% 2.0%RCF rep. / net debt rep. 40.3% 21.1% -23.6% 3.1% 4.1% 4.7% 4.9% 4.8% 4.6% 4.5%RCF adj. / net debt adj. 35.4% 21.2% -17.5% 5.6% 6.4% 6.9% 7.1% 7.0% 6.7% 6.5%Total debt rep. / EBITDA rep. 2.8 4.1 8.4 7.6 7.5 7.1 7.0 6.8 6.6 6.4Net debt rep. / EBITDA rep. 1.9 2.8 7.7 7.0 7.2 6.5 6.6 6.3 6.1 5.9Net debt adj. / EBITDA adj. 2.1 2.9 6.5 6.1 6.2 5.7 5.8 5.6 5.5 5.4FFO rep. / net interest rep. 9.4 6.4 4.4 1.4 1.6 1.6 1.7 1.6 1.6 1.6FFO rep. / gross interest rep. 6.5 5.1 3.8 1.4 1.6 1.6 1.7 1.6 1.6 1.6Capex / sales 1.1% 1.4% 1.2% 1.5% 1.1% 1.1% 0.8% 1.4% 1.4% 1.4%Capex / depreciation 68.7% 94.5% 83.3% 113.2% 81.2% 84.6% 65.4% 104.1% 105.0% 104.9%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 47.7% 55.9% 78.5% 82.7% 83.6% 85.3% 85.9% 86.1% 86.4% 86.4%Net debt / net capitalization rep. 38.2% 45.8% 77.1% 81.5% 82.9% 84.1% 85.4% 85.0% 85.5% 85.6%Net debt / net capitalization adj. 47.6% 53.5% 78.2% 83.4% 83.6% 85.6% 86.6% 86.5% 86.9% 87.0%Net working capital / sales -2.5% -3.6% -3.6% -4.2% -1.6% -2.7% -1.5% -2.9% -2.9% -3.0%Fixed assets / sales 39.7% 46.7% 75.4% 69.0% 66.4% 62.0% 60.4% 60.0% 58.5% 57.0%


Comment FY 2008 FY 2009 FY 2010Sales growth 5% organic growth in 2008 and acquisitions 10.5% 10.0% 10.6%EBITDA growth Margins largely stable on an adjusted basis 10.2% 11.5% 10.6%EBIT growth Margins largely stable on an adjusted basis 9.7% 12.1% 11.0%Capex incl. acquisition Capex/sales of 1.4% and acquisition cash outs of up to DKK 3.000 p.a. 3,989 4,087 4,235Change in working capital Largely stable working capital 303 231 239Funds from operations (FFO) Strong improvement after refinancing in 2007 1,526 1,544 1,778


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Logwin (previously Thiel Logistik) (SELL) Investment rationale We change our recommendation for the TGHGR 8% 12/12 bond from hold to sell. Our

recommendation change is mainly based on concerns about the impact of the weakening economy and cost inflation on the company's operating performance. Luck isn't on Logwin'sside with deteriorating trading conditions now likely to outweigh the company's internal effortsto improve its profitability. In particular, high diesel prices and the company's inability to pass these increases on are expected to put pressure on the company's financials. Furthermore, Logwin reported the first signs of weakening demand in some of its customer industries which will weigh on its top-line performance. Overall, we expect the logistics ship to steer through rather rough waters in the coming quarters, which could put pressure on bond prices.

Recent developments Trading conditions are weakening for logistics companies and could work against the company's efforts to improve its profitability. In its Q2 earnings call, the company painted a relatively dark picture about the current market conditions, by citing primarily two main problems: the weakening economy as well as high diesel prices. The former is already affecting various end markets of the company, i.e. the fashion industry (12.8% of revenues in2007), the automotive industry and even in growth markets such as Asia (i.e. Singapore,Hong Kong, Taiwan) a "clear" slowdown has been noted, according to the company. Inaddition, Logwin is hurt by increasing diesel prices (+10% q-o-q and 30% y-o-y) with the company consuming about 14 mn tons of truck diesel annually. Currently, it is trying to pass these costs on to customers mainly via the use of diesel floaters and is also trying to shortenthe price adjustment periods for long-term contracts (mainly used in the Solutions business which is the most affected). However, we assume that negotiations about price increases could prove difficult in view of more challenging trading conditions and hence take some time.It also remains to be seen how sustainable the recent decline in oil prices is and if and when itcan have a positive impact on the company.

Latest results recap Logwin released Q2 2008 results, which showed no progress in margin improvement.Top-line growth was solid at 4.7%, even accelerating compared to Q1. The revenue increasewas again mainly driven by the Air & Ocean segment (+8.3%), although we note that it has been decelerating strongly from the growth seen in Q1 (17.2%). On a more positive note, thenegative sales trend was reversed in the Solutions segment (+5.7%), while the company continued to grow only selectively in Road & Rail (+2.6%). EBIT was largely unchanged y-o-y at EUR 4.6 mn with the margin remaining stable at a mere 0.9%, clearly far from the magic 3% EBIT margin target. The operating performance was primarily dragged down by a poorperformance of the Solutions segment (reported loss of EUR 0.4 mn in Q2) that was burdened by the slowing economy, cost inflation due to rising diesel prices as well as the cost of bad debt (of about EUR 1.5-1.6 mn). Mirroring the first success of the ongoing turnaround measures, the Road & Rail segment's profit turned at least positive, while margins could be kept at relatively high levels in the Air & Ocean business (3.9%). Turning to cash flow, Logwingenerated cash of EUR 2.6 mn in the quarter (vs. a cash burn of EUR 7.9 mn in Q2 2007) attributable to a better working capital management than a year ago (cash release of EUR 4.2mn vs. a cash burn of EUR 7.6 mn). Further pushed by disposal cash inflows, net debt could be reduced from EUR 160.1 mn at the end of Q1 to EUR 151.2 mn. We calculate adjusted FFO to adjusted net debt of 16.9%.

Liquidity Logwin's liquidity situation remains adequate. At the end of H1 2008, the company reported a cash position of EUR 54.8 mn. In addition, it had unchanged availability under itscommitted credit lines vs. FYE 2007 (i.e. availability of about EUR 60 mn). The upcoming debt maturities are moderate over the next few years until the bond (EUR 130 mn) matures inDecember 2012. We also expect the company to manage its cash outflows, in particular for capex, in a way to generate at least break-even free cash flow.

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Looking ahead, the business climate is weakening with Logwin reducing its guidancefor the full year. Top-line growth is expected to slow down in the second half (previous guidance was sales growth of between 3-5% for 2008 which should now be difficult to meet after the 3.9% achieved in H1 2008). The company still seems confident to achieve double-digit growth rates in the Air & Ocean segment, which seems rather ambitious, in our view, in light of the growth seen in Q2 and a slowing economy. On the other hand, revenues in theSolutions segment are expected to decline. The company also cut its forecast for operatingprofit, now only expecting a slight increase in EBIT and net earnings, compared to an expected significant improvement as previously stated. While improvements are expected inthe Air & Ocean and Road & Rail segments, improvements at the group level should be heldback by a profit decline in the Solutions segment. Overall, we fear that the weakening economy and cost pressure that cannot be passed on could have a greater-than-indicated impact on the company's financials in the coming quarters. We believe that improvements in the company's operating performance will continue to be a challenge, especially in a weakening market environment, and forecast a deterioration in H2 with full year EBIT before extraordinary items expected to be below that of 2007. However, the company's focus on a positive net cash flow, by means of capex adjustments and further asset disposals, might prevent a significant weakening of credit metrics.

DEVELOPMENT OF CREDIT METRICS

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2002 2003 2004 2005 2006 2007 H1 08 2008e 2009e 2010e0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


0%

5%

10%

15%

20%

25%

30%

2002 2003 2004 2005 2006 2007 H1 08 2008e 2009e 2010e0

1

2

3

4

5



Model assumptions/risks Main risks to our model are the failure of the company to pass on high diesel prices, failure to implement the cost saving measures, bigger acquisitions (management seems more opento bigger expansion steps (transaction volumes up to EUR 50 mn) in the medium term), aswell as a more severe negative impact on the business from a weakening economy.

Things to watch ● Top-line development

● Pass through of high diesel costs

● M&A activities


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CAPITALIZATION

Notes Issuer Thiel Logistik AG Initial Amount (in EUR) Maturity Amortization schedule Senior Notes 130 12/12 Bullet Coupon 8% Other Indebtedness Bank and other financial liabilities in the amount of EUR 43.1 mn at Q2 2008 Leasing liabilities in the amount of EUR 36 mn at Q2 2008


BOND DOCUMENTATION – TGHGR 8% 12/15/12

Issuer Thiel Logistik A.G. Call/Put Call Schedule On or after December 15, 2008: 104%; 2009: 102%; 2010 and thereafter: 100% Equity clawback Prior to December 15, 2007 up to 35% at 108% Make whole clause Prior to December 15, 2008, Bund plus 50 bp Change of control 101% (if more than 50% of the total voting power) Guarantees On a senior subordinated basis by certain subsidiaries of the issuer (21 at date of issuance), which represented

80.2% of EBITDA, 70.6 of net sales and 59.8% of the net tangible assets at 09/30/04

Security Notes and guarantees are unsecured obligations of the issuer and subsidiary guarantees Ranking – Subordinated to all existing and future senior indebtedness of the issuer

– Equal to any future senior subordinated indebtedness of the issuer Certain Covenants Limitation on Debt Coverage ratio of at least 2.5x

Most important carve-out/exceptions: – Bank indebtedness; indebtedness represented by CLO, mortgage financing, purchase money obligations;

indebtedness pursuant to a receivables program in total not exceeding EUR 150 mn, less the amount of any permanent repayments of such debt with proceeds from asset sales

– General Basket EUR 20 mn Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of the consideration is in the form of cash/cash

equivalents (assumed indebtedness, securities, additional assets)and is at 100% within 360 days applied for repayment of indebtedness and/or for investment in additional assets Excess proceeds exceeding EUR 10 mn used to redeem notes and pari passu debt at par

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of: – 50% of consolidated net income (minus 100% of such deficit), – Equity proceeds; – Conversion of debt to equity proceeds, – Amount equal to net reduction in restricted investments resulting from repurchase, sale, repayments of loans or

redesignation of unrestricted subsidiaries as restricted subsidiaries Most important carve-out/exceptions: – Purchase or redemption of capital stock in connection with provisions under employee stock options not

exceeding EUR 1.5 mn in any calendar year´ – Loans to employees or management for the purchase of capital stock of the company not exceeding EUR 1.5 mn – Preferred dividends not exceeding EUR 2 mn in any calendar year – General Basket EUR 15 mn

Limitations on Transactions with Affiliates – Board approval if transaction greater than EUR 5 mn – Fairness opinion if transaction greater than EUR 15 mn Most important carve-out/exceptions: – Loans to employees and management not exceeding EUR 1 mn



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Business Description – Logwin AG Logwin (previously Thiel Logistik) is a medium-sized provider of logistics solutions and services throughout the customer supply chain. The company is publicly listed with Delton (100% owned by Stefan Quandt) as major shareholder holding a stake of 50.26%. Logwin holds leading market positions as logistics services provider in certain industries in Germany, such as the hanging garment segment and in press logistics.


Solutions36.3%

Air & Ocean24.9%

Road & Rail38.8%



-10 -5 0 5 10 15 20 25 30

Solutions

Air & Ocean

Road & Rail

Holding

in EUR mn




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B Stable Substantial cash outlays due to restructuring or for debt-funded acquisitions

Moody's B2 Stable Up: Sustainable improvement in operating performance towards industry average, improvement of financial leverage below 4x; Down: Erosion in operating performance, increase in leverage towards 6x, deteriorating liquidity

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

TGHGR 8% 12/15/2012

B-s/ Caa1s/-- EUR 130 12/15/2008 (104)

BOND STRUCTURE

NoteholdersLogwin AG

Subsidiary Guarantors

guarantee


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PROFIT AND LOSS (LOGWIN AG)

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 1,663.6 1,730.4 1,839.6 1,891.4 1,000.9 2,043.1 1,039.7 2,072.9 2,119.1 2,187.2Cost of goods and services sold -1,539.8 -1,599.7 -1,692.6 -1,747.7 -922.2 -1,892.5 -961.4 -1,913.3 -1,958.0 -2,016.6Distribution expenses -34.0 -33.6 -36.9 -36.8 -19.5 -35.9 -18.5 -37.3 -38.1 -37.2Administration -90.1 -88.0 -88.5 -85.0 -44.1 -87.5 -45.5 -91.2 -93.2 -96.2Other operating income/expenses -42.6 17.0 -41.5 1.8 1.4 -1.3 1.1 -5.0 0.0 0.0EBITDA reported 36.6 68.1 57.9 57.5 31.5 61.8 27.7 51.1 54.7 62.2EBIT reported -42.8 26.0 -19.8 23.9 16.4 26.0 15.4 26.1 29.7 37.2Adj. EBIT (bef. pension interest) 23.0 31.4 44.6 49.2 28.8 54.1 25.3 45.9 49.4 57.0Income from investments 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Interest result -15.4 -19.5 -17.6 -16.5 -8.6 -17.1 -8.7 -18.0 -18.0 -18.0Other financial items -7.7 8.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Discontinuing operations -84.3 -7.1 -7.6 -0.3 0.0 0.0 0.0 0.0 0.0 0.0EBT reported -149.8 7.5 -45.0 7.0 7.8 8.9 6.8 8.1 11.7 19.2Taxes on income -7.3 -2.3 -7.9 -5.0 -3.1 -5.5 -2.9 -3.6 -4.1 -6.7Net income -157.1 5.2 -53.0 2.1 4.7 3.3 3.9 4.5 7.6 12.5


in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 604 581 529 508 511 493 486 483 483 488Cash & cash equivalents 51 87 65 64 39 66 55 66 66 66Total assets 998 951 901 913 939 912 916 912 921 939Equity incl. minorities 282 378 322 321 326 318 320 322 327 336Pension provisions 47 39 45 36 36 33 33 33 33 33Other provisions 42 32 23 22 24 22 20 20 18 16Financial liabilities 318 233 222 215 216 208 206 200 195 199Net working capital 3 -6 2 -3 26 2 16 5 4 9

CASH FLOW

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 18 24 25 30 18 33 13 27 31 35Change in working capital 21 37 -3 -10 -28 6 -18 -3 1 -5Operating cash flow 39 61 22 21 -10 39 -5 24 32 30CAPEX -37 -27 -24 -21 -10 -23 -7 -18 -25 -30Free cash flow 2 34 -2 -1 -20 15 -12 6 7 0Dividends 0 0 0 -1 0 -1 -1 -1 -2 -4Acquisitions/disposals -75 13 5 12 -3 -2 4 3 0 0Share buy back/issues 0 95 0 0 0 0 0 0 0 0FCF after extraordinary items -74 142 3 11 -23 12 -8 9 4 -3

DEBT ADJUSTMENTS



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PROFITABILITY RATIOS (LOGWIN AG)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 2.2% 3.9% 3.1% 3.0% 3.1% 3.0% 2.7% 2.5% 2.6% 2.8%EBITDA margin adj. 6.1% 6.2% 6.3% 6.3% 6.2% 5.9% 5.3% 5.1% 5.2% 5.4%EBIT margin rep. -2.6% 1.5% -1.1% 1.3% 1.6% 1.3% 1.5% 1.3% 1.4% 1.7%EBIT margin adj. 1.4% 1.8% 2.4% 2.6% 2.9% 2.6% 2.4% 2.2% 2.3% 2.6%Return on capital (before tax) -9.7% 1.1% -6.9% 1.4% 2.8% 1.7% 3.1% 1.6% 2.2% 3.6%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 37 68 58 57 31 62 28 51 55 62EBITDA adj. 101 108 116 118 62 120 55 107 110 118FFO rep. 18 24 25 30 18 33 13 27 31 35FFO adj. 52 59 60 66 36 68 31 63 66 71Net debt rep. 267 145 156 151 177 143 151 134 130 133Net debt adj. 541 402 423 395 385 367 375 358 354 357Total debt 318 233 222 215 216 208 206 200 195 199EBITDA net interest cover rep. 2.4 3.5 3.3 3.5 3.7 3.6 3.2 2.8 3.0 3.5EBITDA gross interest cover rep. 2.0 3.5 3.0 3.2 3.4 3.4 2.8 2.8 3.0 3.5EBIT net interest cover rep. -2.8 1.3 -1.1 1.4 1.9 1.5 1.8 1.4 1.6 2.1EBIT net interest cover adj. 0.6 0.8 1.2 1.4 1.6 1.6 1.4 1.3 1.4 1.6FFO rep. / total debt rep. 5.6% 10.1% 11.1% 14.1% 14.4% 15.7% 13.4% 13.7% 15.7% 17.9%FFO rep. / net debt rep. 6.7% 16.2% 15.8% 20.0% 17.6% 22.9% 18.3% 20.5% 23.6% 26.7%FFO adj. / net debt adj. 9.7% 14.8% 14.1% 16.7% 17.4% 18.6% 16.9% 17.6% 18.7% 19.9%FOCF rep. / total debt rep. 0.5% 14.6% -0.9% -0.2% -9.0% 7.3% 27.6% 3.1% 3.4% 0.2%FOCF rep. / net debt rep. 0.6% 23.4% -1.3% -0.3% -11.0% 10.7% 37.7% 4.7% 5.1% 0.4%RCF rep. / net debt rep. 6.7% 16.2% 15.8% 19.3% 16.9% 21.8% 17.0% 20.0% 21.9% 23.8%RCF adj. / net debt adj. 9.7% 14.8% 14.1% 16.4% 17.1% 18.2% 16.3% 17.4% 18.1% 18.8%Total debt rep. / EBITDA rep. 8.7 3.4 3.8 3.7 3.9 3.4 3.6 3.9 3.6 3.2Net debt rep. / EBITDA rep. 7.3 2.1 2.7 2.6 3.2 2.3 2.6 2.6 2.4 2.1Net debt adj. / EBITDA adj. 5.4 3.7 3.6 3.3 3.2 3.1 3.3 3.4 3.2 3.0FFO rep. / net interest rep. 2.2 2.2 2.4 2.8 3.1 2.9 2.5 2.5 2.7 3.0FFO rep. / gross interest rep. 2.0 2.2 2.3 2.7 3.0 2.8 2.3 2.5 2.7 3.0Capex / sales 2.2% 1.6% 1.3% 1.1% 1.0% 1.1% 0.7% 0.9% 1.2% 1.4%Capex / depreciation 103.1% 63.8% 30.7% 63.0% 67.5% 65.2% 57.5% 72.0% 100.0% 120.0%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 53.0% 38.1% 40.8% 40.1% 39.9% 39.6% 39.2% 38.3% 37.4% 37.2%Net debt / net capitalization rep. 48.6% 27.8% 32.7% 32.0% 35.2% 31.0% 32.1% 29.4% 28.4% 28.4%Net debt / net capitalization adj. 65.1% 51.0% 56.1% 54.5% 52.5% 52.9% 53.4% 52.0% 51.3% 50.9%Net working capital / sales 0.2% -0.3% 0.1% -0.2% 1.3% 0.1% 0.8% 0.2% 0.2% 0.4%Fixed assets / sales 36.3% 33.6% 28.7% 26.8% 26.0% 24.1% 23.3% 23.3% 22.8% 22.3%


Comment FY 2008 FY 2009 FY 2010Sales growth Slowdown expected for H2 2008 1.5% 2.2% 3.2%EBITDA growth Pressure from diesel costs -17.3% 7.0% 13.7%EBIT growth Pressure from diesel costs 0.3% 13.7% 25.3%Capex incl. acquisition Targeted at least balanced net cash flow 25 25 30Change in working capital Stronger focus on working capital -3 1 -5Funds from operations (FFO) In line with operating performance 27 31 35


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Peri (BUY) Investment rationale We maintain our buy recommendation for Peri’s bonds mainly as a result of the

positive credit momentum while we do not believe in a rating upgrade in the short term.Despite the continuing slowdown in construction markets, Peri’s strong operational performance is likely to continue in the foreseeable future, in our view. Main driver will remainbuoyant growth in Eastern European markets as well as the Middle East and Asia. On its home turf, the German market, it is also growing, despite a weakening in general construction activity. Demand for Peri's technology is expected to remain comparatively robust asconstruction companies amidst a competitive environment and slowing construction activity strive to reduce their cost base. Peri's exposure to commercial and infrastructure construction markets should make it less vulnerable to slowing residential construction activity. To this end, we note that Peri's exposure to US residential construction is limited to larger condominium projects. Growth rates in its Eastern European core markets should remain healthy, driven bycommercial and infrastructure construction markets. Overall, we are still comfortable with Peri’s growth strategy and expect its bonds to remain one of the most solid investments in our HY universe. While S&P recently upgraded Peri to BBB-, Moody's may want to wait a little longer on general concerns relating to the outlook for the construction industry.

Latest results recap Peri H1 figures demonstrated the merits of its diversified geographic sales base. H1 sales advanced 14.2% to EUR 580 mn on strong growth in the Middle East/Asia/Australia (+44.7% to EUR 67 mn) and Eastern Europe (+21.3% to EUR 148 mn), while Western Europe showed a more subdued albeit still healthy performance (+5.6% to EUR 274 mn) butreversed the negative trend of Q1 when sales declined slightly (-2.7%). The Americas continued to show solid growth of 13.8% and 23.7% in local currency. Operating profitability in absolute EBITDA terms, according to Peri, increased 9.1% to EUR 172 mn at a margin of 26.8%, held back by currency effects as well as project delays. Cash flow generation was up y-o-y, with operating cash flow of EUR 99 mn (+16.0%) on a working capital build-up of EUR 44 mn (vs. EUR 41 mn y-o-y). Maintenance capital expenditures rose from EUR 62 mn to EUR 71 mn y-o-y, translating into a free operating cash flow of EUR 29 mn for H1 (vs. an outflow of EUR 24 mn y-o-y). Leverage in terms of net debt to EBITDA, according to Peri,stood at 1.88x, slightly up compared to the 1.79x reported for Q1.

DEVELOPMENT OF SALES AND EBITDA

Sales – Eastern Europe slowing from high basis EBITDA – Eastern Europe only a dip in Q2?

0

50

100

150

200

250

300

350

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

Western Europe Eastern Europe The Americas EMEATotal

0

20

40

60

80

100

120

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

Western Europe Eastern Europe The AmericasEMEA Consolidated EBITDA


Liquidity Peri's main sources of liquidity are its strong operating cash flow as well as committedsyndicated credit facilities. For the LTM H1 2008, Peri generated FFO of EUR 300.5 mn

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and spent EUR 136.9 mn on maintenance capex, leading to an operating free cash flow ofEUR 163.6 mn available for business expansion. Expansion investment (i.e. rental stock) totaled EUR 277.4 mn, which could and, according to Peri, would be scaled back substantially in order to meet immediate liquidity requirements should top line growth slow. Apart from EUR34.8 mn in on balance sheet cash, the company has access to a syndicated credit facility with current headroom of EUR 194 mn in addition to various bilateral credit facilities the amount of which the company does not specify. Peri's liquidity management aims for headroom of atleast EUR 100 mn at any given time. The syndicated facility was renewed and increased from EUR 275 mn to EUR 460 mn with a tenor of five years (2012) in Q4 2007. It has two one-year extension options. With respect to the maturities, we note that the EUR 100 mn FRN matures in December 2009. We expect that Peri will seek to refinance its maturity in the Schuldschein market.


Peri's long-term growth perspectives remain intact due to the advantages thatformwork systems offer in comparison to the traditional wood panels. Formwork systems can be used up to 100 times compared to traditional systems, which can only be used around three times. Advanced formwork systems also save labor time, i.e. formworksystems are beneficial and employed mostly in higher labor cost countries, thus giving construction companies an even higher incentive to employ formwork systems. As a result and over time, we expect increasing wages in emerging markets to lead to higher demand forformwork systems, leaving ample scope for expansion in developed countries as Peri continues its growth strategy. With a view to its continuing expansion, we do not expect a significantly negative impact on margins as we think Peri's performance will develop broadly in line with historical trends. This, however, implies that Peri's debt load will continue to increase as a result of its heavy capital expenditures (EUR 345 mn scheduled for 2008 and 2009) and increasing working capital requirements (for the build-up of rental stock) which are likely to partly consume anticipated strong operational cash flows. For 2008, Peri expects growth to slow from the high rates displayed in previous years (FY 2007: 18.4%) to around10% mainly because of the slowdown in key construction markets. However, a slowdown in construction activity may prove to be a further incentive for contractors to employ Peri's cost-advantageous formwork systems in an effort to ease competitive pressure on margins. Still, we expect a weakening in credit metrics from very healthy levels over the next few quarters.

Moody's takes its time in upgrading Peri's rating. While Peri's operating performance remains strong, an upgrade to investment grade at Moody's is predicated on its ability to improve and sustain a ratio of operating free cash flow before expansion capex in the mid-teens as well as an EBITDA margin of 30% and above. While we believe that the FY 2007 figures underscore the company's excellent track record, Moody's may want to take sometime in upgrading Peri to Baa1, largely as a result of its growth strategy and a potential slowdown in global construction markets. Peri's heavy spending on capex will lead to a further increase in debt (leverage expected to be around 2.0x at FYE 2008), but the ratio of operatingFCF to debt of 17.5% (for the LTM H1 2008) already meets the agency's requirement for aninvestment grade rating.

Risks to our model Main risks to our model are a more pronounced and abrupt slowdown in construction markets,a larger-than-expected increase in capex, the inability to pass on higher raw material costs(for steel and timber) and negative developments on the FX front.

Things to watch ● Development of EBITDA margins and free cash flow generation after maintenance capex



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CAPITALIZATION

Senior Credit Facilities Borrower Peri GmbH Senior Credit Facility Initial Amount (in EUR mn) Maturity Multi currency facility revolving 460 Tenor 5+1+1 years; Extension options after year 1 and 2

Covenants Typical financial covenants

Notes Issuer Peri GmbH Senior Notes 150 + 100 tap 12/11 Bullet Coupon 5.625%

Senior Notes 100 12/11 Bullet Euribor + 175 bp

Other Indebtedness EUR 36.6 mn mortgage secured debt (as of FYE 2007)

Silent participation of EUR 0.3 mn carrying an interest rate of 11%

Source: Peri, UniCredit Global Research

BOND DOCUMENTATION – PERI 5.625% 12/11, PERI FLOATER 12/09

Issuer Peri GmbH Call/Put Call Schedule No Equity claw back Prior to December 15, 2007 35% of the fixed rate bonds at 105.625% and 35% of the floater at 100% Make whole clause No Change of control 101% Guarantees On a senior basis by Peri-Werk Artur Schwörer GmbH & Co. KG and ACS Immobilien GmbH & Co KG; Security No Ranking – Pari passu with senior credit facilities and future senior indebtedness of the issuer

– Structurally subordinated to secured indebtedness and subsidiary debt Certain Covenants Limitation on Debt Fixed charge coverage ratio of at least 2.5x

Most important carve-out/exceptions: – EUR 180 mn less principal repayments and repayments due to asset disposals plus outstanding indebtedness at

issue date less repayments (compare other indebtedness in capitalization table) – Capital lease and mortgage financing of EUR 5 mn – Guarantees to unrestricted subsidiaries of up to EUR 10 mn – General basket of EUR 30 mn

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash, the assumption of liabilities or replacement of assets and is within 365 days 100% applied for repayment of senior facilities or for the investment in replacement assets Most important carve-out/exceptions: – Net proceeds may be deferred until an aggregate of EUR 10 mn has been reached – Proceeds have to be used to offer to redeem notes on a pro rata basis

Limitation on Restricted Payments – Dividends – Make loans to parent guarantor or its restricted subsidiaries – Transfer assets to parent guarantor or its restricted subsidiaries

Limitations on Transactions with Affiliates – Board resolution if transaction is greater than EUR 1 mn – Fairness opinion if transaction is greater than EUR 10 mn



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Business Description – Peri Privately-held Peri, (www.peri.de) is one of the world's leading developer, manufacturer and supplier of formwork systems. Peri sells and rents the formwork systems with revenues from sales accounting for 49% of its FY 2007 revenues. Peri was founded in 1969 and has constantly outgrown the market. With its main production site in Weissenhom, Germany, 49 subsidiaries and 85 rental yards, the company serves over 55 countries around the globe, deriving 87% of its sales outside Germany.


Western Europe34.0%

Eastern Europe25.0%

The Americas16.0%

Middle East/ Asia/ Australia

9.0%

Germany16.0%


EBITDA BY REGION (FY 2007)

Western Europe33.2%The Americas

14.9%

Middle East/ Asia/ Australia

10.2%

Eastern Europe41.7%




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BBB- Stable adj. FFO to debt of 25-30%; adj. Debt/EBITDA <2.5x required for the rating, Down: deterioration of market conditions

Moody's Ba1 Stable Up: demonstrate resilience to cyclical demand swings over some time, Down: not pressure expected

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

PERI 5.625% 12/15/2011

BBB-s/ Ba1s/-- EUR 250

PERI Float + 175 bp 12/15/2009

BBB-s/ Ba1s/-- EUR 100

BOND STRUCTURE

Peri-WerkArtur Schwörer

GmbH & Co. KG

International Subsidiaries

NoteholdersPERI GmbH

ACS ImmobilienGmbH & Co. KG

Senior Guarantees


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PROFIT AND LOSS (PERI)

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 560.6 576.9 648.4 781.8 969.4 538.9 1,147.5 640.5 1,262.2 1,401.1Raw materials used -110.0 -119.5 -160.7 -214.5 -287.6 -163.8 -352.6 -215.0 -414.0 -459.5Personnel costs -138.0 -143.5 -152.7 -173.8 -199.0 -108.1 -222.6 -124.8 -252.4 -280.2EBITDA reported 168.0 160.5 191.3 246.8 294.6 157.6 355.6 171.8 362.3 395.1Depreciation and amortization -104.9 -108.0 -106.2 -108.8 -132.1 -70.0 -162.5 -87.8 -189.3 -196.1Other operating income/expenses -142.6 -151.6 -143.7 -146.6 -188.2 -109.5 -216.7 -128.9 -233.5 -266.2EBIT reported 65.2 54.3 85.1 138.0 162.6 87.6 193.1 84.0 172.9 198.9Income from investments 0.2 0.0 0.1 0.2 0.5 0.1 0.4 0.1 0.0 0.0Interest result -24.3 -24.6 -26.4 -26.4 -27.9 -14.2 -30.8 -16.9 -35.0 -38.0Other financial items 0.1 0.3 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0EBT 39.2 28.3 58.7 111.8 135.2 73.4 162.7 67.1 137.9 160.9Taxes on income -16.3 -14.8 -14.2 -33.5 -33.0 -23.8 -52.8 -16.6 -44.8 -52.3Net income 22.9 13.5 44.5 78.3 102.2 49.6 109.8 50.6 93.1 108.6


in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 141 137 134 150 204 247 274 308 313 350 thereof goodwill 0 0 0 0 0 0 0 0 0 0Cash & cash equivalents 10 10 16 19 33 36 32 35 35 35Total assets 650 660 740 879 1,098 1,224 1,335 1,446 1,573 1,797Equity incl. minorities 166 159 201 301 379 428 471 526 564 673Shareholder loans 28 28 5 0 0 0 0 0 0 0Pension provisions 3 3 3 3 3 3 4 4 5 5Financial liabilities 339 359 415 431 526 583 639 684 772 871 short term (<1 year) 259 72 59 1 50 0 0 0 0 0 long term (>1 year) 80 287 357 430 476 583 639 684 772 871Net working capital 187 194 250 315 363 405 454 465 523 582

CASH FLOW

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) 142 128 146 189 259 127 284 143 284 305Change in working capital -15 -19 -53 -49 -85 -41 -68 -44 -69 -59Operating cash flow 128 108 93 140 174 86 216 99 214 246CAPEX -139 -130 -113 -143 -260 -137 -409 -142 -345 -345Free cash flow -11 -21 -20 -3 -86 -51 -193 -42 -131 -99Dividends 0 -1 0 -6 5 0 0 0 0 0Acquisitions/disposals -2 0 0 0 0 0 0 0 0 0Share buy back/issues 0 0 -31 0 0 0 0 0 0 0FCF after extraordinary items -13 -22 -51 -9 -81 -51 -193 -42 -131 -99

DEBT ADJUSTMENTS

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions 3 3 3 3 3 3 4 4 5 5For operating leases 14 14 14 14 28 28 34 34 34 34Others* 0 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (PERI)

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 30.0% 27.8% 29.5% 31.6% 30.4% 29.2% 31.0% 26.8% 28.7% 28.2%EBITDA margin adj. 30.2% 28.1% 30.0% 32.0% 31.9% 30.6% 32.8% 28.5% 30.4% 29.7%EBIT margin rep. 11.6% 9.4% 13.1% 17.7% 16.8% 16.2% 16.8% 13.1% 13.7% 14.2%EBIT margin adj. 11.5% 9.4% 13.4% 17.8% 17.1% 16.5% 17.1% 13.4% 14.0% 14.5%Return on capital (before tax) 8.1% 5.7% 9.5% 15.3% 14.9% 15.7% 14.6% 14.3% 10.3% 10.4%


2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 168 160 191 247 295 158 356 172 362 395EBITDA adj. 169 162 194 250 310 165 377 182 383 416FFO rep. 142 128 146 189 259 127 284 143 284 305FFO adj. 144 129 148 191 271 133 301 152 301 322Net debt rep. 330 349 399 412 493 547 607 649 738 837Net debt adj. 347 366 416 428 524 579 644 686 776 875Total debt 339 359 415 431 526 583 639 684 772 871EBITDA net interest cover rep. 6.9 6.5 7.2 9.4 10.6 11.1 11.5 10.1 10.4 10.4EBITDA gross interest cover rep. 6.3 6.0 6.7 8.7 9.6 9.9 10.3 8.7 9.3 9.4EBIT net interest cover rep. 2.7 2.2 3.2 5.2 5.8 6.2 6.3 5.0 4.9 5.2EBIT net interest cover adj. 2.5 2.1 3.1 5.0 5.4 5.7 5.7 4.6 4.6 4.9FFO rep. / total debt rep. 41.9% 35.5% 35.2% 43.9% 49.2% 48.6% 44.4% 43.9% 36.7% 35.0%FFO rep. / net debt rep. 43.1% 36.5% 36.6% 45.9% 52.5% 51.7% 46.8% 46.3% 38.5% 36.4%FFO adj. / net debt adj. 41.5% 35.3% 35.5% 44.5% 51.7% 51.9% 46.7% 46.7% 38.8% 36.8%FOCF rep. / total debt rep. -3.2% -5.8% -4.8% -0.7% -16.4% -10.3% -30.2% -24.4% -16.9% -11.4%FOCF rep. / net debt rep. -3.3% -6.0% -5.0% -0.7% -17.5% -11.0% -31.8% -25.7% -17.7% -11.8%RCF rep. / net debt rep. 43.1% 36.4% 36.6% 44.4% 53.5% 52.7% 46.8% 46.3% 38.5% 36.4%RCF adj. / net debt adj. 41.5% 35.2% 35.5% 43.1% 52.6% 52.8% 46.7% 46.7% 38.8% 36.8%Total debt rep. / EBITDA rep. 2.0 2.2 2.2 1.7 1.8 1.8 1.8 1.8 2.1 2.2Net debt rep. / EBITDA rep. 2.0 2.2 2.1 1.7 1.7 1.7 1.7 1.8 2.0 2.1Net debt adj. / EBITDA adj. 2.0 2.3 2.1 1.7 1.7 1.7 1.7 1.7 2.0 2.1FFO rep. / net interest rep. 6.9 6.2 6.5 8.2 10.3 9.9 10.2 9.5 9.1 9.0FFO rep. / gross interest rep. 6.3 5.8 6.1 7.6 9.4 9.0 9.2 8.3 8.3 8.3Capex / sales 24.7% 22.5% 17.4% 18.2% 26.8% 25.4% 35.7% 22.1% 27.3% 24.6%Capex / depreciation 132.1% 119.9% 106.4% 131.0% 196.7% 195.4% 251.9% 161.4% 182.2% 175.9%

CAPITAL STRUCTURE

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. 67.1% 69.4% 67.3% 58.9% 58.1% 57.7% 57.6% 56.5% 57.8% 56.4%Net debt / net capitalization rep. 66.5% 68.8% 66.5% 57.8% 56.5% 56.1% 56.3% 55.2% 56.7% 55.4%Net debt / net capitalization adj. 67.3% 69.5% 67.2% 58.6% 57.9% 57.4% 57.6% 56.5% 57.8% 56.4%Net working capital / sales 33.3% 33.6% 38.6% 40.2% 37.5% 38.6% 39.6% 37.3% 41.5% 41.6%Fixed assets / sales 25.1% 23.8% 20.7% 19.2% 21.1% 23.5% 23.9% 24.6% 24.8% 25.0%


Comment FY 2008 FY 2009Sales growth Slowing down in 2008 10.0% 11.0%EBITDA growth Margins to remain high 1.9% 9.1%EBIT growth Margins to remain high -10.4% 15.1%Capex incl. acquisition Company guidance 345 345Change in working capital Growth leading to cash outflow -69 -59Funds from operations (FFO) Healthy levels expected 284 305


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SGL Carbon (BUY) Investment rationale We keep our buy recommendation for the SGL floater 05/15. Prospects for the operating

development of SGL look fairly good on the back of solid growth prospects, the company's good pricing power and ongoing internal projects to secure at least stable margins. In addition, the company does not face any liquidity issues in the next few years, with the major refinancing successfully completed just in time, i.e. before the turmoil in credit markets hit.Following years of restructuring, SGL is now stepping on the gas to accelerate growth, which should limit further improvements in its credit profile. However, due to the good growth prospects and generally solid cash flow generation capabilities, SGL has currently ampleheadroom to finance increasing investments as well as bolt-on acquisitions, without significantly impairing its credit profile. Despite the cyclicality of the business, we currently view the name as a rather safe investment in the HY universe.

Recent developments In June, SGL's improving operating performance was rewarded, with Moody's changing the outlook for its Ba2 rating from stable to positive. The positive outlook reflects the agency's expectation that the company will be able to post another strong operatingperformance during FY 2008 and further consolidate its credit metrics at a high level.According to the agency, SGL's ambitious capex program in Asia and for the expansion of its Carbon Fibers & Composites business could be accommodated under the current rating if thecompany continues to benefit from a supportive operating environment and proves able tomaintain a strong level of operating cash flows. Over the next two years, Moody's expectsmoderately negative free cash flow. Given the cyclicality of SGL's end markets, Moody'swould consider a rating upgrade if SGL i) can sustain its operating profitability at current levels and maintain its adjusted RCF / Net Debt above 35% over the next twelve to eighteen monthsand ii) the agency is comfortable that these operating and credit metrics will be resilient over time.

Latest results recap SGL Carbon reported strong H1 2008 results. Sales increased 13.5% to EUR 735.1 mn, negatively impacted by exchange rate effects (+18% without this effect). Top-line growth accelerated in the second quarter, with sales increasing by 17.7% after 9.1% in Q1. Operating profitability in EBITDA terms surged 20.9% to EUR 176.0 mn, attributable to further costsavings totaling EUR 12 mn, higher prices and volumes as well as high capacity utilizationthat could offset surging raw material costs. Performance Products continued to be the cashcow of the group, with EBITDA up by 22.3% to EUR 153.3 mn, revealing a marginimprovement to 32%. The profit contribution of Carbon Fibers & Composites increasedstrongly y-o-y, but was still only a mere EUR 8.9 mn. Free operating cash flow generationtotaled EUR 6.9 mn, despite a sharp increase in capex (EUR 86 mn vs. EUR 38 mn a year ago), demonstrating the company's improved internal cash generation (FFO of EUR 148.0 mnvs. EUR 81.7 mn). In the prior-year period, the company used EUR 21.4 mn in cash (beforepayments relating to antitrust proceedings in the amount of EUR 22.5 mn) due to costsassociated with the repayment of the high yield bond. Net debt decreased from EUR 263.1 mnat the end of Q1 to EUR 228.8 mn. We calculate improving credit metrics, with adjusted FFO to adjusted net debt at 63.1% at the end of H1 (49.4% at the end of Q1, 42.1% at FYE 2007).

Liquidity SGL's liquidity remains healthy. At the end of H1 2008, SGL reported a cash pile of EUR 140.2 mn while short-term maturities were a mere EUR 1.5 mn. Following the refinancing of its debt in 2007, the company benefits from a back-end loaded debt maturity profile, with no significant repayments scheduled over the next five years. We expect SGL to continuously generate strong internal cash flows, which should help finance a large part of its increasing capex program. Further sources of liquidity include SGL's undrawn acquisition (EUR 125 mn) and revolving credit facilities (EUR 75 mn), both maturing in 2012.

Company outlook/ Credit profile trend

The fundamental outlook remains positive for SGL in 2008 as well as for 2009. With the

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release of its Q2 results, SGL confirmed its top-line growth guidance for 2008 (i.e. a sales increase by 10-15%) and even raised its profit guidance, now expecting EBIT to improve at the upper end of the previous 15-20% guidance. Given the refinancing completed in 2007, financing costs will decrease in FY 2008 vs. FY 2007, resulting in even stronger growth of netincome. In the Performance Products business, top-line growth should be boosted by ongoingstrong demand from the main end markets, i.e. the steel and aluminum industry, from newcapacity additions as well as announced price increases. The Carbon Fibers & Composites business will benefit from newly built-up capacity coming on stream in 2008 as well as in 2009. Generally, growth prospects remain strong for the company well into 2009, and it expects double-digit growth rates again. Looking at the bottom line, operating profit shouldbenefit from an improving performance of the Carbon Fiber & Composites business (that only contributed EUR 3.1 mn to EBIT in 2007) as well as ongoing cost savings efforts. The latter also includes, in the medium term, the expected positive effects from low energy and labor costs from the new plant in Malaysia, which is currently under construction (expected to come on stream at the end of 2010). In addition, SGL remains confident that it will continue to be able to pass on raw material cost increases such as for needle coke. Following years of restructuring, SGL is now also accelerating growth. For 2008, it expects investments to totalabout EUR 220 mn (previous guidance of EUR 200 mn was raised given the acceleration of the investment in the graphite electrode and cathode plant in Malaysia and as some US investments are brought forward). Hence, net debt is expected to increase in the second halfof the year, while the company remains committed to its gearing (net debt/equity) target of around 0.5x (0.38x at the end of Q2). We also note that SGL may look for strategic acquisitions (largely bolt-ons) to further strengthen its market positions in the Carbon Fiber &Composites business, while establishing a JV is another route SGL intends to follow toexpand and defend its market position. Overall, we forecast a rather stable credit profile development going forward.

CARBON FIBER CAPACITY MORE OR LESS STABLE CREDIT TREND EXPECTED

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Main risks Risks to our model include project risk (i.e. cost overruns) and risks in connection with the strong growth phase (e.g. management distraction).

Things to watch ● October 30: 9M results; Progress of investment program; M&A activities


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CAPITALIZATION

Senior Credit Facilities Borrower SGL Carbon AG Senior Credit Facility Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Acquisition Facility 125 05/12 Amortizing 0.5%-1.75% (margin ratchet) Revolving Facility 75 05/12 Bullet 0.5%-1.75% (margin ratchet) Polish Facility 50 PLN 12/08 Bullet 2% Covenants Typical financial covenants e. g. level of net worth, fixed charge coverage, net debt to EBITDA, EBITDA to interest expenses; restriction on asset disposals; requirement to maintain and protect intellectual property rights; limitations on acquisitions, JVs or similar transactions; limitation of dividends above certain leverage ratio Notes Issuer SGL Carbon AG Senior secured notes 200 05/15 Bullet Euribor +125 bp Convertible 200 05/13 Bullet Coupon 0.75% Other Indebtedness Finance lease liabilities of EUR 2 mn


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BOND DOCUMENTATION – SGL FLOAT EURIBOR +125 BP 05/15/15

Issuer SGL Carbon AG Call/Put Call Schedule On or after May 15, 2008: 102%, 2009: 101%; 2010 and thereafter: 100% Equity claw back No Make whole clause No Change of control 101% Guarantees On a senior basis by subsidiaries accounting for 68% of total net tangible fixed assets (the issuer holds another 10.3%

of net tangible fixed assets), 89% of EBITDA and 76% of sales Security First-priority share pledge over capital stock of SGL Carbon AG as well as the subsidiary guarantors with the

exception of the shares in SGL TECHNIC Ltd. (United Kingdom) Ranking – Equal to all of the Issuer's existing (e. g. pari passu with the senior credit facilities) and future indebtedness that is

not subordinated to the notes, – Senior to all subordinated indebtedness – Structurally subordinated to the indebtedness of the non guarantor subsidiaries

Certain Covenants Limitation on Debt Fixed charge coverage ratio of at least 2.0x; in the case of senior secured indebtedness 2.5x


asset sales – Incurrence of CLO, mortgage finance, purchase money obligations not exceeding EUR 30 mn – General Basket EUR 30 mn

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash, the assumption of liabilities or replacement of assets and is within 360 days 100% applied for debt reduction, for capex or for acquisition of a permitted businesses Most important carve-out/exceptions: – Excess proceeds of up to EUR 10 mn – Excess Proceeds exceeding EUR 20 mn have to be used to offer to redeem notes and pari passu debt at par

Limitation on Restricted Payments – 50% of consolidated net income (minus 100% of such negative amount) plus – Equity proceeds plus – Net reduction of Investments that are not permitted investments Most important carve-out/exceptions: – EUR 100 mn (on top of other restricted payments)




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Business Description – SGL Carbon SGL Carbon is one of the world's leading manufacturers of carbon-based products. Among the products produced are graphite and carbon electrodes, cathodes, furnace linings, carbon fibers, composites, ceramics and fuel cells. In FY 2007, the group generated about 49% of revenues in Europe, 22% in North America and 29% from the Rest of the World. The company is publicly listed with no major shareholder.


Performance Products

60.9%

Graphite Materials &

Systems26.5%

Carbon Fibers & Composites

11.9%

Corporate Center0.7%



-100 -50 0 50 100 150 200 250 300

PerformanceProducts

Graphite Materials& Systems

Carbon Fibers &Composites

Corporate Center

in EUR mn




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB Stable FFO to adjusted debt of more than 25% over the cycle, Down: A more aggressive financial policy or a marked sector downturn, Up: Constrained by intense cost pressure, concentrated supplier base, high reliance on the cyclical steel industry

Moody's Ba2 Positive Up: Sustain operating profitability at current levels and maintain adjusted RCF/Net debt above 35%; Down: Debt-financed acquisitions, cost overruns, deterioration in the market conditions that would lead to adjusted RCF/Net debt sustainably below twenties

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

SGL Float 5/15/2015 BBB-s/ Ba1p/-- EUR 200 5/15/2008 (102)

BOND STRUCTURE

SGL CARBONAG

(Germany)

Senior FacilitiesFloat SGL 05/15Convertible 05/13

Operating Subsidiaries


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PROFIT AND LOSS (SGL CARBON)

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 915.8 944.0 1,068.8 1,190.8 647.5 1,373.0 735.1 1,550.1 1,674.1Cost of goods and services sold -680.8 -681.3 -746.7 -806.8 -415.9 -896.0 -469.2 -996.7 -1,076.5Distribution expenses -121.8 -119.1 -126.8 -132.3 -109.6 -144.2 -114.6 -159.7 -167.4R&D expenses -19.0 -19.2 -18.0 -25.5 0.0 -30.4 0.0 -35.0 -35.0Administration -36.8 -43.6 -48.1 -51.4 0.0 -58.7 0.0 -65.1 -68.6Other operating income/expenses -1.0 -21.8 -16.4 -4.8 0.0 10.8 0.0 5.0 2.0EBITDA reported 122.2 126.6 177.9 223.4 145.6 303.8 176.0 353.6 390.6EBIT reported 56.4 59.0 112.8 170.0 122.0 254.5 151.3 298.6 328.6Adj. EBIT (bef. pension interest) 69.3 81.4 129.8 182.3 128.2 266.9 157.6 311.0 341.0Income from investments -2.8 -0.8 0.8 1.2 0.3 1.3 0.1 0.0 0.0Interest result -49.2 -54.4 -57.5 -40.2 -18.7 -34.0 -15.5 -39.0 -40.0Other financial items -23.0 -6.7 -8.9 -22.5 -31.9 -32.7 -0.9 0.0 0.0Discontinuing operations 0.0 -81.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0EBT reported -18.6 -84.7 47.2 108.5 71.7 189.1 135.0 259.6 288.6Extraordinary result -28.9 0.0 0.0 -32.1 0.0 0.0 0.0 0.0 0.0Taxes on income 18.8 -1.6 -19.1 -35.5 -22.3 -57.9 -36.6 -77.9 -86.6Net income -28.7 -86.3 28.1 40.9 49.4 131.2 98.4 181.7 202.0


in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 536 449 448 441 455 575 619 743 901Cash & cash equivalents 46 196 93 103 124 130 140 130 130Total assets 1,247 1,316 1,183 1,261 1,373 1,506 1,610 1,729 1,941Equity incl. minorities 117 269 323 447 563 637 750 804 986Pension provisions 189 157 159 168 169 170 173 170 170Other provisions 167 168 49 51 57 60 56 62 62Financial liabilities 495 420 342 332 406 415 369 482 521Net working capital 300 248 219 331 483 471 471 539 602

CASH FLOW

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) 55 75 111 167 82 200 148 239 264Change in working capital -23 0 -23 -55 -66 -60 -55 -67 -63Operating cash flow 32 75 88 112 16 140 93 172 201CAPEX -42 -42 -29 -65 -38 -131 -86 -220 -220Free cash flow -10 33 59 47 -21 9 7 -48 -19Dividends 0 0 0 0 0 0 0 -15 -20Acquisitions/disposals -11 -51 -72 -98 -29 -65 -3 -3 0Share buy back/issues -15 220 2 82 2 3 1 0 0FCF after extraordinary items -36 202 -11 30 -49 -53 5 -66 -39

DEBT ADJUSTMENTS



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PROFITABILITY RATIOS (SGL CARBON)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 13.3% 13.4% 16.6% 18.8% 22.5% 22.1% 23.9% 22.8% 23.3%EBITDA margin adj. 14.9% 15.9% 18.3% 20.2% 23.8% 23.4% 25.2% 24.0% 24.4%EBIT margin rep. 6.2% 6.3% 10.6% 14.3% 18.8% 18.5% 20.6% 19.3% 19.6%EBIT margin adj. 7.6% 8.6% 12.1% 15.3% 19.8% 19.4% 21.4% 20.1% 20.4%Return on capital (before tax) 1.2% 2.6% 10.3% 16.7% 20.0% 21.0% 24.0% 20.2% 19.2%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 122 127 178 223 146 304 176 354 391EBITDA adj. 137 150 196 240 154 322 185 372 409FFO rep. 55 75 111 167 82 200 148 239 264FFO adj. 57 76 112 171 84 205 151 245 270Net debt rep. 448 224 249 229 282 285 229 352 391Net debt adj. 836 499 514 466 462 487 431 553 592Total debt 495 420 342 332 406 415 369 482 521EBITDA net interest cover rep. 2.5 3.1 4.0 5.6 7.8 8.9 11.4 9.1 9.8EBITDA gross interest cover rep. 2.3 2.8 3.6 4.9 6.8 7.5 8.8 8.6 9.3EBIT net interest cover rep. 1.1 1.4 2.6 4.2 6.5 7.5 9.8 7.7 8.2EBIT net interest cover adj. 1.4 2.0 2.9 4.3 6.5 7.4 9.5 7.6 8.1FFO rep. / total debt rep. 11.2% 17.8% 32.4% 50.3% 41.4% 48.1% 72.1% 49.6% 50.7%FFO rep. / net debt rep. 12.3% 33.4% 44.6% 72.9% 59.7% 70.0% 116.2% 68.0% 67.5%FFO adj. / net debt adj. 6.8% 15.2% 21.8% 36.8% 37.7% 42.1% 63.1% 44.2% 45.5%FOCF rep. / total debt rep. -2.0% 7.9% 17.3% 14.0% -0.8% 2.2% 24.9% -10.1% -3.7%FOCF rep. / net debt rep. -2.2% 14.7% 23.8% 20.3% -1.1% 3.2% 40.2% -13.8% -5.0%RCF rep. / net debt rep. 12.3% 33.4% 44.6% 72.9% 59.7% 70.0% 116.2% 63.7% 62.4%RCF adj. / net debt adj. 6.8% 15.2% 21.8% 36.8% 37.7% 42.1% 63.1% 41.5% 42.1%Total debt rep. / EBITDA rep. 4.0 3.3 1.9 1.5 1.5 1.4 1.1 1.4 1.3Net debt rep. / EBITDA rep. 3.7 1.8 1.4 1.0 1.1 0.9 0.7 1.0 1.0Net debt adj. / EBITDA adj. 6.1 3.3 2.6 1.9 1.6 1.5 1.2 1.5 1.5FFO rep. / net interest rep. 2.1 2.8 3.5 5.2 5.4 6.9 10.5 7.1 7.6FFO rep. / gross interest rep. 2.1 2.6 3.2 4.7 4.8 5.9 8.4 6.8 7.3Capex / sales 4.6% 4.4% 2.7% 5.5% 5.8% 9.5% 11.7% 14.2% 13.1%Capex / depreciation 63.7% 61.5% 43.9% 122.1% 158.9% 264.7% 348.2% 400.0% 354.8%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. 80.9% 60.9% 51.4% 42.6% 41.9% 39.5% 33.0% 37.5% 34.6%Net debt / net capitalization rep. 79.3% 45.4% 43.5% 33.9% 33.4% 30.9% 23.4% 30.4% 28.4%Net debt / net capitalization adj. 88.1% 65.7% 63.7% 52.2% 44.6% 43.7% 36.8% 41.1% 37.8%Net working capital / sales 32.8% 26.3% 20.5% 27.8% 38.0% 34.3% 32.3% 34.7% 36.0%Fixed assets / sales 58.5% 47.6% 41.9% 37.0% 35.9% 41.9% 42.4% 48.0% 53.8%


Comment FY 2008 FY 2009Sales growth Driven by benign industry outlook 12.9% 8.0%EBITDA growth Improving performance of CF&C, internal efforts 16.4% 10.5%EBIT growth Improving performance of CF&C, internal efforts 17.3% 10.0%Capex incl. acquisition Increasing investments to support top-line growth 223.0 220.0Change in working capital Increase due to raw material prices -67.4 -63.4Funds from operations (FFO) Strong levels should persist 239.0 264.0


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Paper and Packaging Sentiment remains negative with regard to paper companies following the release of

poor results, uninspiring outlook statements and the increasing downside risks withregard to potentially weakening demand and the Sword of Damocles of rising Russianexport duties.

Continuing weak results and Stora now a High Yield issuer

Following earlier profit warnings of some paper companies, Lecta, M-real, Norske as well as Stora released poor Q2 2008 figures. Results continued to be burdened by cost inflation (wood, energy, pulp), negative FX effects as well as a poor performance of the WoodProducts division (Stora). All companies burned cash in the quarter, with the exception ofNorske which managed to stay positive with the help of a working-capital related cash release and lower capex spending. Overall, financial metrics of all companies deteriorated despitesome disposal cash inflows (M-real, Stora). In July, Fitch finally also downgraded the rating ofStora to junk status (BB+), with the company now being an "official member" of the high yield universe with non-investment grade ratings at two rating agencies. Fitch cited intensifyingstructural weaknesses in the European pulp and paper sector as one of the main reasons for its decision.

MARGIN TREND CREDIT PROFILE TREND

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New restructuring measures and capacity closures

European paper companies are embarking on a new round of restructurings, includingcapacity reductions. Early in September, UPM and Stora announced new broad restructuring programs, also involving the closure of capacity: i.e. for newsprint (estimated470,000 tons), coated (140,000 tons) and uncoated magazine paper (estimated 170,000tons). In addition, Holmen announced its intention to reduce its coated magazine paper capacity (by 150,000 tons) while Burgo and Sappi will reduce coated fine paper capacity by acombined 400,000 tons. Other paper companies such as M-real and Lecta have indicated the announcement of further restructuring measures later during the year. Besides measures to restore profitability levels, some of the Finnish paper companies (Stora, UPM) alsoannounced initiatives to reduce exposure to wood imports from Russia in view of thepotentially upcoming further hike in Russian wood duties. Overall, the announcements were positive news for the industry, however, we remain skeptical if they are already sufficient torestore profitability levels of the companies, in particular in paper grades that suffer the mostfrom overcapacity (e.g. coated fine paper) and/or weakening demand (e.g. newsprint).

Bleak sector outlook The near-term sector outlook remains bleak despite capacity reductions. In light of the weakening economy, demand for paper products is likely to decline (in particular for

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newsprint) and could outweigh the positive effects from the announced capacity reductions. Inthis respect, price negotiations could also prove difficult with increases only appearing likely in the magazine paper grade (UPM already implemented a 5% increase). Coated fine paper producers are currently also trying to implement a sizeable price increase (between 6-10%). Although the chances of success might look a bit better following the implemented capacityshutdowns, we believe that further capacity closures are needed to bring the market into full balance and allow for the full magnitude to be implemented. Overall, price increases shouldremain difficult to implement, but paper companies will continuously have to deal with costinflation. With the release of its Q2 results, Stora highlighted the risk of a further upwardrevision of its earlier raised inflation guidance (from 2.5-3% to 4%) and M-real already predicted higher costs than previously estimated. However, positive news in this respect was certainly the recent decline in oil price as well as the increased harvesting of wood in Finland(spurred by the Finnish government), but it remains to be see if these trends will stick. Thesame holds true for the recently seen USD strengthening.

ALREADY THE END OF USD WEAKNESS? DECLINING OIL PRICE

1.161.201.241.281.321.361.401.441.481.521.561.60

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BL


Negative credit profile trend The credit metrics trend remains negative. While this is no news as such, we now expect the credit profile deterioration to be even stronger on the back of weakening demand in H2 aswell as higher cost inflation and despite some potentially implemented price increases. Wewould also not rule out further profit warnings of paper companies.

Consolidation – yes, but when? The "white knight" consolidation is still a long time coming, although rumors in thisrespect have been again increasing recently. So far, the "hoped-for" bigger industry restructurings have not materialized, while comments made by paper companies indicate that market participants are still trying to find solutions. We have highlighted before that the mainfocus of the companies would be to solve their wood sourcing problem. With UPM and Storanow having addressed this issue with their new restructuring programs, we believe that M&A activities could come again to the fore. However, in view of the increasingly challengingtrading as well as capital market conditions, we continue to remain skeptical about any short-term solutions.


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Gerresheimer (HOLD) Investment rationale We recommend to hold the GERRES bond. We continue to like Gerresheimer's satisfactory

business profile given stable non-cyclical customer industries with ongoing strong demand growth forecasts, the company's leading market positions as well as the increasing shifttowards higher value-added products. With an ongoing positive operating outlook, the maindriver for the credit in the near term will be further acquisition activity which should, however, mainly involve small-to-medium sized transactions. Credit positive, on the other hand, wouldbe the disposal of the low margin technical plastic business with the process already beinginitiated. Overall, we view the bonds as a solid investment in the High Yield universe, however, we note that they are somewhat difficult to get hold of.

Recent developments In August, Gerresheimer announced that it has started the process to dispose of itstechnical plastic business. The company had acquired the business that is expected to generate sales of EUR 70 mn in FY 2008 with the acquisition of Wilden. The disposal is partof its strategy to focus on its core businesses to which the production of components for theautomobile industry does not belong. The transaction should further boost the company'sprofitability since the business currently does not meet the return requirements of the group. In June, Gerresheimer had already sold its consumer healthcare business (sales of EUR 24mn), which comprised the production of toothbrushes and other inter-dental articles, to the Krallmann Group.

Latest results recap Gerresheimer reported another strong set of quarterly figures. In Q2 2008, sales increased by 12.8% (16.5% in constant exchange rates) to EUR 276.3 mn, driven by the positive sales trend in the market segments of pharmaceutics and cosmetics as well as byacquisitions. Adjusted EBITDA improved by 20.2% to EUR 53.6 mn, resulting in a margin of19.4% (18.2%), attributable to higher productivity and higher top-line growth. An improving performance could be seen across all segments. During the first six months, the companycontinued to burn cash given ongoing high capex requirements. However, due to the strongeroperating performance as reflected in a doubling of FFO to EUR 66 mn, the cash usedeclined from EUR 35 mn in H1 2007 to EUR 5 mn. Net financial debt stood at EUR 456.2mn, an increase compared to FYE 2007 (EUR 390.6 mn), mainly due to the cash outflows foracquisitions (EUR 36 mn) and dividend payments (EUR 14 mn). Adjusted leverage asreported by the company was 2.3x (2.2x at FYE 2007).

IMPROVING MARGINS IN ALL SEGMENTS POSITIVE CREDIT PROFILE TREND

0%

5%

10%

15%

20%

25%

30%

Tubular GlassPackaging

MouldedGlass

Packaging

PlasticSystems

Life ScienceResearch

Group

Adj

uste

d E

BIT

DA

mar

gin

Q2 2007 Q2 2008

0%

5%

10%

15%

20%

25%

30%

35%

2002

2003

2004

PF

2005

2006

2007

H1

08

2008

e

2009

e

2010

e

0

1

2

3

4

5

6

7

8

9

10FFO adj. / total debt adj. Net debt adj. / EBITDA adj. (RS)


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Liquidity Gerresheimer's liquidity situation is adequate. At the end of Q2 2008, it reported a cash position of EUR 32.5 mn and had EUR 154 mn available under its EUR 175 mn revolvingcredit line (maturing in 2012), which compares with short-term maturities of EUR 91.2 mn, including the drawings under the revolver. In addition, we expect an ongoing sound operatingperformance of the company in 2008, including the return to slightly positive free cash flowgeneration. This should be supportive for any financing needs and to meet the financial covenants of its senior facilities.


While the operational outlook remains positive for Gerresheimer also in 2008, itscontinuing growth strategy should prevent a further material improvement in its credit metrics. With the release of Q2 results, the company confirmed its positive outlook for 2008,expecting sales growth of between 14-16% at constant exchange rates, which should be mainly driven by the ongoing strong demand from the pharma and life science industry. In addition, the company will assess further potential acquisitions. In terms of profitability,Gerresheimer targets improvements towards an adjusted EBITDA margin of around 19.5%(18.7% in H1 2008 vs. 18.0% in H1 2007 and 19% in FY 2007). Profitability should benefit from ongoing productivity improvement measures (e.g. in the Life Science business), thefocus on high-margin products (e.g. RTF syringes, with a third line coming on stream in 2009), as well as the potentially upcoming disposal of low-margin businesses such as the technical plastic business. Free operating cash flow generation is generally burdened by the company'shigh capex requirements, however, we forecast the swing to positive cash generation in 2008.Overall, the operating trend remains positive, but we expect Gerresheimer to continuouslypursue acquisition activities, which should limit major improvements in its credit metrics.However, the scope of acquisitions should be mainly narrowed to targets with a sales volumeof about EUR 20-70 mn, as bigger acquisition targets are scarce. Generally, Gerresheimer is committed to a net leverage target of between 3.0-3.5x, partly determined by its covenants in the senior credit facility.

Model assumptions/risks We base our forecast on the following major assumptions:

i) Ongoing strong top-line growth

ii) Further improvements in profitability

iii) Capex of EUR 110 mn in 2008

iv) Return to small positive free operating cash flow generation in 2008.

Main risks to our model are further acquisitions and the disposal of the technical plastic business which we have not yet included in our model.

Things to watch ● M&A activities

● Free cash flow generation

● October 15: Q3 2008 results


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CAPITALIZATION

Senior Credit Facilities Borrower Gerresheimer Group GmbH Senior Credit Facility Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Term Loan 275 2012* margin ratchet n.a. Revolving Credit Facility 175 2012* n.a. *for EUR 412 mn extension for one year obtained in May 2008, i.e. maturity 2013 Covenants Minimum level of interest coverage, maximum level of leverage Notes Issuer Gerresheimer Holdings GmbH Senior Notes 126 2015 Bullet Coupon 7.875% Other Indebtedness Local borrowing totaling EUR 61.5 mn at the end of Q2 2008 Capitalized lease obligations totaling EUR 28 mn at the end of Q2 2008


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BOND DOCUMENTATION – GERRES 7.875% 03/01/15

Issuer Gerresheimer Holdings GmbH Call/Put Call Schedule On or after February 15, 2010: 103.938%; 2011: 101.969%; 2012 100.984%; 2013 and thereafter: 100% Equity claw back Prior to February 15, 2008 up to 40% at 107.875% Make whole clause Prior to February 15, 2010, Bund plus 50 bp Change of control 101% (if more than 50% of total voting power) Guarantees On a senior subordinated basis by certain subsidiaries of the issuer, which represent 89.6% of assets, 96.6% of

Adjusted EBITDA and 76.2% of net sales Security Second priority security interest in all of the shares of Gerresheimer Group GmbH, first priority security interest in all

of the issuer's rights under the Proceeds Loan Ranking – Equal with any existing and future senior indebtedness of the issuer

– Structurally subordinated to all of the existing and future indebtedness of the issuer's subsidiaries (other than indebtedness of any subsidiary that guarantees the notes to the extent of the guarantee)

Certain Covenants Limitation on Debt/Preferred Stock Fixed charge coverage ratio of at least 2x

Most important carve-out/exceptions: – Indebtedness under the Credit Agreement up to EUR 355 mn, less the amount of any permanent repayments of

such debt with proceeds from asset sales – Indebtedness (including CLO) for financing of property or equipment not exceeding the greater of EUR 30 mn and

3.25% of total assets – General Basket: EUR 25 mn

Limitation on Sale of Certain Assets Limitation on Merger, Consolidation or Sale of Assets

Consideration is at least equal to fair market value and at least 75% of the consideration is in the form of cash/cash equivalents (assumed liabilities, securities, designated non-cash consideration with fair market value not exceeding greater of EUR 50 mn and 5% of total assets are deemed to be cash) and is within 365 days applied for debt/preferred stock reduction, replacement assets or investments in permitted business (shall be extended by an additional 180 days if entered into a bona fide binding commitment) Excess proceeds exceeding EUR 15 mn used to redeem notes at par No consolidation or merger with/into another person or disposal of substantially all of its assets Most important carve-out/exceptions: – -Surviving corporation can incur at least EUR 1 of additional indebtedness

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of: – 50% of consolidated net income (minus 100% of such deficit) – Equity proceeds and conversion of debt to equity proceeds – Capital contributions – Proceeds in case of disposition or repayment of any restricted investment and in case of the sale of the capital

stock of an unrestricted subsidiary – Fair market value of the issuer's investment in any unrestricted subsidiary re-designated as restricted subsidiary

(or which is consolidated/whose assets are transferred into/to issuer or restricted subsidiary) – Proceeds of shareholder debt issuance Most important carve-out/exceptions: – Repurchase of equity or shareholder debt held by employees or management not exceeding EUR 5 mn in any

calendar year (unused amounts being carried over to the subsequent two calendar years) – Dividends following the first public offering of up to 6% p.a. of the public offering proceeds – General basket: EUR 15 mn

Limitations on Transactions with Affiliates General Basket EUR 5 mn, for transactions exceeding this amount only if: – Terms not materially less favorable – Board resolution if transaction greater than EUR 10 mn



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Business Description – Gerresheimer AG (previously Gerresheimer Holdings GmbH) Gerresheimer is an internationally leading manufacturer of specialty products made of glass and plastic for the pharma & life science industry. The group has 40 plants in America, Europe and Asia and employs about 10,300 people. Previously a leveraged buyout company, the company underwent an IPO in June 2007. In the future, the company intends to focus on growth as well as on further profitability improvements.


Plastic Systems 31%

Tubular Glass Packaging

28%

Life Science Research

8%

Moulded Glass Packaging

33%


ADJUSTED EBITDA BY SEGMENT (FY 2007)

-20 0 20 40 60 80

Tubular GlassPackaging

Moulded GlassPackaging

Plastic Systems

Central Function /Consolidation

Life ScienceResearch

in EUR mn


DEBT MATURITY PROFILE 02/28/2008


ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB+ Stable Up: Sustainable improvement of financial performance well above the requirements for the current ratings (i.e. adjusted debt to EBITDA at about 3x, FFO to adjusted debt of about 20-25%); Down: Major debt-financed acquisitions or failure to enhance operating performance

Moody's Ba2 Stable Up: Debt/EBITDA leverage moving below 3x, manage strong growth on a sustained level without compromising profitability; Down: Weakening profitability, Debt/EBITDA moving to 4x

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

GERRES 7.875% 3/1/2015

BB+s/ B1s/-- EUR 126 2/15/2010 (103.94)

BOND STRUCTURE

Gerresheimer AG

Gerresheimer Holdings GmbH

Italian operatingsubsidiary

Gerresheimer Glas GmbH

Noteholders

Additional German Guarantors

Non-guarantor subsidiaries US Guarantors

guaranteesGerresheimerGroup GmbH


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PROFIT AND LOSS (GERRESHEIMER AG (PREVIOUSLY GERRESHEIMER HOLDINGS GMBH))

in EUR mn 2002 2003 2004PF 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 581.6 547.7 529.0 525.8 646.7 447.3 957.7 515.4 1,072.6 1,179.9 1,286.1Cost of goods and services sold -443.4 -415.5 -394.1 -376.4 -474.1 -324.4 -683.5 -367.1 -776.1 -854.4 -928.8Distribution expenses -60.4 -56.8 -53.1 -52.4 -64.1 -46.3 -94.0 -51.4 -104.0 -114.4 -124.7Administration -47.2 -39.6 -38.6 -34.3 -42.9 -30.5 -70.7 -39.8 -69.7 -76.7 -83.6Other operating income/expenses -29.3 -27.0 -68.2 -93.4 -43.5 -22.4 -56.5 -23.8 -30.0 -25.0 -25.0EBITDA reported 69.6 76.4 92.2 87.6 95.0 70.8 151.2 92.3 202.8 226.3 248.9EBIT reported 1.3 8.8 -25.0 -30.6 22.1 23.7 53.1 33.4 92.8 109.3 123.9Adj. EBIT (bef. pension interest) 26.4 33.1 -84.7 6.1 61.7 39.0 95.4 43.4 109.7 126.2 140.8Income from investments 0.0 0.0 0.0 0.0 -0.2 0.1 0.3 0.1 0.0 0.0 0.0Interest result -38.3 -35.6 -31.5 -45.4 -53.9 -36.6 -77.6 -20.3 -41.0 -36.8 -30.9Other financial items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Discontinuing operations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0EBT reported -37.0 -26.8 -56.5 -76.1 -32.1 -12.8 -24.2 13.1 51.8 72.5 93.0Extraordinary result 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Taxes on income 8.8 2.6 19.3 22.1 7.1 4.8 25.1 -5.0 -18.1 -25.4 -32.6Net income -28.3 -24.2 -37.2 -54.0 -25.0 -8.0 0.8 8.1 33.6 47.1 60.5


in EUR mn 2002 2003 2004PF 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 560 504 708 637 682 986 1,004 1,036 1,044 1,027 1,002Cash & cash equivalents 15 13 9 29 25 56 80 33 80 80 80Total assets 813 733 942 883 941 1,408 1,437 1,472 1,506 1,518 1,522Equity incl. minorities 16 -16 124 6 -26 32 500 500 519 550 589Shareholder loans 109 117 0 0 0 0 0 0 0 0 0Pension provisions 180 169 182 187 173 166 160 156 160 160 160Other provisions 68 54 92 73 67 127 103 105 95 87 79Financial liabilities 313 286 414 450 600 895 471 489 522 495 448Net working capital 63 49 75 29 83 139 106 140 126 138 148

CASH FLOW

in EUR mn 2002 2003 2004PF 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 56 50 65 36 48 34 92 66 132 156 177Change in working capital 14 4 -10 12 15 -32 -38 -39 -19 -12 -10Operating cash flow 71 54 55 47 62 1 54 26 113 144 167CAPEX -61 -42 -36 -41 -75 -37 -88 -31 -110 -100 -100Free cash flow 10 12 20 6 -13 -35 -34 -5 3 44 67Dividends -4 0 -2 -2 -2 -2 -3 -14 -14 -16 -21Acquisitions/disposals 29 2 1 -108 -60 -216 -216 -33 -40 0 0Share buy back/issues -17 -6 0 117 2 64 439 0 0 0 0FCF after extraordinary items 17 8 19 12 -72 -189 186 -52 -51 28 46

DEBT ADJUSTMENTS

in EUR mn 2002 2003 2004PF 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions 188 176 196 192 179 173 160 159 160 160 160For operating leases 16 16 15 13 16 18 23 23 23 23 23Others* 0 0 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (GERRESHEIMER AG (PREVIOUSLY GERRESHEIMER HOLDINGS GMBH))

2002 2003 2004PF 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 12.0% 13.9% 17.4% 16.7% 14.7% 15.8% 15.8% 17.9% 18.9% 19.2% 19.4%EBITDA margin adj. 16.6% 18.7% 19.7% 24.2% 21.4% 19.7% 20.7% 20.3% 21.0% 21.1% 21.1%EBIT margin rep. 0.2% 1.6% -4.7% -5.8% 3.4% 5.3% 5.5% 6.5% 8.6% 9.3% 9.6%EBIT margin adj. 4.5% 6.0% -16.0% 1.2% 9.5% 8.7% 10.0% 8.4% 10.2% 10.7% 11.0%Return on capital (before tax) -11.3% -9.9% -10.5% -16.7% -5.6% 0.2% -2.5% 4.3% 5.0% 6.9% 9.0%


2002 2003 2004PF 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 70 76 92 88 95 71 151 92 203 226 249EBITDA adj. 97 103 104 127 138 88 199 105 225 248 271FFO rep. 56 50 65 36 48 34 92 66 132 156 177FFO adj. 58 52 69 38 51 36 97 68 138 161 183Net debt rep. 298 273 405 421 575 839 391 456 442 414 368Net debt adj. 502 465 615 626 770 1,030 574 638 625 598 551Total debt 313 286 414 450 600 895 471 489 522 495 448EBITDA net interest cover rep. 1.8 2.1 2.9 1.9 1.8 1.9 1.9 4.5 4.9 6.1 8.1EBITDA gross interest cover rep. 1.8 2.1 2.9 1.9 1.7 1.9 1.7 4.4 4.9 6.1 8.1EBIT net interest cover rep. 0.0 0.2 -0.8 -0.7 0.4 0.6 0.7 1.6 2.3 3.0 4.0EBIT net interest cover adj. 0.7 0.9 -2.6 0.1 1.1 1.0 1.2 2.0 2.5 3.2 4.2FFO rep. / total debt rep. 18.1% 17.6% 15.8% 7.9% 8.0% 7.5% 19.6% 25.4% 25.4% 31.6% 39.6%FFO rep. / net debt rep. 18.9% 18.4% 16.1% 8.5% 8.3% 8.0% 23.6% 27.2% 30.0% 37.7% 48.2%FFO adj. / net debt adj. 11.6% 11.2% 11.2% 6.1% 6.6% 6.9% 17.0% 20.4% 22.0% 27.0% 33.1%FOCF rep. / total debt rep. 3.1% 4.2% 4.7% 1.3% -2.1% -0.7% -7.2% -1.0% 0.6% 8.9% 15.1%FOCF rep. / net debt rep. 3.3% 4.3% 4.8% 1.4% -2.2% -0.7% -8.6% -1.1% 0.7% 10.7% 18.3%RCF rep. / net debt rep. 17.5% 18.3% 15.7% 7.9% 8.0% 7.8% 22.9% 23.8% 26.7% 33.7% 42.5%RCF adj. / net debt adj. 10.8% 11.2% 11.0% 5.8% 6.4% 6.7% 16.5% 18.0% 19.7% 24.2% 29.3%Total debt rep. / EBITDA rep. 4.5 3.7 4.5 5.1 6.3 7.3 3.1 2.8 2.6 2.2 1.8Net debt rep. / EBITDA rep. 4.3 3.6 4.4 4.8 6.0 6.8 2.6 2.6 2.2 1.8 1.5Net debt adj. / EBITDA adj. 5.2 4.5 5.9 4.9 5.6 6.3 2.9 3.0 2.8 2.4 2.0FFO rep. / net interest rep. 2.5 2.4 3.1 1.8 1.9 1.9 2.2 4.2 4.2 5.2 6.7FFO rep. / gross interest rep. 2.4 2.4 3.1 1.8 1.9 1.9 2.0 4.1 4.2 5.2 6.7Capex / sales 10.5% 7.7% 6.8% 7.8% 11.6% 8.2% 9.2% 6.0% 10.3% 8.5% 7.8%Capex / depreciation 121.4% 85.9% 30.5% 34.9% 102.6% 78.0% 89.5% 52.9% 100.0% 85.5% 80.0%

CAPITAL STRUCTURE

2002 2003 2004PF 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 95.2% 105.8% 77.0% 98.7% 104.6% 96.6% 48.5% 49.4% 50.1% 47.4% 43.2%Net debt / net capitalization rep. 94.9% 106.0% 76.6% 98.6% 104.8% 96.3% 43.9% 47.7% 46.0% 43.0% 38.5%Net debt / net capitalization adj. 98.3% 105.1% 84.8% 99.9% 104.4% 97.7% 53.5% 56.2% 54.6% 52.1% 48.3%Net working capital / sales 10.8% 8.9% 14.2% 5.4% 12.9% 18.0% 11.1% 13.7% 11.7% 11.7% 11.5%Fixed assets / sales 96.2% 92.0% 133.9% 121.1% 105.5% 127.4% 104.8% 101.0% 97.3% 87.0% 77.9%


Comment FY 2008 FY 2009 FY 2010Sales growth Strong top-line growth driven by strong demand for products and RTF syringes 12.0% 10.0% 9.0%EBITDA growth Ongoing productivity improvements 34.1% 11.6% 10.0%EBIT growth Ongoing productivity improvements 74.8% 17.8% 13.4%Capex incl. acquisition Generally high capex requirements driven by furnace overhauls 160 100 100Change in working capital In line with sales growth -19 -12 -10Funds from operations (FFO) Benefiting from higher top line growth 132 156 177


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Lecta (SELL) Investment rationale We change our recommendation for Lecta notes from hold to sell on macroeconomic

fears and the related further aggravation of the already challenging trading conditionsfor paper companies. We are still skeptical that currently implemented restructuringmeasures in the coated fine paper industry will be sufficient to restore the profitability levels of paper companies. In addition, an increasingly uncertain macro outlook increases the risk offurther setbacks in the companies' efforts to restructure the industry. Lecta's credit metrics are set to weaken in FY 2008 vs. FY 2007, however, on the back of potential price increases and internal profitability improvement measures, leverage should at least decline somewhat in FY 2009. The main risk to our short position is the announcement of a broader industryrestructuring. While we are still rather skeptical about a short-term solution, rumors in this respect have been increasing again recently.

Recent developments After years of more or less stable prices, coated fine paper producers are trying to implement a sizeable price increase (between 6-10%). Lecta announced a EUR 60 per ton price increase on its CWF sheets and reels deliveries effective September 15. The companyseems fairly optimistic that it can implement the increases on the back of capacity shutdownsat Burgo (210,000 tons already effective as of August) and Sappi (190,000 tons intended to be shut down by the end of the year) as well as the improved determination in the industry topush through price increases. Lecta had already tried to raise prices earlier in the year, an attempt that failed since it was not supported by other market participants. That said, thechances of success look a bit better now, although we believe that further capacity closuresare needed to restore the market balance and allow for the full magnitude to be implemented. In this context, Lecta seemed quite optimistic that there will be further capacity shutdowns (orconversion of mills) in the market within the next six to twelve months.

RECENT WEAKNESS IN COATED FINE PAPER DELIVERIES CREDIT METRICS SHOULD REMAIN WEAK

CWF Deliveries y-o-y change

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Jan-

07

Feb-

07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

0

1

2

3

4

5

6

7

2004 2005 2006 2007 H1 08 2008e 2009e0%

5%

10%

15%

20%

25%

30%

35%Adj. total debt to adj. EBITDA Adj. FFO to adj. total debt

Source: Cepifine, Company data, UniCredit Global Research

Latest results recap Lecta's Q2 2008 results were weak and continued to reflect the difficult tradingconditions in the coated fine paper industry. Top-line growth was again pushed by higher sales of energy (from EUR 6.0 mn to EUR 20.8 mn) while sales of paper remained nearly flaty-o-y at EUR 371.4 mn on higher volumes of 1.4% and about EUR 9 per ton lower average paper prices. However, compared to Q1, paper prices were slightly up, attributable to price increases in Spain and Italy (which were, however, abandoned during the quarter) and the impact of higher selling prices from the acquisition of distribution company Secmar (which tend to have higher selling prices than producers). EBITDA margin before exceptional items was down from 12.1% in Q2 2007 to 9.3% (9.5% in Q1 2008). Higher input costs for pulp

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(average purchase price of EUR 443 per ton vs. EUR 429 mn per ton) as well as the impact from the consolidation of lower-margin Secmar could not be fully offset by further labor cost reductions (down from 15.9% of sales to 15.1% y-o-y) as well as a positive impact from a build-up of finished goods and work in progress (which should, however, reverse in the coming quarter). During the quarter, the company burned EUR 21.1 mn in cash (vs. cash generation of EUR 8.9 mn) as a result of the weaker operating performance and a build-up in working capital, in particular inventories. In addition, Lecta paid about EUR 40 mn for the acquisition of Secmar. Hence, net debt went up from EUR 605.9 mn at the end of Q1 2008 to EUR 672.8 mn at the end of June, with net leverage increasing to 4.7x on an LTM basis (4.0x at the end of Q1).

Liquidity Lecta's liquidity remains adequate. At the end of Q2 2008, the company's cash pile was still healthy, totaling EUR 124.7 mn. In addition, Lecta continues to have full access to its EUR 60 mn revolving credit line. Following the completed refinancing of its debt in February 2007,the company's maturity schedule is back-end loaded, with the main maturities being the revolver in 2013 and the FRN notes in 2014. At the end of June, reported short-term liabilities amounted to EUR 24.4 mn. Overall, available liquidity resources should help to cover theupcoming short-term maturities. In addition, we expect Lecta to start generating cash in the second half of the year, supported by a working capital related cash release and somewhat reduced capex spending (capex guidance for the year was reduced from EUR 87 mn to EUR60 mn). We also note that Lecta has no covenants in its loan documentation that could act as stumbling blocks.

Credit profile trend We expect a weakening of credit metrics in FY 2008 compared to FY 2007. However,leverage should decline again somewhat in FY 2009. In our model, we have only includedsome moderate price increases for the remainder of year, which should at least help to stop the declining trend in margins. However, we do not foresee the company meeting its prioryear profitability as Q3 will also be negatively impacted by the temporary production shutdown during the summer months. For 2009, we forecast positive effects on Lecta's profitability as a result of the new cogeneration plant in Spain (expected EBITDA improvement of EUR 10 mn from 2009 onwards) and the ongoing internal improvements as part of the company's EUR 40mn cost savings program. Generally, we remain skeptical that the already announced and to-be-implemented restructurings in the industry will be sufficient to actually restore profitabilitylevels close to historical levels. Overall, we forecast net debt to EBITDA (before exceptional items) to increase to 4.5x at FYE 2008 (3.9x at FYE 2007).

Main risks Main risks to our expectations are falling demand as a result of a greater-than-expectedweakening of the macroeconomic environment, failure to implement any price increases, theinability of the company to reduce its cost base as well as an exit of the private equity sponsorin the course of a broader industry restructuring.

Things to watch ● Success of announced price increases

● M&A activities in the sector

● Execution of the restructuring program


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CAPITALIZATION

Senior Credit Facilities Borrower Lecta S.A. and subsidiaries Senior Credit Facility Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Revolving Credit Facility* 60 2013 n.a. margin ratchet (total net debt/EBITDA): 2% if ratio greater/equal than 2.5x 1.5% if ratio greater/less than 2x *additionally EUR 15 mn uncommitted Notes Issuer Lecta S.A. Secured Notes 598 02/14 Bullet EURIBOR + 262.5 bp Unsecured Notes 150 02/14 Bullet EURIBOR + 400 bp Other Indebtedness n.a. Available Credit Lines EUR 60 mn under revolver


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BOND DOCUMENTATION – LECTA FLOAT 02/15/14 – SECURED NOTES

Issuer Lecta S.A. Call/Put Call Schedule On or after February 15, 2008: 101%; 2009 and thereafter: 100% Equity claw back No Make whole clause No Change of control 101% (if more than 35% of the total voting power and a rating decline) Guarantees Secured note guarantees by certain subsidiaries of the company Security Security interests in certain of the issuers assets (i.e. of its shares in Sub Lecta 1 S.A. and Sub Lecta 2 S.A., the

Intercompany Loans held by it) or the guarantors assets (overall EUR 135 mn of unconsolidated EBITDA); security interest will be first ranking except that the RCF and certain hedging debt will be repaid in priority

Ranking – Pari passu with all existing and future debt of the issuer that is not subordinated to the secured notes – Structurally subordinated to all liabilities, disqualified stock and preferred stock of the issuer's subsidiaries that do

not guarantee the secured notes Certain Covenants Limitation on Debt Fixed charge coverage ratio of at least 2.5x

Most important carve-out/exceptions: – Indebtedness under Revolving Credit Facility/Refinancing not exceeding EUR 75 mn, less the amount of any

permanent repayments of such debt with proceeds from asset sales – Debt not exceeding EUR 55 mn for the purpose of investing in the Riva del Garda cogeneration facility – Incurrence of CLO, mortgage finance, purchase money obligations not exceeding EUR 5 mn – General Basket EUR 50 mn

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash/cash equivalents and is within twelve-months applied to debt reduction or invested in additional assets. Excess Proceeds exceeding EUR 10 mn used to redeem secured notes at par Carve-out: consideration of less than EUR 10 mn p.a. (limited to overall EUR 20 mn)

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of the following if the issuer can incur additional debt of at least EUR 1: – 50% of consolidated net income (minus 100% of such negative amount), – Equity proceeds; – Conversion of debt to equity proceeds. Most important carve-out/exceptions: – General basket: EUR 5 mn




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BOND DOCUMENTATION – LECTA FLOAT 02/15/14 – UNSECURED NOTES

Issuer Lecta S.A. Call/Put Call Schedule On or after February 15, 2008: 101%; 2009 and thereafter: 100% Equity claw back No Make whole clause No Change of control 101% (if more than 35% of the total voting power and a rating decline) Guarantees Unsecured note guarantees by certain subsidiaries of the company Security No Ranking – Pari passu with all existing and future debt of the issuer that is not subordinated to the unsecured notes

– Structurally subordinated to all liabilities, disqualified stock and preferred stock of the issuer's subsidiaries that do not guarantee the unsecured notes

– Subordinated to all existing and future secured debt of the issuer and any guarantor, including the secured notes and indebtedness under the revolving credit facility

Certain Covenants Limitation on Debt Fixed charge coverage ratio of at least 2.5x

Most important carve-out/exceptions: – Indebtedness under Revolving Credit Facility/Refinancing not exceeding EUR 75 mn, less the amount of any

permanent repayments of such debt with proceeds from asset sales – Debt not exceeding EUR 55 mn for the purpose of investing in the Riva del Garda cogeneration facility – Incurrence of CLO, mortgage finance, purchase money obligations not exceeding EUR 5 mn – General Basket EUR 50 mn

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash/cash equivalents and is within twelve-months applied to debt reduction or invested in additional assets. Excess Proceeds exceeding EUR 10 mn used to redeem unsecured notes at par Carve-out: consideration of less than EUR 10 mn p.a. (limited to overall EUR 20 mn)

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of the following if the issuer can incur additional debt of at least EUR 1: – 50% of consolidated net income (minus 100% of such negative amount), – Equity proceeds; – Conversion of debt to equity proceeds. Most important carve-out/exceptions: – General basket: EUR 5 mn




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Business Description – Lecta Group Lecta is one of the leading European producers of coated fine as well as specialty paper. It was formed in 1997 by private equity firm CVC for the acquisition of the Italian paper manufacturer Garda and grew subsequently with the takeover of French Condat in 1998 and Spanish Torraspapel in 1999. The three companies continued to operate under their own brand names while also maintaining separate management. The group today mainly focuses on Southern Europe, where it holds leading market positions. Besides paper production, Torraspapel is also active in the distribution of paper in Spain, Portugal and France. In addition, Lecta operates a pulp mill (through Torraspapel). The company is majority-owned (i.e. about 57% of total voting rights) by CVC, with the remaining shares being held by other investors and management.

REVENUES BY PRODUCT (FY 2007)

Coated Woodfree Paper

74.6%

Specialty Papers19.1%

Other6.3%



Spain28.7%

France16.5%

Italy13.9%

UK11.1%

Germany3.8%

Other countries21.9%

North America4.2%


DEBT MATURITY PROFILE 2007E

<1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years >5 yearsFinancial debt 15 moderate moderate moderate moderate 755

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B+ Stable FFO to debt of 10-15% over the cycle, while maintaining debt leverage below 5x; Down: a further protracted market downturn, liquidity constraints

Moody's B1 Stable Down: EBITDA margins trending below 9%, Debt/EBITDA remaining above 6x, RCF/Debt weakening to below 10%

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

LECTA Float + 262.5 2/15/2014

B1s/B+s EUR 598 2/15/2008 (101)

LECTA Float + 400 2/15/2014

B3s/B-s EUR 150 2/15/2008 (101)

BOND STRUCTURE

Sub Lecta 1 S.A.

Condat Holding S.A.

Torraspapel Holding S.A.

Condat S.A.S.

Sub Lecta 2 S.A.

Lecta S.A.Secured and unsecured

notes

Cartiere del Garda S.p.A

Sarrlopapel y Celulosa S.A.

Torraspapel S.A.

Guarantees


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PROFIT AND LOSS (LECTA GROUP)

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 1,355.2 1,414.8 1,440.8 762.6 1,519.6 788.2 1,629.6 1,673.8Raw materials used -580.4 -617.0 -653.7 -353.2 -699.9 -382.5 -776.0 -793.4Personnel costs -232.0 -235.4 -238.2 -119.8 -235.0 -116.9 -244.3 -246.0EBITDA reported 173.3 181.6 153.1 88.3 145.3 72.6 141.3 161.7Depreciation and amortization -89.4 -85.9 -84.3 -42.2 -87.3 -43.9 -91.0 -93.7Other operating income/expenses -365.0 -379.5 -410.5 -204.7 -432.9 -214.0 -465.9 -472.7EBIT reported 83.9 95.7 68.8 46.1 58.0 28.7 50.2 67.9Interest result -56.2 -61.4 -64.7 -50.2 -87.6 -36.1 -78.0 -76.0EBT 27.7 34.3 4.1 -4.2 -29.7 -7.4 -27.8 -8.1Taxes on income -11.5 -15.5 16.0 2.3 0.1 2.4 7.0 5.0Net income 16.2 18.8 20.1 -1.8 -29.6 -5.0 -20.8 -3.1


in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 1,063 1,027 978 963 946 957 957 928Cash & cash equivalents 145 125 164 143 181 125 181 181Total assets 1,719 1,681 1,726 1,720 1,702 1,737 1,750 1,741Equity incl. minorities 445 463 485 482 455 444 432 428Pension provisions 0 0 0 0 0 0 0 0Financial liabilities 873 769 754 770 772 797 830 819Net working capital 131 121 116 161 114 166 129 132

CASH FLOW

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) 105 121 63 32 54 33 60 81Change in working capital -11 5 36 -61 -21 -36 -15 -3Operating cash flow 94 125 98 -29 33 -3 45 78CAPEX -63 -48 -47 -33 -59 -30 -60 -65Free cash flow 31 78 51 -62 -26 -33 -15 13Dividends -1 -1 -1 0 -1 0 -2 -2Acquisitions/disposals -2 0 24 15 19 -40 -42 0Share buy back/issues 0 0 0 0 0 0 0 0FCF after extraordinary items 28 76 74 -47 -9 -73 -58 11

DEBT ADJUSTMENTS

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions 13 21 20 16 19 19 19 19For operating leases 0 12 15 15 16 16 16 16Others* 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (LECTA GROUP)

2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 12.8% 12.8% 10.6% 11.6% 9.6% 9.2% 8.7% 9.7%EBITDA margin adj. 13.1% 13.3% 9.9% 11.4% 10.3% 9.8% 9.1% 10.0%EBIT margin rep. 6.2% 6.8% 4.8% 6.0% 3.8% 3.6% 3.1% 4.1%EBIT margin adj. 6.5% 6.9% 3.9% 5.7% 4.4% 4.0% 3.3% 4.2%Return on capital (before tax) 2.1% 2.8% 0.3% 2.2% -2.4% 0.4% -2.2% -0.6%


2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 173 182 153 88 145 73 141 162EBITDA adj. 178 188 143 87 157 77 149 167FFO rep. 105 121 63 32 54 33 60 81FFO adj. 105 124 65 33 58 34 64 84Net debt rep. 729 644 589 627 591 673 649 638Net debt adj. 741 677 625 657 625 708 683 672Total debt 873 769 754 770 772 797 830 819EBITDA net interest cover rep. 3.1 3.0 2.4 1.8 1.7 2.0 1.8 2.1EBITDA gross interest cover rep. 3.1 3.0 2.4 1.8 1.7 2.0 1.8 2.1EBIT net interest cover rep. 1.5 1.6 1.1 0.9 0.7 0.8 0.6 0.9EBIT net interest cover adj. 1.6 1.6 0.8 0.9 0.7 0.9 0.7 0.9FFO rep. / total debt rep. 12.1% 15.7% 8.3% 3.9% 7.0% 6.9% 7.3% 9.8%FFO rep. / net debt rep. 14.4% 18.7% 10.6% 4.8% 9.2% 8.1% 9.3% 12.6%FFO adj. / net debt adj. 14.2% 18.4% 10.4% 5.1% 9.2% 8.3% 9.4% 12.5%FOCF rep. / total debt rep. 3.5% 10.1% 6.8% -5.2% -3.4% -2.8% -1.8% 1.5%FOCF rep. / net debt rep. 4.2% 12.0% 8.7% -6.4% -4.5% -3.4% -2.2% 2.0%RCF rep. / net debt rep. 14.3% 18.6% 10.4% 4.7% 8.9% 7.9% 9.1% 12.4%RCF adj. / net debt adj. 14.1% 18.3% 10.2% 4.9% 9.0% 8.1% 9.1% 12.3%Total debt rep. / EBITDA rep. 5.0 4.2 4.9 4.8 5.3 6.2 5.9 5.1Net debt rep. / EBITDA rep. 4.2 3.5 3.9 3.9 4.1 5.2 4.6 3.9Net debt adj. / EBITDA adj. 4.2 3.6 4.4 4.5 4.0 4.8 4.6 4.0FFO rep. / net interest rep. 2.9 3.0 2.0 1.6 1.6 1.9 1.8 2.1FFO rep. / gross interest rep. 2.9 3.0 2.0 1.6 1.6 1.9 1.8 2.1Capex / sales 4.7% 3.4% 3.2% 4.4% 3.9% 3.8% 3.7% 3.9%Capex / depreciation 70.8% 55.9% 55.3% 78.6% 68.1% 68.6% 65.9% 69.3%

CAPITAL STRUCTURE

2004 2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. 66.2% 62.4% 60.9% 61.5% 62.9% 64.2% 65.8% 65.7%Net debt / net capitalization rep. 62.1% 58.2% 54.9% 56.5% 56.5% 60.2% 60.0% 59.9%Net debt / net capitalization adj. 63.1% 60.5% 57.4% 58.5% 58.9% 62.5% 62.3% 62.2%Net working capital / sales 9.7% 8.5% 8.1% 10.8% 7.5% 10.7% 7.9% 7.9%Fixed assets / sales 78.5% 72.6% 67.9% 65.0% 62.3% 62.0% 58.7% 55.5%


Comment FY 2008 FY 2009Sales growth Influenced by acquisition 7.2% 2.7%EBITDA growth Cost pressure in FY 2008 -2.8% 14.4%EBIT growth Cost pressure in FY 2008 -13.3% 35.2%Capex incl. acquisition Increase due to investment in Italy of EUR 50 mn 102 65Change in working capital NWC/sales of around 8% -15 -3Funds from operations (FFO) Impacted by restructuring cash outs 60 81


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M-real (SELL) Investment rationale We keep our sell recommendation for M-real. While one could argue that current bond

prices already adequately reflect the inherent risks with the credit, we think that it can still getworse in case of a greater-than-expected weakening of the macroeconomic environment. Thelatter could also offset the expected positive effects from recently announced industryrestructuring measures by M-real's competitors. Overall, the fundamental outlook still remains weak for the company, and also liquidity could become highly vulnerable in case of a weaker-than-expected operating performance and further bigger impairment charges to be announced with the indicated new restructuring program. That said, we continue to believe that in a worst-case scenario the company would opt to sell the best piece of the family silver (its stake in Metsä-Botnia) if it were absolutely necessary to secure its liquidity.

Recent developments S&P changed the outlook for M-real's B- rating from stable to negative. The outlook revision reflects a deterioration in M-real's liquidity position, resulting from negative operating cash flow generation in the first half of 2008, with poor prospects for any significant medium-term improvement, large upcoming debt maturities in 2009, and the expiry in 2009 of a EUR500 mn revolving credit facility, which is M-real's key liquidity source. According to the agency, a downgrade could be triggered in case of a further weakening in the company'sliquidity position or failure to address upcoming refinancing needs over the near term.

In line with other market participants, M-real announced that it will increase its prices for coated and uncoated fine paper in Europe by 10% from September 1. While we note that there have already been capacity shutdowns in the coated fine paper market (Burgoclosed 210,000 tons effective as of August) with further shutdowns intended by the end of theyear (Sappi with 190,000 tons), we still believe that the announced measures will not besufficient to restore the market balance and allow for the full increase to be implemented. In addition, there could be further setbacks during the implementation in case of softeningdemand.

Latest results recap M-real released weak Q2 2008 results, revealing an operating loss (excluding non-recurring items) of EUR 21 mn (vs. a profit of EUR 3 mn in Q1 2008 and a loss of EUR 2 mn in Q22007) as well as continuing cash burn of EUR 77 mn. M-real's poor cash flow generation capabilities were particularly evident in a negative FFO of EUR 20 mn (EUR 1 mn in Q2 2007). Thanks to the ongoing asset disposals (EUR 81 mn cash inflow in the quarter), net debt could be slightly reduced from EUR 2,063 mn at the end of Q1 to EUR 2,055 mn.Nevertheless, leverage further deteriorated, with adjusted net debt to adjusted EBITDA at6.6x and adjusted FFO to adjusted net debt at a mere 2.2%.

Liquidity Liquidity risk has increased at M-real given the increasing cash burn in the second quarter. The headroom under M-real's loan covenants has improved following the fair value adjustments after the sale of a 6.7% stake in utility Pohjolan Voima (PVO) with gearing at86% vs. the cap at 120% and an equity ratio of 42% vs. the required 30%. However, continuing poor internal cash flow generation increases the risk of a liquidity squeeze by thetime the main liquidity line needs to be refinanced. In addition, further impairment chargescould again reduce the covenant headroom. At the end of the second quarter, the companyreported cash of EUR 73 mn and EUR 853 mn in committed credit facilities, including the EUR 500 mn syndicated line maturing in December 2009 (according to M-real, negotiations with banks will start at the end of the year) and a pension loan facility. In addition, it isassumed that M-real might have access to interest-bearing receivables totaling EUR 167 mn. Further sources of liquidity include upcoming disposal proceeds from the targeted EUR 200mn disposal program (still EUR 62 mn outstanding, with the company seeming confident that it can achieve even more by the end of Q1 2009). This compares to short-term maturities of EUR 491 mn at the end of H1 and a cash use of an estimated EUR 73 mn for FY 2008.

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Hence, liquidity seems to be adequate for the time being, but could be endangered in case ofa weaker-than-expected operating performance and further bigger impairment charges. That said, we believe that the company would opt to sell its best piece of the family silver (its stakein Metsä-Botnia) if it were absolutely necessary.

M-REAL CONTINUES TO BURN CASH WEAK FINANCIAL PROFILE

-400

-300

-200

-100

0

100

200

300

400

500

2003 2004 2005 2006 2007 H1 07 H1 08

in E

UR

mn

FFO Operating cash flow Free operating cash flow

0%

5%

10%

15%

20%

25%

30%

35%

40%

2002 2003 2004 2005 2006 2007 H1 08 2008e 2009e0

1

2

3

4

5

6

7

8

9Total debt adj. / EBITDA adj. FFO adj. / total debt adj.


Credit profile trend The fundamental outlook remains bleak for M-real given the ongoing challenging trading conditions. For the full-year, the company expects a decline in profit as cost inflation (estimated at EUR 215 mn) cannot be offset by ongoing cost savings (EUR 130 mn plus EUR45 mn in savings from the Metsä-Botnia Uruguay pulp mill). Hence, a further restructuring program is to be announced later during the year. While there seems to be some relaxation at the wood supply front with Finnish forest owners increasing wood sales after the governmentimplemented tax incentives, downside risks prevail regarding a weakening in demand due tothe deteriorating economy and ongoing cost inflation. As stated several times, the industry performance can only be put on a more sound operational footing with broader restructuringmeasures, in our view. While M-real seems optimistic about positive results from the ongoing strategic review, we have lost confidence in a short-term solution. With regard to financials, we expect Q3 to be negatively impacted by the implemented production curtailments, while the announced capacity closures in the coated fine paper market might allow for somemoderate price increases to kick in during Q4. Overall, we expect leverage to jump to 6.9x by the end of FY 2008.

Main risks Main risks to our expectations are a greater-than-expected weakening of demand, failure toimplement price increases, failure to implement restructuring measures, as well as increased M&A activity.

Things to watch ● October 22: Q3 results

● Success of announced price increases

● Potential industry restructurings


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CAPITALIZATION

Senior Credit Facilities Borrower M-real Corporation Senior Credit Facility Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitm. fee Syndicated Credit Facility 500 2009 n.a. n.a. n.a. Notes Issuer M-real Corporation Senior Notes 500 2013 Bullet Coupon 7.25% Senior Notes 400 2010 Bullet Floating Rate Note Other Indebtedness USD 350 mn Private Note Issue maturing 2009-2014 EUR 310 mn private placements under EUR 1,500 mn Global Medium-Term Note Program maturing 2008-2011 EUR 287 mn in bilateral loans EUR 89 mn finance lease EUR 335 mn pension loans Botnia: 30% of bilateral loans (EUR 126 mn) EUR 350 mn domestic CP-program EUR 150 mn Belgian CP-program


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BOND DOCUMENTATION – MESSA 7.25% 04/13

Issuer M-real Corporation Call/Put Call Schedule No, early redemption only for tax reasons Equity claw back No Make whole clause No Change of control 101%, also under the condition that M-real is downgraded within 90 days by one or more rating agency Guarantees No guarantee Security No Ranking Senior unsecured obligations, equal to all existing and future senior unsecured indebtedness of the issuer Certain Covenants Limitation on Debt/Preference Share No Limitation on Sale of Certain Assets No Limitation on Restricted Payments No Limitations on Transactions with Affiliates No Fall away/ Suspension Covenants No Negative pledge Yes Cross default Yes Anti Layering No Rating Step Up/Down 0.25% p.a. for each rating notch decrease per rating agency below Ba3 (Moody's) and BB- (S&P), rating ; 0.25% p.a.

for each rating notch increase per rating agency but limited to initial interest rate (i.e. 7.25%)


BOND DOCUMENTATION – MESSA FLOAT 12/15/10

Issuer M-real Corporation Call/Put Call Schedule On or after December 15, 2007: 102%, 2008: 101%, 2009 and thereafter: 100% Equity claw back No Make whole clause No Change of control 101%, also under the condition that M-real is downgraded within 90 days by one or more rating agency Guarantees No guarantee Security No Ranking Senior unsecured obligations, equal to all existing and future senior unsecured indebtedness of the issuer Certain Covenants Limitation on Debt/Preference Share No Limitation on Sale of Certain Assets No Limitation on Restricted Payments No Limitations on Transactions with Affiliates No Fall away/ Suspension Covenants No Negative pledge Yes Cross default Yes Anti Layering No Rating Step Up/Down 0.25% p.a. for each rating notch decrease per rating agency below Ba3 (Moody's) and BB- (S&P), rating, 0.25% p.a.

for each rating notch increase per rating agency but limited to initial margin (i.e. 3.625% p.a.)


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Business Description – M-real Headquartered in Finland, M-real is a leading paper and board producer in Europe with an annual production capacity of paper and board of 4.9 mn metric tons. Its product range includes fine paper, coated magazine paper and folding boxboard. The company generates most of its turnover in Europe, which still accounts for about 80% of its sales. M-real's largest shareholder is Metsäliitto (which is owned by private forest owners in Finland) with about 60% of the voting rights.


Internal sales and otheroperations

11.6% ConsumerPackaging

21.0%

Graphic Papers51.1%

Office Papers16.3%


OPER. PROFIT BEFORE NON-RECURRING ITEMS (FY 2007)

-40 -20 0 20 40 60 80

ConsumerPackaging

Graphic Papers

Office Papers

Internal sales andother operations

in EUR mn


DEBT MATURITY PROFILE 30.6.2008


ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B- Negative Increased risk of a further deterioration in the company's liquidity position or failure to address upcoming refinancing needs over the near term

Moody's B3 Negative Consumption of further sizable cash and lost access to external liquidity sources

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

MESSA 5% 12/15/2010 B3n/B-n/-- EUR 400 12/15/2007 (102)

MESSA 7.25% 4/1/2013

B3n/B-n/-- EUR 500

BOND STRUCTURE

M-real Corp.Noteholders


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PROFIT AND LOSS (M-REAL)

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 6,564.2 6,035.5 5,522.0 5,241.0 5,624.0 2,253.0 4,440.0 2,164.0 4,320.0 4,363.2 4,450.5Raw materials used -3,876.3 -3,564.1 -5,188.0 -5,008.0 -5,441.0 -2,176.0 -4,235.0 -2,112.0 -4,204.9 -4,158.1 -4,210.1Personnel costs -1,078.5 -1,044.3 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.EBITDA reported 786.9 560.0 420.0 439.0 299.0 258.0 444.0 228.0 376.1 355.1 390.3Depreciation and amortization -457.7 -481.0 -392.0 -403.0 -570.0 -177.0 -564.0 -153.0 -310.0 -310.0 -310.0Other operating income/expenses -822.5 -867.1 86.0 206.0 116.0 181.0 239.0 176.0 261.0 150.0 150.0EBIT reported 329.2 79.0 28.0 36.0 -271.0 81.0 -120.0 75.0 66.1 45.1 80.3Income from investments -3.7 -5.2 0.0 -2.0 0.0 -1.0 -3.0 -1.0 0.0 0.0 0.0Interest result -142.2 -176.6 -140.0 -115.0 -137.0 -66.0 -147.0 -73.0 -145.0 -142.0 -140.0Other financial items -49.0 22.6 4.0 -33.0 0.0 -3.0 -3.0 -1.0 -7.0 -7.0 -7.0Discontinuing operations 0.0 0.0 0.0 0.0 0.0 1.0 55.0 -26.0 -26.0 0.0 0.0EBT 134.3 -80.2 -108.0 -114.0 -408.0 11.0 -273.0 0.0 -85.9 -103.9 -66.7Extraordinary result 144.5 -15.1 173.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Taxes on income -59.8 -0.7 -17.0 34.0 9.0 -7.0 23.0 -1.0 25.0 13.0 9.0Net income 219.0 -96.0 48.0 -80.0 -399.0 5.0 -195.0 -27.0 -86.9 -90.9 -57.7


in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 4,935 4,769 4,056 3,982 3,755 3,533 3,180 3,368 3,158 2,928 2,818Cash & cash equivalents 200 184 242 112 182 174 380 73 380 380 380Total assets 7,410 7,106 6,486 6,327 6,172 5,726 5,194 5,198 5,117 4,898 4,818Equity incl. minorities 2,536 2,264 2,430 2,316 1,906 1,875 1,670 1,892 1,863 1,752 1,674Pension provisions 25 26 216 211 199 194 159 141 141 141 141Financial liabilities 3,362 3,424 2,506 2,529 2,781 2,450 2,336 2,128 2,267 2,242 2,236Net working capital 1,277 1,261 1,200 1,318 1,257 1,121 885 1,065 857 851 868

CASH FLOW

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 521 417 165 218 157 61 85 22 49 119 242Change in working capital 145 8 52 -82 65 -18 42 -60 28 6 -17Operating cash flow 666 425 217 136 222 43 127 -38 77 125 225CAPEX -304 -232 -239 -452 -428 -112 -259 -51 -150 -150 -200Free cash flow 362 193 -22 -316 -206 -69 -132 -89 -73 -25 25Dividends -108 -107 -54 -39 -39 -20 -20 -20 -20 -20 -20Acquisitions/disposals 229 -168 427 328 28 275 628 138 162 70 0Share buy back/issues 0 0 448 12 31 2 6 2 0 0 0FCF after extraordinary items 483 -82 799 -15 -186 188 482 31 69 25 5

DEBT ADJUSTMENTS

in EUR mn 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions 25 26 216 211 199 194 159 141 141 141 141For operating leases 44 52 16 14 16 15 9 9 9 9 9Others* 0 0 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (M-REAL)

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 12.0% 9.3% 7.6% 8.4% 5.3% 11.5% 10.0% 10.5% 8.7% 8.1% 8.8%EBITDA margin adj. 12.4% 9.8% 8.6% 7.7% 7.6% 8.3% 8.5% 6.5% 6.8% 8.4% 9.1%EBIT margin rep. 5.0% 1.3% 0.5% 0.7% -4.8% 3.6% -2.7% 3.5% 1.5% 1.0% 1.8%EBIT margin adj. 5.3% 1.7% 1.4% 0.3% 1.0% 1.2% 1.3% -0.6% -0.4% 1.2% 2.0%Return on capital (before tax) 3.2% -1.7% -2.3% -1.6% -8.7% -5.0% -6.7% -5.0% -1.9% -2.4% -1.5%


2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 787 560 420 439 299 258 444 228 376 355 390EBITDA adj. 812 594 474 403 430 186 380 141 296 368 403FFO rep. 521 417 165 218 157 61 85 22 49 119 242FFO adj. 528 430 171 223 162 64 88 24 52 122 245Net debt rep. 3,162 3,241 2,264 2,417 2,599 2,276 1,956 2,055 1,887 1,862 1,856Net debt adj. 3,231 3,319 2,496 2,642 2,814 2,485 2,124 2,205 2,037 2,012 2,006Total debt 3,362 3,424 2,506 2,529 2,781 2,450 2,336 2,128 2,267 2,242 2,236EBITDA net interest cover rep. 5.5 3.2 3.0 3.8 2.2 3.9 3.0 3.1 2.6 2.5 2.8EBITDA gross interest cover rep. 4.6 2.9 2.6 3.4 1.9 3.9 3.0 3.1 2.6 2.5 2.8EBIT net interest cover rep. 2.3 0.4 0.2 0.3 -2.0 1.2 -0.8 1.0 0.5 0.3 0.6EBIT net interest cover adj. 2.4 0.6 0.5 0.2 0.4 0.4 0.4 -0.2 -0.1 0.4 0.6FFO rep. / total debt rep. 15.5% 12.2% 6.6% 8.6% 5.6% 4.9% 3.6% 2.2% 2.2% 5.3% 10.8%FFO rep. / net debt rep. 16.5% 12.9% 7.3% 9.0% 6.0% 5.3% 4.3% 2.2% 2.6% 6.4% 13.1%FFO adj. / net debt adj. 16.3% 13.0% 6.9% 8.4% 5.8% 5.1% 4.1% 2.2% 2.6% 6.1% 12.2%FOCF rep. / total debt rep. 10.8% 5.6% -0.9% -12.5% -7.4% 1.9% -5.7% -11.7% -3.2% -1.1% 1.1%FOCF rep. / net debt rep. 11.5% 6.0% -1.0% -13.1% -7.9% 2.1% -6.7% -12.2% -3.9% -1.3% 1.4%RCF rep. / net debt rep. 13.0% 9.6% 4.9% 7.4% 4.5% 4.4% 3.3% 1.3% 1.5% 5.3% 12.0%RCF adj. / net debt adj. 13.0% 9.7% 4.7% 6.9% 4.4% 4.3% 3.2% 1.3% 1.6% 5.1% 11.2%Total debt rep. / EBITDA rep. 4.3 6.1 6.0 5.8 9.3 5.9 5.3 5.1 6.0 6.3 5.7Net debt rep. / EBITDA rep. 4.0 5.8 5.4 5.5 8.7 5.5 4.4 5.0 5.0 5.2 4.8Net debt adj. / EBITDA adj. 4.0 5.6 5.3 6.6 6.5 6.1 5.6 6.6 6.9 5.5 5.0FFO rep. / net interest rep. 4.7 3.4 2.2 2.9 2.1 1.9 1.6 1.3 1.3 1.8 2.7FFO rep. / gross interest rep. 4.0 3.2 2.0 2.7 2.0 1.9 1.6 1.3 1.3 1.8 2.7Capex / sales 4.6% 3.8% 4.3% 8.6% 7.6% 5.0% 5.8% 2.4% 3.5% 3.4% 4.5%Capex / depreciation 76.5% 56.4% 61.1% 118.9% 108.6% 63.3% 45.9% 33.3% 48.4% 48.4% 64.5%

CAPITAL STRUCTURE



Comment FY 2008 FY 2009 FY 2010Sales growth Lower paper volume -2.7% 1.0% 2.0%EBITDA growth Burdened by cost inflation -15.3% -5.6% 9.9%EBIT growth 2007 was influenced by one-off items n.m. -31.8% 78.2%Capex incl. acquisition Restrained capex 150 150 200Change in working capital Focus on working capital management 28 6 -17Funds from operations (FFO) Ongoing rather weak internal cash flow generation 49 119 242


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Norske Skog (SELL) Investment rationale We keep our sell recommendation for Norske, reflecting fears about the

macroeconomic development, the persistently challenging outlook for the company'smain market Newsprint Europe and the expected deteriorating credit profile in FY 2008.While recently announced capacity reductions in the European newsprint market bycompetitors of Norske were certainly positive news for the company, we remain skeptical ifthe announced measures will already be sufficient to support price increases at the beginningof 2009 when keeping in mind the softening demand and expected new capacity additions.Despite improving prospects in the European magazine paper business and in Asia, wecontinue to view trading conditions generally as challenging, in particular in light of theweakening economic environment and ongoing cost pressure. Hence, we expect leverage ofNorske to remain at current high levels at FYE 2008 despite the net debt reduction following the completed sale of the company's Korean assets. This should finally also result in a ratingdowngrade by S&P.

Recent developments In September, Norske announced the sale of its headquarters property for NOK 429.5mn (EUR 55 mn). At the same time, the company entered into a leasing agreement with the new owners. Hence, adjusted debt should remain rather unchanged.

Norske also announced that it has completed the sale of its Korean operations toMorgan Stanley Private Equity Asia and Shinhan Private Equity. The companies finallyamended the cash consideration from NOK 3.2 bn to NOK 3.1 bn. This was necessary as thecustomary compensation which has to be offered in Korea by the seller of a business to theemployees in connection with such transactions was higher than previously assumed. Overall, net debt will be reduced (by including the repaid intercompany loan totaling USD 130 mn)from NOK 15.7 bn at the end of Q2 2008 to NOK 12 bn, after deducting for transaction costsand taxes. We calculate a reduction in adjusted net leverage on a pro-forma basis as of the end of Q2 from 5.8x to 5.3x. Overall, the transaction was primarily positive for improving theliquidity situation of the company. In terms of ratings, S&P stated that it will keep the BB-rating on watch negative until the transaction is closed. According to the agency, ratings willmost likely be affirmed with a negative outlook, but the agency also does not exclude thepossibility of a downgrade based on a further negative market assessment. Moody's stated that the deal has no impact on its B1 rating.

Latest results recap Norske's Q2 2008 results were weak but at least not as bad asfeared. As a result of the ongoing cost savings as well as price increases in Asia and South America, the company's performance improved sequentially with recurring EBITDA up from NOK 489 mn to NOK 601mn on revenues of NOK 6,528 mn. Nevertheless, profitability remained weak at 9.2% vs.16.6.% in the prior year but trended at least upwards again q-o-q. Sequentially, almost all segments showed signs of improvement apart from the magazine paper segment that wasimpacted by lower production at one of its mills with associated higher costs. Margins atNewsprint Europe, the biggest division, could be kept largely stable. Cash generation reflected the expected more normalized level for financial payments and disbursements, withfree operating cash flow at only NOK 23 mn in the quarter (NOK 442 mn in Q1). Compared tothe prior year period, cash generation, however, improved y-o-y despite the weaker operatingperformance, reflecting the benefits of a working-capital related cash release and lower capex spending. Owing to the slowing operating performance since Q3 2007, LTM credit ratiosdeteriorated further, with adjusted net debt to adjusted EBITDA at 5.8x (vs. 5.0x at the end of Q1).

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ADJUSTED EBITDA MARGIN TREND WEAK CREDIT METRICS

0%

5%

10%

15%

20%

25%

Q1

03

Q3

03

Q1

04

Q3

04

Q1

05

Q3

05

Q1

06

Q3

06

Q1

07

Q3

07

Q1

08

Adj

uste

d E

BIT

DA

mar

gin

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2004 2005 2006 2007 H1 08 2008e 2009e 2010e0

1

2

3

4

5

6

7FFO adj. / net debt adj. Net debt adj. / EBITDA adj.


Liquidity Norske's liquidity still looks adequate. At the end of Q2 2008, it reported available liquidity of NOK 5.1 bn, excluding the maturing USD 500 mn liquidity line (in 2009) that is expected tobe canceled following the completed asset sale. This compares with debt repayments totalingaround NOK 900 mn in H2. Liquidity will be further enhanced by NOK 3.1 bn to be received in Q3 from the Korean asset disposal. In order to get bank lender approval for this transaction,Norske now also has to maintain a liquidity buffer of NOK 2.5 bn going forward. In the secondquarter, gearing improved from 1.12x to 1.07x (pro-forma the asset sale 0.83x). However, potential further write-downs could easily lead to Norske being again close to its covenantlimits (i.e. gearing of 1.4x). In this respect, we note that its competitor UPM has just recently announced a further goodwill impairment in its newsprint business given the weakeningmarket outlook. On the other side, in a worst-case scenario, we believe the company could also sell some of its energy contracts (current value of NOK 6.5 bn) to secure its liquidity.

Credit profile trend With the release of its Q2 results, Norske provided a cautious near-term outlook, albeit expecting H2 to be somewhat better than H1. The results should benefit from further cost reductions (although the achievement of the NOK 3 bn in cost savings by FYE is challenging) as well as positive pricing momentum in Asia and South America. However, falling prices inAustralia, rising costs (in particular for recovered paper), and the potential negative effects from softening demand in Europe are of concern. Overall, we expect leverage to remain atcurrent high levels at FYE 2008 despite the expected net debt reduction from the announcedKorean asset sale. We note that the company has still not communicated how it will exactlyuse the proceeds while, however, it stated again its commitment to debt reduction

Main risks The main risks to our model are a greater-than-expected setback in the general market development, as well as larger industry restructuring measures.


● Structural changes in the paper industry

● Demand development

Jana Arndt, CFA (HVB) [email protected] +49 89 378-13211

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CAPITALIZATION

Senior Credit Facilities Borrower Norske Skog Initial Amount (in mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Credit Facility USD 500 2009 n.a. n.a. n.a. Credit Facility EUR 400 2012 n.a. n.a. n.a. Notes Issuer Norske Skog ASA Senior Notes EUR 500 06/17 Bullet Coupon 7% Senior Notes NOK 750 10/09 Bullet FLOAT NIBOR + 70 bp Senior Notes NOK 1,100 03/12 Bullet FLOAT NIBOR + 105 bp Senior Notes NOK 200 10/09 Bullet Coupon 4.35% Senior Notes NOK 300 10/14 Bullet Coupon 5.4% Senior Notes USD 200 10/15 Bullet Coupon 6.125% Senior Notes USD 200 10/33 Bullet Coupon 7.125% Senior Notes USD 600 10/11 Bullet Coupon 7.625% Other Indebtedness n.a.


BOND DOCUMENTATION – NSINO 7% 06/26/17

Issuer Norske Skog ASA Call/Put Call Schedule None Equity clawback None Make whole clause None Change of control 101% (linked to rating agency downgrading the rating following a change of control, only applicable if rating is non-

investment grade following the downgrade) Guarantees None

Security None Ranking Pari pasu with all other present and future unsecured obligations of the issuer Certain Covenants Limitation on Debt None Limitation on Sale of Certain Assets None Limitation on Restricted Payments None Limitations on Transactions with Affiliates None Fall away/ Suspension Covenants None Negative pledge Yes Anti Layering None


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Business Description – Norske Skog Norske Skog is the second largest producer of newsprint and fourth largest producer of magazine paper in the world. The company has an annual paper making capacity of about 6.4 mn tons. In 2007, it generated about 52% of sales in Europe, 6% in South America, 4% in North America, 15% in Australasia and 22% in Asia. Norske is publicy-listed at the Oslo Stock Exchange.


Magazine Paper Europe23.8%

Newsprint Asia19.7%

Other activities6.1%

Newsprint Australasia

13.8%

Newsprint Europe32.0%

Newsprint South America

4.6%



0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

Newsprint Europe

Magazine PaperEurope

Newsprint SouthAmerica

NewsprintAustralasia

Newsprint Asia

Elimination


DEBT MATURITY PROFILE FYE 2007


ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB- Cwn Performance in H1 2008, progress on asset disposals, market development

Moody's B1 Negative Down: Refinancing challenges, EBITDA margins falling below 9%, RCF/debt to below 10%, EBIT/Interest below 2.5x

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

NSINO 7% 6/26/2017 B1n/BB-cwn/-- EUR 500

BOND STRUCTURE

Norske Skogindustries ASA

Notes


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PROFIT AND LOSS (NORSKE SKOG)

in NOK mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 25,302.0 25,726.0 28,812.0 13,520.0 27,118.0 12,797.0 25,076.8 22,986.0 23,813.9Raw materials used -13,025.0 -13,896.0 -15,498.0 -7,728.0 -15,214.0 -7,874.0 -15,347.0 -13,998.5 -14,264.6Personnel costs -3,548.0 -3,691.0 -3,800.0 -1,760.0 -3,495.0 -1,758.0 -3,385.4 -3,103.1 -3,214.9EBITDA reported 4,240.0 3,950.0 3,932.0 1,715.0 8,395.0 2,922.0 4,099.9 2,506.8 2,787.6Depreciation and amortization -3,203.0 -3,320.0 -6,459.0 -1,422.0 -7,718.0 -2,642.0 -4,042.0 -2,400.0 -2,400.0Other operating income/expenses -4,426.0 -3,919.0 -5,098.0 -2,317.0 -14.0 -2,076.0 -4,077.5 -3,677.6 -3,746.9EBIT reported 1,037.0 630.0 -2,527.0 293.0 677.0 280.0 57.9 106.8 387.6Income from investments -43.0 -750.0 204.0 30.0 37.0 1.0 42.0 42.0 42.0Interest result -836.0 -711.0 -976.0 -519.0 -479.0 -393.0 -850.0 -820.0 -820.0Other financial items 52.0 -173.0 -181.0 234.0 0.0 0.0 0.0 0.0 0.0EBT 210.0 -1,004.0 -3,480.0 38.0 235.0 -112.0 -750.1 -671.2 -390.4Taxes on income 419.0 156.0 463.0 -16.0 -918.0 -159.0 250.0 201.4 117.1Net income 629.0 -848.0 -3,017.0 22.0 -683.0 -271.0 -500.1 -469.8 -273.3


in NOK mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 36,608 42,242 36,936 35,577 28,767 22,059 22,311 21,111 20,211Cash & cash equivalents 419 452 397 3,522 1,792 1,993 1,792 1,792 1,792Total assets 44,295 52,033 45,230 47,071 43,260 43,447 36,992 35,812 35,212Equity incl. minorities 19,195 22,679 18,550 17,145 15,957 14,867 15,454 14,984 14,288Pension provisions 365 444 530 511 519 483 519 519 519Financial liabilities 17,760 20,112 17,826 20,963 18,435 17,623 14,748 14,258 14,504Net working capital 2,930 2,774 2,492 2,783 7,532 12,028 7,498 7,638 7,888

CASH FLOW

in NOK mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 3,153 2,744 3,329 1,748 2,644 406 1,242 1,830 1,927Change in working capital -205 317 -566 -875 -391 721 34 -140 -250Operating cash flow 2,948 3,061 2,763 873 2,253 1,127 1,276 1,690 1,677CAPEX -1,981 -2,230 -1,722 -698 -1,746 -662 -1,500 -1,500 -1,500Free cash flow 967 831 1,041 175 507 465 -224 190 177Dividends -817 -807 -1,046 -1,049 -1,049 0 0 0 -423Acquisitions/disposals 202 -3,784 1,224 2 102 14 3,914 300 0Share buy back/issues 10 3,840 0 0 5 -3 -3 0 0FCF after extraordinary items 362 80 1,219 -872 -435 476 3,687 490 -246

DEBT ADJUSTMENTS

in NOK mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions 270 421 433 425 318 304 318 318 318For operating leases 0 0 0 0 0 0 0 0 0Others* 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (NORSKE SKOG)

2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 16.8% 15.4% 13.6% 12.7% 31.0% 22.8% 16.3% 10.9% 11.7%EBITDA margin adj. 17.3% 15.5% 16.4% 17.2% 14.6% 8.6% 9.2% 11.0% 11.8%EBIT margin rep. 4.1% 2.4% -8.8% 2.2% 2.5% 2.2% 0.2% 0.5% 1.6%EBIT margin adj. 5.1% 3.5% 5.2% 6.4% -3.8% -2.0% -1.8% 0.6% 1.8%Return on capital (before tax) 0.5% -0.2% -9.6% -7.6% 0.6% 0.8% -2.6% -2.4% -1.5%


2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 4,240 3,950 3,932 1,715 8,395 2,922 4,100 2,507 2,788EBITDA adj. 4,375 3,984 4,734 2,319 3,970 1,104 2,299 2,538 2,819FFO rep. 3,153 2,744 3,329 1,748 2,644 406 1,242 1,830 1,927FFO adj. 3,153 2,744 3,329 1,748 2,644 406 1,242 1,830 1,927Net debt rep. 17,341 19,660 17,429 17,441 16,643 15,630 12,956 12,466 12,712Net debt adj. 17,611 20,081 17,862 17,866 16,961 15,934 13,274 12,783 13,029Total debt 17,760 20,112 17,826 20,963 18,435 17,623 14,748 14,258 14,504EBITDA net interest cover rep. 5.1 5.6 4.0 3.3 17.5 7.4 4.8 3.1 3.4EBITDA gross interest cover rep. 4.7 5.1 3.8 3.3 17.5 7.4 4.8 3.1 3.4EBIT net interest cover rep. 1.2 0.9 -2.6 0.6 1.4 0.7 0.1 0.1 0.5EBIT net interest cover adj. 1.5 1.3 1.5 1.7 -2.1 -0.6 -0.5 0.2 0.5FFO rep. / total debt rep. 17.8% 13.6% 18.7% 16.8% 14.3% 7.4% 8.4% 12.8% 13.3%FFO rep. / net debt rep. 18.2% 14.0% 19.1% 20.2% 15.9% 8.3% 9.6% 14.7% 15.2%FFO adj. / net debt adj. 17.9% 13.7% 18.6% 19.7% 15.6% 8.2% 9.4% 14.3% 14.8%FOCF rep. / total debt rep. 5.4% 4.1% 5.8% 0.3% 2.8% 1.4% -1.5% 1.3% 1.2%FOCF rep. / net debt rep. 5.6% 4.2% 6.0% 0.4% 3.0% 1.5% -1.7% 1.5% 1.4%RCF rep. / net debt rep. 13.5% 9.9% 13.1% 13.7% 9.6% 8.3% 9.6% 14.7% 11.8%RCF adj. / net debt adj. 13.3% 9.6% 12.8% 13.3% 9.4% 8.2% 9.4% 14.3% 11.5%Total debt rep. / EBITDA rep. 4.2 5.1 4.5 5.6 2.2 1.8 3.6 5.7 5.2Net debt rep. / EBITDA rep. 4.1 5.0 4.4 4.6 2.0 1.6 3.2 5.0 4.6Net debt adj. / EBITDA adj. 4.0 5.0 3.8 3.6 4.3 5.8 5.8 5.0 4.6FFO rep. / net interest rep. 4.8 4.9 4.4 4.4 6.5 2.0 2.5 3.2 3.3FFO rep. / gross interest rep. 4.5 4.5 4.2 4.4 6.5 2.0 2.5 3.2 3.3Capex / sales 7.8% 8.7% 6.0% 5.2% 6.4% 5.2% 6.0% 6.5% 6.3%Capex / depreciation 64.0% 72.6% 53.4% 49.1% 22.6% 25.1% 37.1% 62.5% 62.5%

CAPITAL STRUCTURE



Comment FY 2008 FY 2009 FY 2010Sales growth Influenced by disposals in 2008 and 2009 -7.5% -8.3% 3.6%EBITDA growth Weaker prices and cost inflation -51.2% -38.9% 11.2%EBIT growth Weaker prices and cost inflation -91.4% 84.4% 262.9%Capex incl. acquisition Tight capex management 1627 1500 1500Change in working capital Slight increase in NWC/sales ratio 34 -140 -250Funds from operations (FFO) In line with operating development 1242 1830 1927


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Stora Enso (SELL) Investment rationale We welcome Stora Enso in our High Yield & Crossovers Publication with a sell

recommendation. Trading conditions in the industry remain challenging, as a response to which Stora announced another broad restructuring program. While we acknowledge thepositive effects the program might have in the medium term, we again stress the persistingchallenging market conditions in the paper sector such as cost inflation and limited pricingpower. Hence, it remains to be seen if the new program is sufficient to spur the company'sprofitability and, in turn, improve its financial profile. On a more positive note, however, Storaseems to be able to significantly reduce its exposure to Russian roundwood and hence to the potential next increase in wood duties at the beginning of 2009. Based on increasingmacroeconomic fears and related further negative effects for the paper industry, werecommend to stay away from the name.

Recent developments In July, Fitch downgraded the rating of Stora from BBB- to BB+ and kept the negativeoutlook. According to the agency, the action reflects intensifying structural weaknesses in theEuropean pulp and paper sector, as demonstrated by the deterioration in the company'sperformance and cash flow generation in the six months ending June 30, 2008. The negative outlook reflects Fitch's view that the structural challenges currently faced by the papercompanies are likely to intensify in the next 12 months, given softening demand, an increasingly likely hike in Russian export duties on wood (January 2009) and the continuedcost pressure from high fiber and energy costs.

At the beginning of September, Stora Enso announced a further round of broadrestructuring measures to improve its profitability and to be able to operate without Russian roundwood in 2009. The program includes: i) plans for the permanent closure of assets with poor profitability totaling 600,000 tons of paper and board (including 190,000 tons of folding boxboard and 140,000 tons of coated magazine paper) and 170,000 cubic meters of sawn goods annual capacity as well as ii) investments (of about EUR 135 mn) and controlled curtailments to reduce the dependency on Russian roundwood. In addition, thecompany intends to look at further cost improvement measures at some of its mills and theadministrative functions and also agreed to set up a joint venture with ABB that will providemill maintenance services in Finland. The program is estimated to result in EUR 280 mn inprovisions and fixed asset write-downs, with about half involving cash costs. By 2010, cost savings of about EUR 140 mn are anticipated. Overall, the new measures are supportive for the future development of the company, as they are expected to make it independent fromRussian roundwood and the upcoming increase in wood duties. In addition, the announcedcapacity closures (e.g. in folding boxboard) should help to improve the market balance in thepaper segment and hence, pricing power. In its press release, Stora also stated that it foresees a more focused group, with fewer product lines. In this context, it indicated that possibly not all of the paper businesses will remain part of Stora Enso as the company isactively working on consolidation solutions. In this context, the fine paper business pops up in our head, which has not been affected at all by Stora's restructuring measures, although thissegment actually needs restructuring and/or consolidation the most. Generally, we still remainskeptical about any M&A transactions in the short-term, however, we believe that potential discussions could again come to the fore following the solutions that were found for the Russian wood problem.

Results recap Following its profit warning, Stora Enso reported poor Q2 2008 results well below market expectations. Operating profit excluding non-recurring items and fair valuations (down from EUR 222.9 mn to EUR 94.4 mn y-o-y) was negatively affected by cost inflation for wood, fuel and electricity as well as the ongoing weak performance of the Wood Product business (down from EUR 59.3 mn to a loss of EUR 10.9 mn). The company continued toburn cash of EUR 67 mn in the quarter. Given the cash inflow from the sale of its Merchant

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business, net debt remained close to the FYE 2007 level at EUR 3,492 mn. Due to the worsening operating performance, we calculate deteriorating credit metrics, with adjustedFFO to adjusted net debt at 17.4% (21.9% at the end of Q2).

Liquidity Stora's liquidity remains adequate despite the weakening operating performance. Short-term maturities of reported EUR 819.9 mn should be well covered by the existing cashposition (EUR 489.3 mn at the end of H1) as well as by full access to the company's EUR 1.4bn liquidity line. In addition, Stora stated that it is currently looking to re-borrow up to EUR 800 mn of pension money (i.e. pension contribution in Finland) at very favorable rates. Internalcash flow generation should be relatively minor also in 2009. However, given Stora's well-invested asset base, we believe that further capex curtailments could also be an option toboost cash generation to help finance the dividend payments. We note that the company'sloans do not have any financial covenants.

Credit profile trend Despite disposal-driven debt reduction, we expect the credit profile of Stora Enso toweaken in FY 2008 given the pressure on its operating performance. With the release of its Q2 2008 results (the guidance was reiterated in September with the announcement of the restructuring program), the company provided a weak outlook for the summer quarter,expecting it to be even worse (although only somewhat) than the poor Q2 results. Earlier,Stora had already raised its cost inflation guidance from 2.5-3% to 4% for the full year, but it also did not exclude a further upward revision if the current cost trend continues. Furthermore,the company stated that it is seeing the first clear signs of weakening demand in somegrades, i.e. newsprint and fine paper. Overall, the fundamental outlook remains weak and it remains to be seen if the initiated cost savings measures can really offset ongoing costinflation and the effects of potentially weakening demand.

PRESSURE ON MARGINS AND CREDIT METRICS

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000

2001

2002

2003

2004

2005

2006

2007

H1

08

2008

e

2009

e

0%

3%

6%

9%

12%

15%

18%

21%

24%

27%EBITDA margin adj. EBITDA gross interest cover adj. (RS)

0%

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25%

30%

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40%

45%

50%

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2008

e

2009

e

0.0

0.5

1.0

1.5

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2.5

3.0

3.5

4.0

4.5



Main risks Main risks to our model are weaker-than-expected demand as well as a greater industry restructuring.

Things to watch ● October 23: Q3 results; demand development; acquisition strategy


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CAPITALIZATION

Senior Credit Facilities Borrower Stora Enso OYJ Senior Credit Facility Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Syndicated Credit Facility 1,400 2012 n.a. n.a. n.a. Covenants none Issuer Stora Enso OYJ Initial Amount (in mn) Maturity Amortization schedule Coupon Senior Notes EUR 517 06/14 Bullet 5.125% EMTNSenior Notes EUR 500 06/10 Bullet 3.250% EMTNSenior Notes EUR 25 10/10 Bullet Floating Rate EMTNSenior Notes EUR 50 05/18 Bullet Floating Rate EMTNSenior Notes SEK 4,372 12/09 Bullet 3.875% EMTNSenior Notes SEK 500 12/15 Bullet 3.50% CPISenior Notes SEK 400 12/08 Bullet 4.0% DMTNSenior Notes USD 508 04/16 Bullet 6.40% Senior Notes USD 300 04/36 Bullet 7.25% Senior Notes USD 469 05/11 Bullet 7.375% Other Indebtedness EUR 145 mn Private Placement USD 356 mn Private Placement SEK 775 mn Private Placement


BOND DOCUMENTATION – EUR 4 BN EMTN PROGRAMME

Issuer Stora Enso OYJ Call/Put Call Schedule none Equity clawback none Make whole clause none Change of control none Guarantees none

Security Unsecured obligations and will rank pari passu among themselves and equally with all other unsecured obligations of the issuer

Ranking Unsubordinated Certain Covenants Limitation on Debt none Limitation on Sale of Certain Assets none Limitation on Restricted Payments none Limitations on Transactions with Affiliates none Fall away/ Suspension Covenants none Negative pledge Yes Anti Layering none


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Business Description – Stora Enso Headquartered in Finland, Stora Enso (www.storaenso.com) is the world's largest paper and board company with an annual production capacity of paper and board of 16.5 mn metric tons. Its product range includes publication paper (second largest supplier of magazine paper in the world and the world's third largest newsprint supplier), fine paper (world's largest producer of coated fine paper and sixth largest producer of uncoated fine paper), packaging boards and forest products. Following the disposal of its North American operations in 2007, the company generates most of its sales in Europe. Stora's strategy focuses on increasing its activities in emerging markets, in particular in South America, China and Russia. The company employs about 44,000 people in more than 40 countries. Stora's largest shareholder is the Finnish state with about 25% of voting rights.


Magazine Paper17.1%

Merchants14.9%

Industrial Packaging

8.1%

Wood Products13.8%

Fine Paper16.1%

Newsprint and Book Paper

12.9%

Consumer board17.1%


OPERATING PROFIT BY SEGMENT EXCL. EXTRAORD. (FY 2007)

0 50 100 150 200 250

Newsprint and Book Paper

Magazine Paper

Fine Paper

Merchants

Consumer board

Industrial Packaging

Wood Products

Other

in EUR mn




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BBB- Negative Failure to stabilize and improve its performance and prospects and to maintain financial measures adequate for the ratings (adj. FFO/debt of 25-30%)

Moody's Ba1 Stable Further deterioration of the cash generation and debt metrics

Fitch BB+ Negative Structural challenges are likely to intensify in the next 12 months

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

STORA 6.375% 6/29/2007

BBB-n/Ba1s/BB+n EUR 850

STORA 3.25% 6/22/2010

BBB-n/Ba1s/BB+n EUR 500

STORA 5.125% 6/23/2014

BBB-n/Ba1s/BB+n EUR 517.5

BOND STRUCTURE

Stora Enso OyjNoteholders


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PROFIT AND LOSS (STORA ENSO)

in EUR mn 2001 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 13,547.2 12,812.9 12,172.3 12,395.8 13,187.5 14,593.9 7,660.6 13,373.6 5,703.6 11,345.0 11,021.8Raw materials used -6,547.8 -6,373.2 -6,129.3 -6,561.5 -7,232.3 -9,862.9 -4,372.5 -9,308.2 -4,031.2 -8,100.3 -7,818.5Personnel costs -2,234.4 -2,282.0 -2,297.6 -1,907.9 -2,182.5 -2,225.5 -1,041.5 -1,883.7 -902.4 -1,713.1 -1,653.3EBITDA reported 2,754.5 2,290.3 1,671.8 1,907.5 1,367.9 1,881.5 1,098.0 1,455.4 507.7 935.7 1,106.9Depreciation and amortization -1,267.6 -2,441.9 -1,200.4 -1,172.0 -1,427.7 -1,257.7 -529.2 -1,550.6 -347.7 -843.4 -683.4Other operating income/expenses -2,010.5 -1,867.4 -2,073.6 -2,018.9 -2,404.8 -624.0 -1,148.6 -726.3 -262.3 -595.9 -443.1EBIT reported 1,486.9 -151.6 471.4 735.5 -59.8 623.8 568.8 -95.2 160.0 92.3 423.6Income from investments 79.6 14.6 -23.0 38.9 67.2 87.4 44.0 341.4 36.3 80.0 80.0Interest result -333.1 -229.5 -186.1 -106.0 -151.6 -79.4 -129.0 -168.9 -82.8 -165.0 -165.0Other financial items -10.4 23.3 -51.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Discontinuing Operations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -283.9 2.9 3.0 0.0EBT 1,223.0 -343.2 210.7 668.4 -144.2 631.8 483.8 77.3 113.5 7.3 338.6Taxes on income -299.6 120.9 -67.0 97.6 36.8 -42.6 -117.4 -5.8 -18.4 -1.2 -91.4Net income 923.4 -222.3 143.7 766.0 -107.4 589.2 366.4 -212.4 98.0 6.0 247.2


in EUR mn 2001 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 15,386 12,470 13,223 11,636 12,548 12,081 11,986 9,810 9,981 9,554 9,671Cash & cash equivalents 247 169 202 274 351 609 318 971 489 489 489Total assets 20,558 18,214 17,942 16,242 17,854 17,440 17,511 15,311 14,880 14,221 14,298Equity incl. minorities 9,039 8,187 8,013 7,762 7,314 7,903 8,170 7,548 7,740 7,653 7,546Pension provisions 774 747 912 1,077 888 763 681 327 301 327 327Financial liabilities 6,410 5,176 5,174 4,028 6,084 5,248 5,068 4,441 3,982 3,712 4,047Net working capital 2,278 3,010 2,570 2,212 2,642 2,389 2,802 2,212 2,224 2,175 2,135

CASHFLOW

in EUR mn 2001 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from Operations) 1,700 1,973 1,218 1,587 1,088 1,168 897 1,231 405 699 781Change in working capital -171 -547 471 -92 -401 289 -458 -331 -353 37 40Operating cashflow 1,529 1,426 1,689 1,495 687 1,457 439 900 52 736 821CAPEX -765 -878 -1,233 -980 -1,145 -583 -296 -820 -331 -750 -800Free cash flow 764 549 456 515 -458 873 143 79 -279 -14 21Dividends -407 -404 -388 -376 -365 -355 -355 -355 -355 -355 -355Acquisitions / disposals -314 695 -178 -173 -275 346 -3 253 178 177 0Share buy back / Issues -170 -287 -322 -199 -345 5 7 5 -3 3 0FCF after extraordinary items -128 553 -432 -232 -1,443 870 -208 -18 -458 -189 -334

DEBT ADJUSTMENTS

in EUR mn 2001 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions 867 951 1,133 1,074 872 736 709 324 314 324 324For operating leases 201 188 142 136 135 129 119 111 111 111 111Others* 0 0 0 209 359 343 343 343 343 343 343


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PROFITABILITY RATIOS (STORA ENSO)

2001 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 20.3% 17.9% 13.7% 15.4% 10.4% 12.9% 14.3% 10.9% 8.9% 8.2% 10.0%EBITDA margin adj. 20.7% 17.6% 14.5% 13.0% 11.9% 13.2% 14.1% 12.3% 9.3% 9.9% 10.5%EBIT margin rep. 11.0% -1.2% 3.9% 5.9% -0.5% 4.3% 7.4% -0.7% 2.8% 0.8% 3.8%EBIT margin adj. 11.2% 7.8% 4.4% 4.1% 3.2% 5.6% 7.2% 8.8% 3.0% 3.6% 4.1%Return on capital (before tax) 7.5% -2.9% 2.2% 5.3% -1.6% 4.1% 5.4% -2.2% -5.0% -0.6% 2.2%


2001 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 2,755 2,290 1,672 1,908 1,368 1,882 1,098 1,455 508 936 1,107EBITDA adj. 2,804 2,260 1,761 1,606 1,575 1,932 1,078 1,647 531 1,126 1,157FFO rep. 1,700 1,973 1,218 1,587 1,088 1,168 897 1,231 405 699 781FFO adj. 1,723 1,996 1,238 1,606 1,109 1,193 907 1,236 414 719 800Net debt rep. 6,163 5,007 4,973 3,753 5,733 4,639 4,749 3,471 3,492 3,223 3,557Net debt adj. 7,230 6,147 6,248 5,173 7,099 5,846 5,920 4,248 4,260 4,000 4,335Total debt 6,410 5,176 5,174 4,028 6,084 5,248 5,068 4,441 3,982 3,712 4,047EBITDA net interest cover rep. 8.3 10.0 9.0 18.0 9.0 23.7 8.5 8.6 6.1 5.7 6.7EBITDA gross interest cover rep. 7.2 8.6 7.8 7.5 3.8 5.7 8.5 8.6 6.1 5.7 6.7EBIT net interest cover rep. 4.5 -0.7 2.5 6.9 -0.4 7.9 4.4 -0.6 1.9 0.6 2.6EBIT net interest cover adj. 4.3 4.0 2.7 4.2 2.6 8.8 4.1 6.9 2.0 2.3 2.6FFO rep. / total debt rep. 26.5% 38.1% 23.5% 39.4% 17.9% 22.3% 25.1% 27.7% 18.5% 18.8% 19.3%FFO rep. / net debt rep. 27.6% 39.4% 24.5% 42.3% 19.0% 25.2% 26.8% 35.5% 21.1% 21.7% 21.9%FFO adj. / net debt adj. 23.8% 32.5% 19.8% 31.0% 15.6% 20.4% 21.9% 29.1% 17.4% 18.0% 18.5%FOCF rep. / total debt rep. 11.9% 10.6% 8.8% 12.8% -7.5% 16.6% 26.2% 1.8% -19.3% -0.4% 0.5%FOCF rep. / net debt rep. 12.4% 11.0% 9.2% 13.7% -8.0% 18.8% 27.9% 2.3% -22.0% -0.4% 0.6%RCF rep. / Net debt rep. 21.0% 31.4% 16.7% 32.3% 12.6% 17.5% 19.4% 25.2% 11.0% 10.7% 12.0%RCF adj. / Net debt adj. 18.2% 25.9% 13.6% 23.8% 10.5% 14.3% 16.0% 20.7% 9.1% 9.1% 10.3%Total debt rep. / EBITDA rep. 2.3 2.3 3.1 2.1 4.4 2.8 2.4 3.1 4.6 4.0 3.7Net debt rep. / EBITDA rep. 2.2 2.2 3.0 2.0 4.2 2.5 2.3 2.4 4.0 3.4 3.2Net debt adj. / EBITDA adj. 2.6 2.7 3.5 3.2 4.5 3.0 2.9 2.6 3.9 3.6 3.7FFO rep. / net interest rep. 6.1 9.6 7.5 16.0 8.2 15.7 8.0 8.3 5.9 5.2 5.7FFO rep. / gross interest rep. 5.4 8.4 6.7 7.2 4.0 4.5 8.0 8.3 5.9 5.2 5.7Capex / sales 5.6% 6.8% 10.1% 7.9% 8.7% 4.0% 3.9% 6.1% 5.8% 6.6% 7.3%Capex / depreciation 53.9% 63.9% 105.2% 84.6% 102.7% 54.4% 55.9% 52.9% 95.1% 88.9% 117.1%

CAPITAL STRUCTURE

2001 2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. 41.5% 38.7% 39.2% 34.2% 45.4% 39.9% 38.3% 37.0% 34.0% 32.7% 34.9%Net debt / net capitalization rep. 40.5% 37.9% 38.3% 32.6% 43.9% 37.0% 36.8% 31.5% 31.1% 29.6% 32.0%Net debt / net capitalization adj. 44.7% 43.5% 44.5% 40.0% 49.2% 42.4% 42.1% 36.0% 35.5% 34.3% 36.5%Net working capital / sales 16.8% 23.5% 21.1% 17.8% 20.0% 16.4% 18.6% 16.5% 19.5% 19.2% 19.4%Fixed assets / sales 113.6% 97.3% 108.6% 93.9% 95.2% 82.8% 79.7% 73.3% 87.4% 84.2% 87.7%


Comment FY 2008 FY 2009Sales growth Influenced by disposals -15.2% -2.8%EBITDA growth Burdened by cost inflation and restructuring program -35.7% 18.3%EBIT growth Influenced by one-off items in 2007 n.m. 359.0%Capex incl. Acquisition Capex curtailments 780 800Change in working capital Increasing new working capital / sales ratio 37 40Funds from Operations (FFO) Influenced by restructuring cash outs 700 781


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Technology/Media/Telecommunications (TMT) Introduction

Current market environment impacts event risk

The operating performance of companies in the high yield TMT sector showed a mixedpicture. NXP released very weak Q2 results and recently announced a major restructuringprogram, which enforced existing liquidity concerns. Alcatel published weak Q2 results, while in line with expectations. Wind Hellas could improve some KPIs, but the EBITDA developmentand its FCF generation continue to remain weak. Strong figures were published by Wind SpA, Unitymedia, KDG, Versatel, while Virgin Media confirmed the positive trend of recent quarters.The rating development in the HY telecom sector is also mixed with negative rating outlooksfor NXP, Alcatel, Seat, WDAC, Wind Hellas and stable to positive views for TDC/NTCH, WindSpA, Unitymedia, KDG and VNU/Nielsen.

Technology Alcatel-Lucent confirmed its 2008 outlook

In Q2 2008, Alcatel-Lucent confirmed its outlook for 2008, but warned that the globaleconomic environment has deteriorated over the last three months and that theeconomic slowdown has begun to spread to Europe. Although not evident yet, thecompany believes this could impact the capital expenditure decisions of certain Europeancustomers, especially in fixed access. For full-year 2008, the company believes it can achieve an adjusted gross margin in the mid-30s and confirms its target to achieve a low to mid single-digit adjusted operating margin in percentage of revenues. For Q3 2008, Alcatel-Lucent expects its revenue to be flat to slightly down sequentially, followed by a strong ramp-up in the fourth quarter. The company had an aggressive three-part plan in place under its former CEO to improve profitability and reposition the business. This plan should result in incrementalsavings of EUR 400 mn in gross margins and comparable operating expenses by YE 2009. With this plan, the company is targeting gross margins in the high 30s and operating marginsof 10% or better from 2010 onwards. However, the outlook for 2008 seems to be far from thispromising medium-term guidance and we wonder if Alcatel-Lucent's new senior management will not change it.

NXP's results were negatively impacted despite moderate worldwide semiconductor sales

According to the Semiconductor Industry Association (SIA), worldwide sales ofsemiconductors amounted to USD 148.3 bn YTD (until the end of June), an increase of 5.0% y-o-y and a 2.8% q-o-q.

SEMICONDUCTOR MARKET WORLDWIDE: NON-MEMORY CHIPS

Total Non-Memory Chip Unit Sales Total Non-Memory Chip Unit Volumes

-50%-40%-30%-20%-10%

0%10%20%30%40%50%60%

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

-25-20-15-10-5051015202530

in U

SD

bn

Changes (y-o-y) Total Non-Memory Chip Sales

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

-30

-20

-10

0

10

20

30

40

50

60

Chi

p un

its in

mn

Changes (y-o-y) Total Non-Memory Chip Units

Source: SIA, UniCredit Global Research

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Growing sales of consumer electronics, personal computers and cell phones, which accountfor about 80% of chip demand, contributed to a healthy 7.6% y-o-y increase in worldwide microchip sales. Excluding memory products, worldwide semiconductor sales grew by nearly 11.6% y-o-y and by 3.2% sequentially. Despite a slowing U.S. economy, markets outside theU.S. continued to show robust growth in demand for electronic products that drivesemiconductor sales, e.g. by strong sales growth of personal computers and handsets.

According to NXP, the market remains soft. NXP's management continues to see a relatively flat market development. The company expects a y-o-y comparable mid single-digit sales decrease in Q3 2008, translating into a close to flat sequential sales development. The Home segments suffers from a weak TV market environment with further declining revenuesin analogue TV chips. In the mobile segment, NXP's business suffers from the general shift tolow price handsets and a related product mix change to lower margin chips. In the automotive segment, the company foresees a flattish top-line development, while the identification business is a project-related business which is difficult to predict.

Telecoms The Greek mobile market In general, we can conclude that the Greek mobile market might suffer from the

following in 2008: a) subscriber growth; b) pressure on ARPU via MTR cuts; c)increasing competition.

Mobile subscriber growth … Greece has one of the highest mobile penetration rates in Europe with 143.7% as of June 30, 2008, according to Informa. The Greek mobile base grew by 657k subscribers in Q2 2007,while 729k mobile customers were added in Q2 2008, indicating that the subscriber slowdownin Q1 2008 might have been just a short-term market weakness. Moreover, we can conclude from the charts below that Greece still assumes the top position in the European mobilemarkets in terms of subscriber growth in Q2 2008, even though it fell to No. 6 in Q1 2008.

MOBILE SUBSCRIBER GROWTH AND PENETRATION IN EUROPE

Mobile penetration in Europe in H1 2008 Mobile subscriber growth in Europe in H1 2008

0%

20%

40%

60%

80%

100%

120%

140%

160%

Fran

ce

Bel

gium

Nor

way

Sw

itzer

land

Net

herla

nds

Sw

eden

Den

mar

k

Ger

man

y

Finl

and

UK

Aus

tria

Spa

in

Irela

nd

Por

tuga

l

Gre

ece

Italy

YTD Single country penetration YTD Average Penetration

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

Nor

way UK

Sw

eden

Italy

Fran

ce

Irela

nd

Spa

in

Sw

itzer

land

Bel

gium

Aus

tria

Finl

and

Por

tuga

l

Den

mar

k

Ger

man

y

Gre

ece

Net

herla

nds

YTD single country growth YTD average growth

Source: Informa Telecoms & Media, UniCredit Global Research

Italian telecoms market At its annual bank meeting in London in April this year, Wind provided the following depressed outlook for the Italian telecoms market: The total CAGR of the Italian telecoms market is expected to be 0.1% for 2007-2011. This development is anticipated to reflect mobile market growth of 0.3% CAGR and a fixed market reduction of 0.3% CAGR. The mobile market should be characterized by voice revenue declines due to termination tariffreduction and retail price competition, which will be offset by revenues from innovative value-added services, data usage and rising SIM card penetration. The fixed market reduction will

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be driven by voice revenue declines which will not fully be offset by broadband Internet andbusiness data growth. Despite this depressed market outlook, Wind anticipates for 2008revenue growth in the mid-single digit range, as the company anticipates continued growth inmobile and accelerated expansion in the fixed line business. The company now expects itsfull-year EBITDA to be in the range of EUR 1,940-1,980 mn (previously EUR 1,875 mn), including a positive impact of approximately EUR 60-70 mn from non-recurring items.

Danish telecom market For 2008, TDC has provided, compared to previous years, a relatively impreciseoutlook, which was confirmed: TDC expects that revenues will increase slightly, due to the full-year effect of HTCC's acquisition of Invitel, and growth in YouSee and Mobile Nordic. Netincome from continuing operations, excluding special items and fair value adjustments, shouldincrease by 10%-20%, as more efficient operations and decreasing interest expenses will be only partly offset by higher taxes from the full-year effect of new tax legislation.

The Spanish Cable Sector Weak broadband market in Spain

The competitive environment in the Spanish TMT market is challenging. While revenues in the TMT sector grew by 5.5% in 2007, the housing crisis in Spain combined with the overall economic slowdown is expected to have a significant negative impact on the Spanish TMTmarket in 2008. For example, the number of new subscribers is anticipated to be impacted by a potential housing recession in Spain in 2008. Especially as Telefonica has recentlyconfirmed all of its targets for 2008, this likely means more aggressive competitive behavior of the market leader in the Spanish TMT market. In particular in the pay-TV segment, cooperation between Sogecable and Telefonica is expected to impact ONO. Moreover, theacquisition of Tele2 and ya.com by Vodafone and Orange, respectively, worsened thecompetitive environment in the Internet segment.

ONO confirmed its 2008 company outlook, but clearly indicated that it aims to achievethe upper end of its guidance (lower end for capex): Revenue growth is expected to be between EUR 1,590-1,640 mn (-2%-+2%); EBITDA should be between EUR 650-680 mn(+1%-+6%) and capex between EUR 410-450 mn (-24% to -16%). However, ONO advisednot to extrapolate the good Q2 2008 results into the future. In particular, Q3 is seasonally aweak quarter and, given the current environment, will probably be even weaker than normal. Hence, the impact of the competitive and macroeconomic environment on the operatingperformance of the company is hard to predict, but is more likely to lead to adversedevelopments in the coming months

The German Cable/Broadband Sector The German Cable/Broadband sector

In the German Cable sector, the big three (Level 3) players (Kabel Deutschland, UnityMedia and Kabel BW are following the same trends:

In the traditional basic cable segment (analogue and digital TV transmission), the companies are increasing their pricing step-by-step to drive revenue growth. The related churn is relatively remote and accepted as a necessary evil. Recently, KDG indicated that churn in thissegment should decline as most of the major existing Level 4 operators have completed the build-out of own head-ends.

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BASIC CABLE/CABLE ACCESS RGUS

Unity Media Kabel Deutschland

0

1,000

2,000

3,000

4,000

5,000

6,000

Q1

2006

Q2

2006

Q3

2006

Q4

2006

Q1

2007

Q2

2007

Q3

2007

Q4

2007

Q1

2008

Q2

2008

in '0

00 R

GU

s

7.00

7.50

8.00

8.50

9.00

9.50

10.00

AR

PU

in E

UR

Analogue Digital Basic Cable ARPU in EUR

0

2,000

4,000

6,000

8,000

10,000

12,000

Q1

FY 2

005/

06

Q2

FY 2

005/

06

Q3

FY 2

005/

06

Q4

FY 2

005/

06

Q1

FY 2

006/

07

Q2

FY 2

006/

07

Q3

FY 2

006/

07

Q4

FY 2

006/

07

Q1

FY 2

007/

08

Q2

FY 2

007/

08

Q3

FY 2

007/

08

Q4

FY 2

007/

08

Q1

FY 2

008/

09

in '0

00 R

GU

s

6.606.807.007.207.407.607.808.008.208.40

AR

PU

in E

UR

RGU's Cable Access ARPU Cable Access


The pay-TV segment continues to grow, however at a declining pace. Profitability expectations are relatively low but stable, while the business is probably seen as part of thetriple-play package and therefore a necessary component. However, it seems unlikely that thecable operators will undertake significant investments in content to fight competition. Unity Media's excursion in the German Bundesliga rights business is assumed to be a one-off (i.e. lesson learned).

DIGITAL PAY-TV


0

100

200

300

400

500

600

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

in '0

00 R

GU

s

0

2

4

6

8

10

12

AR

PU

in E

UR

Digital TV Pay RGU ARPU

0100200300400500600700800900

Q1

FY 2

005/

06

Q2

FY 2

005/

06

Q3

FY 2

005/

06

Q4

FY 2

005/

06

Q1

FY 2

006/

07

Q2

FY 2

006/

07

Q3

FY 2

006/

07

Q4

FY 2

006/

07

Q1

FY 2

007/

08

Q2

FY 2

007/

08

Q3

FY 2

007/

08

Q4

FY 2

007/

08

Q1

FY 2

008/

09

in '0

00 R

GU

s

0123456789

AR

PU

in E

UR

RGU's Kabel Digital ARPU Kabel Digital


The Level 3 operators very much focus their activities on the German Broadband sector.Especially during the last three quarters, the cable operators demonstrated significant growthin these segments. According to UM, the company gained a net adds market share inupgraded regions of up to 30%. Given that the market share of DT was in the region of 40-45%, this explains the weak subscriber adds of the alternative telecoms operators, especiallyin H1 2008. ARPUs are increasing in the basic cable segment, while they are declining in other segments, mainly driven by bundled offers. Deviations from this trend might steam fromdiminishing promotions which are reflected in a short term upwards trend.

<date>




INTERNET


0

50

100

150

200

250

300

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

in '0

00 R

GU

s

0

5

10

15

20

25

AR

PU

in E

UR

Retail Broadband Internet RGU Retail Broadband Internet

050

100150200250300350400450500

Q1

FY 2

005/

06

Q2

FY 2

005/

06

Q3

FY 2

005/

06

Q4

FY 2

005/

06

Q1

FY 2

006/

07

Q2

FY 2

006/

07

Q3

FY 2

006/

07

Q4

FY 2

006/

07

Q1

FY 2

007/

08

Q2

FY 2

007/

08

Q3

FY 2

007/

08

Q4

FY 2

007/

08

Q1

FY 2

008/

09

in '0

00 R

GU

s

0

5

10

15

20

25

30

35

AR

PU

in E

UR

RGU's Highspeed Internet ARPU Highspeed Internet


TELEPHONY


0

50

100

150

200

250

300

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

in '0

00 R

GU

s

0

5

10

15

20

25

30

AR

PU

in E

UR

Telephony RGU Telephony

050

100150200250300350400450500

Q2

FY 2

005/

06

Q3

FY 2

005/

06

Q4

FY 2

005/

06

Q1

FY 2

006/

07

Q2

FY 2

006/

07

Q3

FY 2

006/

07

Q4

FY 2

006/

07

Q1

FY 2

007/

08

Q2

FY 2

007/

08

Q3

FY 2

007/

08

Q4

FY 2

007/

08

Q1

FY 2

008/

09

in '0

00 R

GU

s

0

5

10

15

20

25

30

35

AR

PU

in E

UR

Total RGU's Total blended ARPU per RGU


Stephan Haber (HVB) +49 89 378-15192 [email protected]

<date>




Media Sector trends Key performance indicators for our covered Media sector universe are mainly

advertising markets and marketing research markets. Organic growth rates of directory companies Seat Pagine Gialle and Truvo/World Directories are primarily driven by GDPgrowth and the change from print revenues to more online revenues. Advertising markets are mainly dependent on the economic climate in the specific countries. Leading indicator are,e.g. consumer and business confidence levels, which in turn influence the volume ofadvertising expenses of companies. On August 29, Carat (www.marketingcharts.com) revised downward its growth forecasts for global ad expenditures for 2008-2009 to 4.9% in 2008 from the previous 6% and to 4.8% from 4.9% for 2009. Truvo as well as Seat said that looking ahead, print revenues in Belgium, Ireland and Italy are under pressure due to faster-than-expected migration to online business coupled with the deteriorating macroeconomic environment. We believe that this should pressure top-line growth, lead to increased costs and investments and should be accompanied by a contraction in EBITDA. Recently, the far-reaching effects of the subprime crisis, combined with rising inflation and depressed housingmarkets in some countries, have resulted in lower GDP growth forecasts for the major advertising markets in developed countries. Nevertheless, emerging markets, CEE and digitalexposure remain key for top-line growth. At Nielsen, we expect more stable organic revenuegrowth, which is mainly driven by market research trends which are less cyclical.

2008 WITH LOWER GROWTH IN LARGE AD MARKETS EUROPEAN BUSINESS CONFIDENCE FELL RECENTLY

02.5

57.510

12.515

17.520

22.525

Global

USA

Asia Pac

ificJa

pan

China

Wes

tern E

urope UK

German

y

France Ita

lyCEE

Ad

reve

nues

gro

wth

rate

in % 2007 2008e 2009e

40

45

50

55

60

65

70

75

80

Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08-20

-15

-10

-5

0

5

10

15USA Business Conf. Index EU Business Confidence (RS)

Source: Carat (www.marketingcharts.com), Bloomberg, UniCredit Global Research

M&A M&A is a topic at all of our covered Media HY names. Nielsen was the most active in this respect in the past. Therefore, Nielsen's results in FY 2008 will continue to be affected byseveral acquisitions with an aggregate consideration (net of cash acquired) of USD 837 mnand some disposals in FY 2007. Going forward, Seat will try to dispose of its internationalbusinesses as it focuses on Italy. So far, no concrete transaction was announced by Seat.Truvo sold its Dutch subsidiary to European Directories SA at an EV of approx. EUR 290 mn, the completion of the transaction still remains subject to regulatory approval, and thesuccessful closing of the transaction is anticipated during Q3 2008. After the closing, the company has the option to re-invest the proceeds in other assets within a 12-month timeframe (e.g. buyout of minority stakes at south African and Portuguese businesses) or use theproceeds to reduce debt.


<date>




Alcatel-Lucent (SELL) Investment rationale We keep our sell recommendation for the ALUFP 6.375% 04/14 bond. Alcatel-Lucent is

currently suffering from demand weakness in the wireless equipment business (especially inNorth America) and from fierce competition, while the demand weakness might spill over to Europe. In our opinion, top-line is currently more likely to decline even stronger thananticipated by the company in 2008. The operating margin is heavily impacted byrestructuring charges and top-line pressure. Further rating pressure cannot be ruled out. We expect more negative newsflow to weigh on spreads, as the new CEO realigns the strategy of the company.

Recent developments On July 29, Alcatel-Lucent announced that its chairman, Serge Tchuruk, and its CEO,Patricia Russo, will step down. On September 2, Alcatel-Lucent announced that the Board of Directors approved the appointment of Philippe Camus as the company’snon-executive Chairman as of October 1, 2008 and Ben Verwaayen as the company’schief executive officer. Philippe Camus was the Co-CEO of EADS and is Co-Managing Partner of Lagardère, an international media group, and partner at Evercore Partners, a New York based investment and advisory firm. Ben Verwaayen, 56, was CEO of BT from February2002 to June 1, 2008. Ben Verwaayen was formerly vice-chairman of the management board of Lucent Technologies in the US, which he joined in September 1997. Prior to that, heworked at KPN in the Netherlands for nine years as president and managing director of itstelecom subsidiary, PTT Telecom. Prior to that, Ben Verwaayen worked for ITT, a predecessor of Alcatel. We view it as positive that Alcatel-Lucent's top management wasreassigned in a relatively short period of time. Moreover, Ben Verwaayen made a name forhimself when he successfully restructured and repositioned BT-Group and we therefore view his appointment as a positive move for Alcatel-Lucent. However, the implementation of a new strategy by the new senior management might lead to some additional negative newsflow.

Latest results recap On July 29, Alcatel-Lucent released weak Q2 2008 results, which were in line withexpectations with respect to top-line development. While the outlook was confirmed, the company warned about market weakness in Europe. In Q2 2008, revenues declinedby 5.2% y-o-y and increased by 6.1% q-o-q to EUR 4,101 mn (Q1 2008: -0.5% y-o-y and -26.2% sequentially to EUR 3.864 bn), which was in line with the market consensus of EUR4.09 bn. At a constant EUR/USD exchange rate, revenues grew by 1.7% y-o-y and by 8.5 % q-o-q (Q1 2008: +6.3% y-o-y and -23.2% q-o-q), which was at the upper end of the company's guidance, indicating an increase in the mid single-digit range sequentially at constant currency exchange rates. The adjusted gross margin was 34.9% (Q1 2008: 36.2%) of revenues in Q2 2008 (Q2 2007: 33.4%). Adjusted operating income was EUR 93 mncompared to an adjusted operating loss of EUR -19 mn (Q1 2008: EUR 36 mn or 0.9% of sales, including a EUR 31 mn capital gain from the receipt of proceeds due to a sale of intellectual property rights). Net debt increased to EUR 415 mn as of June 30, from EUR 30mn as of March 31, primarily reflecting an increase in non-operating working capital requirements mainly related to the bonus payments which were concentrated in Q2, cash outflow related to restructuring plans (EUR 166 mn) and cash contribution to pensions (EUR 112 mn).

Liquidity Alcatel's liquidity appears to be healthy and able to cope with scheduled debtmaturities as well as potentially negative free cash flow in 2008. Cash and cash equivalents amounted to EUR 4,756 mn at the end of Q1 2008. Short-term debt maturities amount to EUR 483 mn and EUR 805 mn in 2008 and 2009, respectively. FCF is expected tobe neutral to slightly negative in 2008, but should not exceed cash outflows of EUR 600 mn. The company's relatively huge cash position appears to be able to cope with the potentialcash outflows. Moreover, Alcatel has an undrawn revolving credit facility of EUR 1.0 bn.

<date>





Alcatel-Lucent confirmed its outlook for 2008, but warned that the global economicenvironment has deteriorated over the last three months and that the economic slowdown hasbegun to spread to Europe. Although not evident yet, the company believes this could impact somewhat the capital expenditure decisions of certain European customers, especially infixed access. For full-year 2008, the company believes it can achieve an adjusted grossmargin in the mid-thirties and confirms its target to achieve a low to mid single-digit adjusted operating margin in percentage of revenues. For Q3 2008, Alcatel-Lucent expects its revenue to be flat to slightly down sequentially, followed by a strong ramp-up in the fourth quarter.

The company has an aggressive three-part plan in place to improve profitability and reposition the business. This plan should result in incremental savings of EUR 400 mn in gross marginsand comparable operating expenses by YE 2009. With this plan, the company is targetinggross margins in the high 30s and operating margins of 10% or better from 2010 onwards.However, the outlook for 2008 seems to be far from this promising medium-term guidance.

ALCATEL-LUCENT SA

Credit protection measures do not improve fast enough Improving operating performance questionable

-150%

-100%

-50%

0%

50%

100%

150%

200%

2001 2002 2003 2004 2005 2006 2007 2008e 2009e0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0FFO adj. / total debt adj. FFO adj. / net interest adj.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2001 2002 2003 2004 2005 2006 2007 2008e 2009e0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000EBITDA margin adj. EBIT margin adj.

Source: Company data, forecast UniCredit Global Research

Model assumptions/risks Our forecast is characterized by conservative growth assumptions: a) Revenue decline of 5% y-o-y in 2008, 2% growth in 2009; b) Restructuring costs of EUR 600 mn and EUR 300 in 2008 and 2009, respectively. For FY 2008 and FY 2009, we assume adjusted operating margins of 1.9% and 5.3%, respectively.

Key risks to our model estimates: a) Weaker-than-expect top-line development due to weaker demand or adverse exchange rate developments; b) Higher-than-expected restructuring costs and lower-than-expected synergies.

Things to watch ● Demand for telecom equipment; merger integration process; creation of synergies (EUR

1.7 bn), restructuring costs (EUR 1.7-1.9 bn) over Q4 2006- FY 2009, operating margin; November 13: Q3 2008 results.


<date>




CAPITALIZATION

Senior Credit Facilities Borrower Alcatel SA (excluding Lucent) Senior Credit Facility Initial Amount (in mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Revolving Credit Facility EUR 1,000 06/09 Bullet Euribor +72.5 bp 27.19 bpCovenants The availability of this syndicated revolving credit facility does not depend upon Alcatel's credit ratings. The ability to draw on this facility is conditioned upon compliance with certain financial covenants. Until its amendment on March 15, 2005, the facility contained two financial covenants: the first was a gearing ratio (net debt/equity including minority interests) and the second is a ratio linked to the capacity to generate cash to reimburse its debt. The March 15th amendment eliminated the gearing ratio covenant. The cash-generation covenant is tested every quarter. Notes Issuer Senior Notes EUR 1,120 02/09 Bullet Coupon 4.375% Senior Notes EUR 462 04/14 Bullet Coupon 6.6375% Other Indebtedness None Available Credit Lines EUR 1,000 mn under RCF undrawn as of June 30, 2008


BOND DOCUMENTATION ALUFP 6.375% 04/07/14

Issuer Alcatel SA Call/Put Call Schedule No Equity claw back No Make whole clause No Change of control No Guarantees No Security No Ranking Senior unsecured securities of the issuer Certain Covenants Rating The outstanding bonds do not contain clauses that would trigger an accelerated repayment in the event of a lowering

of Alcatel's credit ratings. However, the EUR 1,200 mn 7.00% notes due in December 2006, of which only EUR462 mn remains, includes a “step up rating change” clause, which provides that the interest rate will be increased by 150 basis points if Alcatel's ratings fall below investment grade. This clause was triggered when Alcatel's credit ratings were lowered to below investment grade status in July 2002. The 150 basis point increase in the interest rate from 7% to 8.5% became effective in December 2002, and applied to the payment of the December 2003, 2004 and 2005 coupons. This bond issue also contains a “step-down rating change” clause that provides that the interest rate will be decreased by 150 basis points if Alcatel's ratings move back to investment grade level. However, since the condition related to Alcatel's ratings was not met before December 7, 2005, no step-down rating change will occur. Alcatel's 6.375% notes due 2014, which Alcatel exchanged for a portion of its 7.00% notes due 2006, as described above, do not provide for a “step-up rating change.”

Limitation on Debt No Limitation on Sale of Certain Assets No Limitation on Restricted Payments No Limitations on Transactions with Affiliates No Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering No


<date>




BOND DOCUMENTATION – ALUFP 4.375% 02/17/09

Issuer Alcatel SA Call/Put Call Schedule No Equity claw back No Make whole clause No Change of control No Guarantees No Security No Ranking Senior unsecured securities of the issuer Certain Covenants Limitation on Debt No Limitation on Sale of Certain Assets No Limitation on Restricted Payments No Limitations on Transactions with Affiliates No Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering No


<date>




Business Description – Alcatel-Lucent SA Alcatel-Lucent, headquartered in Paris, France, is a truly global communications solutions provider with the broadest wireless, wireline and services portfolio in the industry. The company provides solutions that enable service providers, enterprises and governments worldwide, to deliver voice, data and video communication services to end-users. As a leader in fixed, mobile and converged broadband networking, IP technologies, applications, and services, Alcatel-Lucent offers the end-to-end solutions that enable compelling communications services for people at home, at work and on the move. In 2007, the company had revenues of approximately EUR 17.79 bn, divided quite evenly between North America (~36.6%), Europe (~39.3%) and the rest of the world (~24.1%). As of December 31, 2007, the company had about 76,410 employees.


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Carrier Enterprise Service Others


ADJUSTED EBIT BY SEGMENT (FY 2007)

-1,000

-800

-600

-400

-200

0

200

Carrier Enterprise Service Others


DEBT MATURITY PROFILE AT YE 2007


ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB- Negative Up: Global integration plans, stabilizing North American wireless business, operating profitability and cash flows up; Down: integration difficulties, increasing competitive pressure

Moody's Ba3 Negative Reduce net debt/EBITDA well below 4x;FCF trend towards a positive amount

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

ALUFP 4.375% 2/17/2009

BB-n/Ba3n/-- EUR 1,120

ALUFP 6.375% 4/7/2014

BB-n/Ba3n/-- EUR 462

BOND STRUCTURE

Alcatel-Lucent SA

Subsidiaries

Old Alcatel Noteholders

Lucent Technologies Inc.

Subsidiaries

Old LucentNoteholders


<date>




PROFIT AND LOSS (ALCATEL-LUCENT SA)

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 12,513.0 12,244.0 13,135.0 12,282.0 8,208.0 17,792.0 7,965.0 16,902.4 17,240.4Cost of goods and services sold -8,415.0 -7,631.0 -8,503.0 -8,212.0 -5,684.0 -12,083.0 -5,136.0 -10,986.6 -11,068.4R&D expenses -1,593.0 -1,490.0 -1,443.0 -1,466.0 -1,512.0 -2,954.0 -1,459.0 -2,619.9 -2,499.9Administration -2,173.0 -1,944.0 -2,000.0 -1,910.0 -1,800.0 -3,462.0 -1,497.0 -2,974.8 -2,758.5Other operating income/expenses 0.0 0.0 0.0 -833.0 -671.0 -3,800.0 -387.0 -600.0 -300.0EBITDA reported 937.0 1,587.0 1,746.0 633.0 -708.0 -107.0 -214.0 481.1 1,373.7EBIT reported 332.0 1,179.0 1,189.0 -139.0 -1,459.0 -4,507.0 -514.0 -278.9 613.7Adj. EBIT (bef. pension interest) 378.2 1,219.4 1,256.5 766.7 -751.6 -642.1 -359.5 386.1 978.7Income from investments -113.0 -61.0 -14.0 30.0 65.0 110.0 56.0 110.0 20.0Interest result -230.0 -171.0 -142.0 -98.0 184.0 371.0 106.0 371.0 -300.0Other financial items -59.0 64.0 92.0 -120.0 -34.0 -3.0 -11.0 -3.0 -43.0Discontinuing operations 0.0 142.0 -13.0 159.0 652.0 610.0 0.0 0.0 0.0EBT reported -70.0 1,153.0 1,112.0 -168.0 -592.0 -3,419.0 -363.0 199.1 290.7Extraordinary result -1,772.0 -472.0 -50.0 -4.0 -194.0 2.0 -829.0 0.0 0.0Taxes on income -82.0 -36.0 -91.0 42.0 178.0 -60.0 -69.0 -530.0 -675.0Net income -1,924.0 645.0 971.0 -130.0 -608.0 -3,477.0 -1,261.0 -330.9 -384.3


in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 6,836 6,732 6,614 20,532 18,967 15,042 13,430 15,152 15,262 thereof goodwill 3,839 3,774 3,772 10,977 10,318 7,328 6,204 7,328 7,328Cash & cash equivalents 6,269 5,163 5,150 5,994 5,477 5,271 4,409 4,472 3,589Total assets 21,132 20,342 20,821 41,372 38,020 33,830 30,943 32,767 31,994Equity incl. minorities 4,038 5,293 6,711 15,991 15,421 11,747 9,957 11,027 10,254Pension provisions 1,010 1,172 1,167 5,331 4,634 4,402 3,967 4,402 4,402Other provisions 3,049 2,382 2,078 2,827 2,563 2,263 2,185 2,263 2,263Financial liabilities 5,293 4,606 3,798 6,209 5,310 5,048 4,843 5,048 5,048 short term (<1 year) 883 1,115 1,046 1,161 328 483 1,194 483 483 long term (>1 year) 4,410 3,491 2,752 5,048 4,982 4,565 3,649 4,565 4,565Net working capital 285 1,226 1,522 895 -1,941 -1,946 -1,805 -1,977 -1,977

CASH FLOW

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) -673 611 944 760 -118 188 -169 429 376Change in working capital 1,117 -553 -95 -409 -220 -212 -264 31 0Operating cash flow 444 58 849 351 -338 -24 -433 460 376CAPEX -253 -579 -638 -684 -396 -842 -399 -870 -870Free cash flow 191 -521 211 -333 -734 -866 -832 -410 -494Dividends -7 -9 -26 -219 -365 -366 -7 -389 -389Acquisitions/disposals 696 730 487 1,301 704 331 111 0 0Share buy back/issues 1 12 18 19 16 20 0 0 0FCF after extraordinary items 881 212 690 768 -379 -881 -728 -799 -883

DEBT ADJUSTMENTS

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions 1,010 1,175 1,195 0 0 0 0 0 0For operating leases 462 404 675 1,212 1,212 1,082 1,082 1,082 1,082Others* 276 276 61 1,041 1,041 1,041 1,041 1,041 1,041


<date>




PROFITABILITY RATIOS (ALCATEL-LUCENT SA)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 7.5% 13.0% 13.3% 5.2% -8.6% -0.6% -2.7% 2.8% 8.0%EBITDA margin adj. 8.4% 13.8% 14.4% 12.9% 1.1% 5.6% 0.4% 7.8% 11.1%EBIT margin rep. 2.7% 9.6% 9.1% -1.1% -17.8% -25.3% -6.5% -1.6% 3.6%EBIT margin adj. 3.0% 10.0% 9.6% 6.2% -9.2% -3.6% -4.5% 2.3% 5.7%Return on capital (before tax) 2.0% 10.7% 10.4% -1.1% -10.3% -27.9% -24.7% -2.8% 2.4%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 937 1,587 1,746 633 -708 -107 -214 481 1,374EBITDA adj. 1,052 1,691 1,896 1,586 94 991 29 1,323 1,916FFO rep. -673 611 944 760 -118 188 -169 429 376FFO adj. -604 675 1,027 948 -24 365 -80 606 553Net debt rep. -976 -557 -1,352 215 -167 -223 434 576 1,459Net debt adj. 772 1,298 579 2,468 2,086 1,900 2,557 2,699 3,583Total debt 5,293 4,606 3,798 6,209 5,310 5,048 4,843 5,048 5,048EBITDA net interest cover rep. 6.5 13.1 18.2 6.5 -8.7 -0.6 -2.2 2.8 5.5EBITDA gross interest cover rep. 6.3 7.0 8.0 2.6 -3.4 -0.3 -1.1 1.2 3.7EBIT net interest cover rep. 2.3 9.7 12.4 -1.4 -18.0 -26.1 -5.2 -1.6 2.5EBIT net interest cover adj. 2.0 7.6 7.7 4.5 -6.4 -2.7 -2.8 1.6 3.1FFO rep. / total debt rep. -12.7% 13.3% 24.9% 12.2% 5.3% 3.7% 2.8% 8.5% 7.4%FFO rep. / net debt rep. 69.0% -109.7% -69.8% 353.5% -167.1% -84.3% 31.6% 74.5% 25.8%FFO adj. / net debt adj. -78.3% 52.0% 177.4% 38.4% 24.9% 19.2% 12.1% 22.5% 15.4%FOCF rep. / total debt rep. 3.6% -11.3% 5.6% -5.4% -20.9% -17.2% -24.2% -8.1% -9.8%FOCF rep. / net debt rep. -19.6% 93.5% -15.6% -154.9% 664.1% 388.3% -270.0% -71.2% -33.9%RCF rep. / net debt rep. 69.7% -108.1% -67.9% 251.6% 182.0% 79.8% 29.7% 7.0% -0.9%RCF adj. / net debt adj. -79.2% 51.3% 172.9% 29.6% -3.0% 0.0% 11.7% 8.0% 4.6%Total debt rep. / EBITDA rep. 5.6 2.9 2.2 9.8 -6.4 -47.2 12.5 10.5 3.7Net debt rep. / EBITDA rep. -1.0 -0.4 -0.8 0.3 0.2 2.1 1.1 1.2 1.1Net debt adj. / EBITDA adj. 0.7 0.8 0.3 1.6 2.4 1.9 2.8 2.0 1.9FFO rep. / net interest rep. -3.6 6.0 10.8 8.8 -0.5 2.1 -0.7 3.5 2.5FFO rep. / gross interest rep. -3.5 3.7 5.3 4.2 0.4 1.5 0.1 2.1 2.0Capex / sales 2.0% 4.7% 4.9% 5.6% 4.8% 4.7% 5.0% 5.1% 5.0%Capex / depreciation 41.8% 141.9% 114.5% 108.4% 52.7% 57.8% 133.0% 142.6% 142.6%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. 56.7% 46.5% 36.1% 28.0% 25.6% 30.1% 32.7% 31.4% 33.0%Net debt / net capitalization rep. -31.9% -11.8% -25.2% 1.3% -1.1% -1.9% 4.2% 5.0% 12.5%Net debt / net capitalization adj. 16.5% 19.7% 8.0% 13.4% 11.9% 13.9% 20.4% 19.7% 25.9%Net working capital / sales 2.3% 10.0% 11.6% 7.3% -13.8% -10.9% -10.3% -11.7% -11.5%Fixed assets / sales 54.6% 55.0% 50.4% 167.2% 135.1% 84.5% 76.5% 89.6% 88.5%


Comment FY 2008e FY 2009eSales growth Decline in 2008 mainly exchange rate driven (company guidance) -5.0% 2.0%EBITDA growth Assumed to improve due to less restructuring costs n.m. 185.5%EBIT growth Assumed to improve due to less restructuring costs n.m. n.m.Capex incl. acquisition Stable capex driven by low top line growth 870 870Change in working capital Expect to be almost negligible 31 0Funds from operations (FFO) Improvement after restructuring is completed 429 376


<date>




Kabel Deutschland GmbH (BUY) Investment rationale We change our hold recommendation to buy for the KABEL 10.75% 07/14 bond. This

reflects our view that the company should be a relatively solid investment in current volatile times due to its positive operating performance, its strong FCF generation in its traditionalbasic cable access business (excluding new services) and its declining leverage (throughincreasing EBITDA to 4.4x by FYE 2008/09, according to our estimates).

The operating performance of Kabel Deutschland is developing positively. Strong subscriber growth consequently leads to rising capex, which might result in moderately negative freecash flow in FY 2008/2009. Given the current growth phase of the German broadband market, it is imperative that Kabel Deutschland GmbH (“KDG”) invests strongly in the build-out of its network and own subscriber growth in new services. Therefore, capex is likely toincrease further in FY 2008/2009, which will result in negative FCF or at best in even orslightly positive FCF.

Positive is that the EBITDA development apparently has started to benefit from subscribergrowth in the past, despite strong investments in market and subscriber acquisition costs.What is negative is that we cannot see how much of the subscriber acquisition costs may be buried in the capex.

Liquidity seems sufficient during our assessment period of the next 12-18 months. Ourforecast incorporates already increased capex to EUR 400 mn in FY 2008/2009, but no additional bolt-on acquisitions.

We expect that the bond will not be called before its first call-date on July 1, 2009. We currently see only limited risk of an exit of the existing private equity sponsor, given our view of the current market environment.

Recent developments On June 24, S&P revised its outlook on Kabel Deutschland GmbH (KDG) to stable fromnegative, while its B+ long-term corporate credit rating was affirmed. The outlook revision acknowledges the good near-term revenue and EBITDA growth prospects from the uptake of high-speed Internet and telephony services (together with CATV called triple play)and from digital pay-TV services, which should result in improving credit metrics in the next 12 months. Furthermore, KDG's financial flexibility in terms of available cash reserves andcovenant headroom under its existing senior term loan documentation in the near to mediumterm improved following KDG's decision to buy only 1.1 million CATV subscribers rather thanthe originally envisaged maximum of up to 1.6 million from the Orion Group for about EUR 500 mn. The acquisition was closed on April 30, 2008. KDG's financial flexibility is now adequate for the rating level and is expected to remain that way through year-end 2009, according to the rating agency. The ratio of adjusted total debt to adjusted EBITDA (LTM) is expected to have declined to about 7.2x at the end of March 31, 2008, on the back of themarked EBITDA growth for FY 2008, according to S&P.

Latest results recap On August 29, KDG released Q1 FY 2008/09 results which were slightly weaker than we had expected but still strong, while the comparison was impacted by the first time consolidation of the Orion assets, which were acquired on April 30, 2008 and includedfor just two months in Q1 FY 2008/2009. Total revenues grew by 13.6% y-o-y to EUR 329.2 mn (Q4 2007/08: +11.4% y-o-y to EUR 311.8 mn), while EBITDA adjusted for non-cash management compensation improved by about 24.7% to EUR 134.1 mn. If we adjust Q1 FY 2008/09 figures for the consolidation of two months of Orion assets, top-line growth in Q1 ofaround 10% was slightly lower compared to Q4 2007/08 (11.4%). Moreover, even adjustingfor the contribution from the Orion assets for the missing one month in Q2 showed a lowerrevenue and EBITDA contribution than we had expected. However, the adjusted EBITDA

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margin improved to 40.7% in Q1 FY 2008/09 from 39.8% in Q4 FY 2007/08 or from 37.1% inQ2 FY 2007/08, indicating that the profitability trend goes in the right direction.

Reported net debt strongly increased q-o-q to EUR 2,458.3 mn from EUR 1,950.1 mn in Q4 FY 2007/2008, mainly due to the acquisition of assets from Orion for roughly EUR 535 mn, which translates into a reported net debt to adj. EBITDA (LTM EUR 484.4 mn) ratio of about5.1x or about 4.5x if the Q1 FY 2008/09 EBITDA is adjusted for the two-month consolidation of Orion assets and annualized, i.e. EUR 549.4 mn. The Q1 adjusted annualized EBITDA isalready at EUR 550 mn for FY 2008/09 and marks the lower end of KDG's EBITDA guidancefor the year.

KPI development In Q1 FY 2008/09, also the RGU and ARPU development was impacted by theacquisition of subscribers from Orion (plus 271.9k subscribers to 9,156.3k). However, the good news is that excluding the Orion transaction the subscriber development would havebeen flat, i.e. the subscriber decline of the last couple of quarters was stopped. We were told by KDG that we probably have seen most of the subscriber decline due to the build-out of own head-ends from existing Level 4 operators: In the traditional Cable Access business (-132.4k in Q4 FY 2007/2008), RGUs increased q-o-q by 278.5k and ARPU rose q-o-q to EUR 8.17 from EUR 7.89. The pay-TV business, Kabel Digital, grew by 40.8k in Q1 FY 2008/09and the ARPU increased q-o-q to EUR 7.53 from EUR 7.37.

KABEL DEUTSCHLAND: OPERATING PERFORMANCE

Improving EBITDA/EBITDA margin Moderately rising ARPU

0

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Total RGU's Total blended ARPU per RGU


High-speed Internet (HSI) subscribers continued to increase by 88.5k during the lastquarter compared to only 73.8k net adds in Q4 FY 2007/2008. However, roughly 20k RGUs stem from the Orion transaction, indicating that absolute growth was slightly lower q-o-q. Growth in the telephone business is mainly related to the HSI development (70% of newHSI subscribers order the double flat rate), but also shows that even the phone product on astand-alone basis has relatively strong demand. The RGU growth did not impact the HSI ARPU, which grew q-o-q to EUR 13.72 from EUR 13.11 (diminishing promotions), while thePhone ARPU declined q-o-q by roughly EUR 1 to EUR 22.65 driven by price reductions. Tosummarize, the RGU and ARPU development was positive, with total RGUs increasing q-o-q by 518.7k and total blended monthly ARPU per RGU up q-o-q from EUR 8.52 to EUR 8.90 inQ1 FY 2008/09.

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KEY PERFORMANCE INDICATORS

Cable access High-speed Internet

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in '0

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6.606.807.007.207.407.607.808.008.208.40

AR

PU

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RGU's Cable Access ARPU Cable Access

050

100150200250300350400450500

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Liquidity Liquidity seems sufficient during our assessment period of the next 12-18 months. As of June 30, 2008, KDG's cash balance amounted to EUR 52.3 mn and it had EUR 255 mn available under its revolving credit line (EUR 325 mn). Current short-term financial liabilities amounted to EUR 58.3 mn at the end of June 2008, while no scheduled repayments are due (senior credit facilities mature in March 2012) in the coming years.


For 2008/09, KDG's outlook indicates strong growth: KDG foresees revenue growth of 15-20% (including the acquisition of Orion assets), an adjusted EBITDA in excess of EUR 550 mn and capex of roughly EUR 400 mn, which specified the company's former guidance of(significantly) more than EUR 330 mn. This includes expenses for the transition and one-time reconnection of Orion Cable networks of around EUR 40 mn. In addition, the number of Internet/phone subscribers is expected to grow from 421k to above 750k in FY 2008/09.

Model assumptions/risks We base our forecast on the following major assumptions: a) Medium-term organic sales growth potential: around 10% annually; b) Adjusted EBITDA of EUR 550 mn in FY 2008/09; c) Capex of EUR 400 mn in FY 2008/09 and EUR 360 mn in FY 2009/10.

Key risks to our model estimates are: Underperformance due to competition from other TV-platform providers; EBITDA underperformance due to higher costs related to the HSI growth initiative; constantly increasing capex; M&A activities, potential exit of current shareholder.

Things to watch

● End of November 2008: Q2 FY 2008/2009 results

● HSI RGU growth momentum, EBITDA and capex development

● Potential acquisition of further level 4 assets, potential exit of current PE-sponsor


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CAPITALIZATION

Senior Credit Facilities Issuer Kabel Deutschland Vertrieb und Service GmbH & Co. KG (KDS) Senior Credit Facility Initial Amount (in mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Term Loan EUR 1,150 03/12 Bullet 2.00% (margin ratchet) Revolving Credit Facility EUR 200 03/12 Bullet 2.00% (margin ratchet) n.a.

Covenants Minimum consolidated EBITDA to consolidated net interest and maximum consolidated senior net borrowing. Notes Issuer Kabel Deutschland GmbH Senior Notes EUR 250 mn 07/14 Bullet Coupon 10.75% Senior Notes USD 610 mn 07/14 Bullet Coupon 10.625% Other Indebtedness PiK loan in the amount of EUR 480 mn at Kabel Deutschland Holding GmbH Operating leases Available Credit Lines At June 30, 2008 the company had EUR 255.0 mn available under its existing EUR 325.0 mn revolving credit facility.


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BOND DOCUMENTATION – KABEL 10.750% 07/01/14

Issuer Kabel Deutschland Call/Put Call Schedule On or after July 1, 2009: 105.375%; 2010: 103.583%; 2011: 101.792%; 2012 and thereafter: 100% Equity claw back Prior to July 1, 2007 up to 35% at 110.750% Make whole clause Prior to July 1, 2009 all or partially at 100% plus Bund +50bp. Change of control 101% Guarantees On a senior subordinated basis by Kabel Deutschland Vertrieb und Service GmbH & Co. KG (KDS). Security By a second ranking pledge of the ownership interests in KDS and a second ranking pledge of the shares of Kabel

Deutschland Verwaltungs-GmbH (KDV), a general partner of KDS. Ranking – Rank senior in right of payment to all existing and future indebtedness that is expressly subordinated in right of

payment to the notes. – Rank equally in right of payment with all existing and future liabilities of KDG that are not subordinated. – Rank effectively subordinated to any future secured indebtedness of KDG

Certain Covenants Limitation on Debt Incurrence of indebtedness was permitted up to a consolidated leverage ration of 5.5x prior to January 2, 2006 and is

from then permitted up to 5x. Most important carve-outs/exceptions: – Indebtedness under the senior credit facilities up to the amount of the senior credit facilities plus refinancing costs

plus EUR 100 mn. – Indebtedness of any M&A-target (not merging or acquisitions funds), if i) KDG can raise EUR 1 of additional debt

or ii) the consolidated leverage ratio is not greater than it was prior to the M& A. – Incurrence of CLO, mortgage finance and PMO not exceeding EUR 100 mn or 5.0% of total assets. – Obligations to hedge interest and exchange rate risk, agreements and commodity entered into for bona fide

hedging purposes. – General basket indebtedness up to EUR 125 mn or 5% of total assets.

Limitation on Sale of Certain Assets and Subsidiary Stock

– Asset disposition will be permitted if – Consideration is at least equal to the fair market value, as determined in good faith by the board of directors of

KDG, and – at least 75% of the consideration received by KDG or such restricted subsidiary is in form of cash or cash

equivalents or temporary cash investments, and – KDG or such subsidiary applies 100% of the net available cash from the asset disposition to prepay, repay or

purchase a) senior indebtedness or b) pari passu indebtedness or c) to invest in additional assets or d) to reduce indebtedness in any manner not prohibited by the indenture.

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of: – 50% of consolidated net income (minus 100% of such negative amount), – Equity proceeds – Conversion of debt to Equity proceeds. Most important carve-outs/exceptions: – Payment of any dividend within 60 day after declaration date. – (Re)purchase, redemptions, defeasance or to acquisitions, cancellation or retirement for value of capital stock of

KDG or any restricted subsidiary or parent from management investors, which will not exceed the amount equal to i) EUR 15 mn plus ii) EUR 7.5 mn for each year since the issue date, plus the net cash proceeds from the issuance or sale of capital stock to management investors since the issue date.

– Declaration or payment of dividends on the common stock or common equity interests of KDG or any parent following a public offering, limited to an annual amount of the greater of i) 6% of IPO-net cash proceeds, of ii) with a consolidated leverage ratio equal or less than 4.0x, 7% of the market capitalization or IPO market capitalization and iii) with a consolidated leverage ration equal or less than 4.5x, 5% of the market capitalization or IPO market capitalization.

– Restricted payments in an aggregate amount outstanding up to EUR 60 mn. – Indirect Payments to holders of capital stock of KDG or any parent in lien of the issuance of fractional shares of

such capital stock, not to exceed EUR 500,000 in the aggregate. – Declaration and payment of any dividend in cash, not to exceed an amount of EUR 475 mn.

Limitations on Transactions with Affiliates Affiliate transactions will be allowed if – they are made in good faith and comparable to a transaction with a third person (dealing at arm's lengths

principle), – transactions involving an aggregate value over EUR 10 mn have been approved by a majority of the members of

the board of directors, and – transactions involving an aggregate value of more than EUR 50 mn a written opinion from an independent

financial advisor declaring the fairness of the transaction is required. Fall away/ Suspension Covenants Yes Negative pledge Yes Anti Layering Yes


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Business Description – Kabel Deutschland GmbH KDG is the largest cable television operator/ Level 3 operator in Germany. The company was formed following the acquisition of six of the nine regional cable television businesses owned by DT AG. The network connects approx. 15.3 mn homes of which the company served ~ 9.6 mn directly and indirectly. KDG has a market share of roughly 47% in the German cable television (CATV) market. It provides cable television services (analog and digital) and high speed broadband Internet services to its subscribers.


Cable access73%

TV/Radio15%

Internet4%

Phone6%

TKS2%



-200 -100 0 100 200 300 400 500 600

Cable access

TV/Radio

Internet & Phone

TKS

Reconciliation

in EUR mn


DEBT MATURITY PROFILE AS JULY 2008 EST.

<1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years >5 yearsFinancial debt 0 0 0 0 1,250 1,291

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B+ Stable Good near-term trading prospects Moody's Ba3 Negative Downward pressure: Debt/EBITDA 5.5x,

fails to reach pro-forma guidance Fitch BB- Stable Up: De-leveraging, equity-funded

acquisitions of Level-4 operators; Down: shareholder distributions, aggressive price regulations, competitor's re-pricing

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

KABEL 10.75% 7/1/2014

B-s/B2n/BB-s EUR 250 7/1/2009 (105.38)

BOND STRUCTURE

Kabel Deutschland GmbH

100%

Kabel DeutschlandVertrieb und Service

GmbH & Co. KG

Noteholders

BanksSenior Credit Facilities

Guarantee

Shareholders

Kabel Deutschland Holding GmbH & Co. KG

NoteholdersEUR 400 mn 10 Y FR-PIK-Notes

EUR 250 mn KABEL 10.75 7/14USD 610 mn KABEL 10.625 7/14


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PROFIT AND LOSS (KABEL DEUTSCHLAND GMBH)

in EUR mn

FY 2003/04

FY 2004/05

FY 2005/06

FY 2006/07

Q1 FY 2007/08

FY 2007/08

Q1 FY 2008/09

FY 2008/09e

FY 2009/10e

Sales 962.1 1,003.2 1,012.1 1,093.2 289.7 1,196.9 329.2 1,411.4 1,496.1Cost of goods and services sold -616.5 -573.3 -490.1 -567.1 -145.7 -588.5 -161.5 -672.8 -713.1Distribution expenses -220.5 -262.5 -277.0 -318.7 -80.2 -352.8 -98.3 -394.9 -418.6Administration -115.5 -110.3 -102.4 -141.0 -28.4 -128.7 -31.8 -130.6 -138.4Other operating income/expenses 33.9 17.9 12.5 13.2 3.0 12.6 4.1 13.0 13.8EBITDA reported 404.3 367.9 376.0 326.3 106.0 437.2 132.8 531.3 554.9EBIT reported 43.5 74.9 155.1 79.7 38.5 139.5 41.6 226.2 239.7Adj. EBIT (bef. pension interest) 58.4 89.6 169.8 96.6 42.7 155.9 46.0 243.6 257.5Income from investments 0.5 0.7 0.5 0.4 0.2 0.9 13.2 1.4 1.4Interest result -209.9 -168.4 -226.0 -152.1 -34.5 -169.8 -45.4 -187.9 -187.9Other financial items 0.0 -0.3 -0.1 0.3 -2.3 -3.7 0.0 -3.7 -3.7EBT reported -165.8 -93.0 -70.5 -71.7 1.8 -33.1 9.4 35.9 49.5Taxes on income 13.9 -9.5 -6.3 -27.6 -6.1 -0.8 -7.7 -1.0 -1.0Net income -151.9 -102.6 -76.8 -99.3 -4.3 -33.8 1.7 34.9 48.5


in EUR mn

FY 2003/04

FY 2004/05

FY 2005/06

FY 2006/07

Q1 FY 2007/08

FY 2007/08

Q1 FY 2008/09

FY 2008/09e

FY 2009/10e

Fixed assets 1,665 1,496 1,428 1,477 1,482 1,529 2,120 2,154 2,198Cash & cash equivalents 185 133 225 54 35 15 52 -76 -23Total assets 2,090 1,758 1,826 1,705 1,722 1,752 2,359 2,258 2,355Equity incl. minorities -80 -755 -809 -896 -897 -933 -922 -902 -854Pension provisions 18 18 20 24 25 29 32 33 37Other provisions 80 93 118 197 195 217 269 217 217Financial liabilities 1,645 1,952 1,988 1,896 1,983 1,942 2,502 2,472 2,516 short term (<1 year) 310 20 97 37 39 26 58 26 70 long term (>1 year) 1,336 1,932 1,891 1,859 1,945 1,916 2,443 2,446 2,446Net working capital 9 -79 -92 -106 -35 -106 -123 -71 -71

CASH FLOW

in EUR mn

FY 2003/04

FY 2004/05

FY 2005/06

FY 2006/07

Q1 FY 2007/08

FY 2007/08

Q1 FY 2008/09

FY 2008/09e

FY 2009/10e

FFO (Funds from operations) 306 255 241 190 75 280 110 344 368Change in working capital -134 -36 8 0 -98 -10 -22 -35 0Operating cash flow 172 219 249 190 -23 270 88 309 368CAPEX -64 -94 -144 -269 -45 -316 -91 -400 -360Free cash flow 108 125 105 -79 -68 -47 -3 -91 8Dividends -729 -475 0 0 0 -14 0 0 0Acquisitions/disposals 2 -35 -7 -11 -35 -31 -513 -530 0Share buy back/issues 0 0 0 0 0 0 -4 0 0FCF after extraordinary items -620 -385 98 -90 -103 -91 -521 -621 8

DEBT ADJUSTMENTS

in EUR mn

FY 2003/04

FY 2004/05

FY 2005/06

FY 2006/07

Q1 FY 2007/08

FY 2007/08

Q1 FY 2008/09

FY 2008/09e

FY 2009/10e

For pensions 18 18 20 24 25 29 32 33 37For operating leases 139 136 135 155 155 155 155 155 155Others* 1,198 1,157 929 1,023 1,023 1,023 1,023 1,023 1,023


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PROFITABILITY RATIOS (KABEL DEUTSCHLAND GMBH)

FY 2003/04

FY 2004/05

FY 2005/06

FY 2006/07

Q1 FY 2007/08

FY 2007/08

Q1 FY 2008/09

FY 2008/09e

FY 2009/10e

EBITDA margin rep. 42.0% 36.7% 37.1% 29.9% 36.6% 36.5% 40.4% 37.6% 37.1%EBITDA margin adj. 48.0% 43.4% 45.9% 42.0% 43.7% 44.6% 46.6% 46.1% 46.3%EBIT margin rep. 4.5% 7.5% 15.3% 7.3% 13.3% 11.7% 12.6% 16.0% 16.0%EBIT margin adj. 6.1% 8.9% 16.8% 8.8% 14.7% 13.0% 14.0% 17.3% 17.2%Return on capital (before tax) -10.6% -7.8% -6.0% -7.2% 4.5% -3.0% 6.2% 2.4% 3.1%


FY 2003/04

FY 2004/05

FY 2005/06

FY 2006/07

Q1 FY 2007/08

FY 2007/08

Q1 FY 2008/09

FY 2008/09e

FY 2009/10e

EBITDA rep. 404 368 376 326 106 437 133 531 555EBITDA adj. 462 436 465 459 127 534 153 651 692FFO rep. 306 255 241 190 75 280 110 344 368FFO adj. 348 296 290 249 90 339 124 403 428Net debt rep. 1,461 1,819 1,763 1,842 1,948 1,926 2,449 2,547 2,539Net debt adj. 2,815 3,130 2,847 3,044 3,151 3,134 3,659 3,758 3,755Total debt 1,645 1,952 1,988 1,896 1,983 1,942 2,502 2,472 2,516EBITDA net interest cover rep. 1.9 2.2 1.7 2.1 3.1 2.6 2.9 2.8 3.0EBITDA gross interest cover rep. 1.9 2.0 1.6 2.1 3.0 2.5 2.9 2.8 2.9EBIT net interest cover rep. 0.2 0.4 0.7 0.5 1.1 0.8 0.9 1.2 1.3EBIT net interest cover adj. 0.3 0.5 0.7 0.6 1.1 0.8 0.9 1.2 1.3FFO rep. / total debt rep. 18.6% 13.1% 12.1% 10.0% 11.3% 14.4% 12.6% 13.9% 14.6%FFO rep. / net debt rep. 20.9% 14.0% 13.7% 10.3% 11.5% 14.5% 12.8% 13.5% 14.5%FFO adj. / net debt adj. 12.4% 9.5% 10.2% 8.2% 9.1% 10.8% 10.2% 10.7% 11.4%FOCF rep. / total debt rep. 6.6% 6.4% 5.3% -4.2% -1.8% -2.4% 3.3% -3.7% 0.3%FOCF rep. / net debt rep. 7.4% 6.9% 5.9% -4.3% -1.9% -2.4% 3.4% -3.6% 0.3%RCF rep. / net debt rep. -29.0% -12.1% 13.7% 10.3% 11.5% 13.8% 12.3% 13.5% 14.5%RCF adj. / net debt adj. -13.5% -5.7% 10.2% 8.2% 9.1% 10.4% 9.9% 10.7% 11.4%Total debt rep. / EBITDA rep. 4.1 5.3 5.3 5.8 5.8 4.4 5.4 4.7 4.5Net debt rep. / EBITDA rep. 3.6 4.9 4.7 5.6 5.7 4.4 5.3 4.8 4.6Net debt adj. / EBITDA adj. 6.1 7.2 6.1 6.6 6.6 5.9 6.5 5.8 5.4FFO rep. / net interest rep. 2.5 2.5 2.1 2.2 3.2 2.6 3.4 2.8 3.0FFO rep. / gross interest rep. 2.4 2.4 2.1 2.2 3.1 2.6 3.4 2.8 2.9Capex / sales 6.7% 9.3% 14.3% 24.6% 15.5% 26.4% 27.6% 28.3% 24.1%Capex / depreciation 17.7% 32.0% 65.4% 109.0% 66.7% 106.3% 99.7% 131.1% 114.2%

CAPITAL STRUCTURE

FY 2003/04

FY 2004/05

FY 2005/06

FY 2006/07

Q1 FY 2007/08

FY 2007/08

Q1 FY 2008/09

FY 2008/09e

FY 2009/10e

Total debt / capitalization rep. 105.1% 163.0% 168.7% 189.7% 182.5% 192.4% 158.4% 157.5% 151.4%Net debt / net capitalization rep. 105.8% 170.9% 184.9% 194.8% 185.3% 193.9% 160.4% 154.9% 150.7%Net debt / net capitalization adj. 102.5% 131.2% 138.8% 140.7% 138.7% 141.2% 132.7% 130.6% 128.4%Net working capital / sales 0.9% -7.9% -9.0% -9.7% -3.1% -8.8% -10.0% -5.0% -4.7%Fixed assets / sales 173.1% 149.2% 141.1% 135.1% 132.7% 127.7% 171.5% 152.6% 146.9%


Comment

FY 2008/09e

FY 2009/10e

Sales growth Driven by new services in FY 2008/09 as well by acquisitions 17.9% 6.0%EBITDA growth Declining marketing/distribution costs, acquisition in FY 2008/09 21.5% 4.4%EBIT growth Declining marketing/distribution costs, acquisition in FY 2008/09 62.1% 6.0%Capex incl. acquisition Company guidance for capex in FY 2008/09 (incl. acquisition) 930 360Change in working capital Assumed to be negligible -35 0Funds from operations (FFO) Driven by revenue increases, cost control and acquisitions 344 368


<date>




Nielsen/VNU (BUY) Investment rationale We continue to have a buy recommendation for Nielsen (formerly VNU). We like the

positive top-line growth rate of the company's marketing information and media measurement& information segments despite the difficult economic environment. This underpins thehistorical observation that the market research business in general was historically morestable than the cyclical advertising markets. Hence, we like Nielsen's resilient business model, characterized by long-term client relationships, multi-year contracts and high contract renewal rates in its marketing and media measurement services, which leads to a stable and predictable revenue stream. In general, >50% of each year’s consumer services segment revenues are already under agreement at the beginning of the fiscal year. Both Consumer Services and Media have multi-year client agreements and high contract renewal rates (e.g. >95% in the U.S. television audience measurement business). The average contract length is3-5 years and 5-7 years, respectively, in its marketing and media measurement services segments. The average length of relationship with its top ten clients including Procter &Gamble, NBC/Universal, Unilever, News Corp., Nestlé and Coca-Cola is over 30 years. Advertising across the segments represented only 4% of total revenues in 2007. No single client accounted for more than 5% of the company's total revenue in 2007. Nielsen's relatively high financial leverage and limited capacity to reduce debt from internal cash flow in the near-term limits, however, any rating upgrade potential. We also believe that Nielsen's constantbolt-on acquisitions, execution risk and cash outflow from restructuring, competitive pressureas well as its 54%-revenue exposure to the US are risk factors for the credit.

Recent developments On August 27, GfK ended talks regarding a possible offer for TNS. This means that Nielsen's competitor WPP, which made a hostile bid for TNS, has the chance to form, together with TNS, the global No. 2 in the marketing research market behind Nielsen, with a global market share of 25% compared to that of 28% of Nielsen. EU regulators extended theirreview of the GBP 1.14 bn transaction after WPP offered antitrust concessions andcommitments.

GLOBAL MARKETING RESEARCH MARKET CYCLICAL BUSINESS MEDIA SEGMENT EBITDA STILL STABLE

IMS Health, USA14%

The Nielsen Company, USA

28%

Arbitron, USA 2%

Westat, USA 3%

IRI, USA 5%

Synovate, UK 5%

Ipsos, France 8%

GfK AG, Germany 10%

WPP/Kantar, UK 10%Taylor Nelson

Sofres, UK 15%

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2004 2005 2006 2007 H1 07 H1 08

EB

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Marketing information (Consumer Services)Media Measurement & Information (Media)Nielsen Business MediaCorporate

Source: GfK, Company reports, UniCredit Global Research

Latest results recap On August 14, Nielsen reported solid Q2 2008 results with revenues increasing y-o-y by 11.5% to USD 1,304 mn. In constant currency terms, revenues still increased 6.4% y-o-y, driven by a 5.8% increase at Consumer Services and a 12.2% increase at Media, partly offsetby a 6.1% decline in Business Media revenues. In Consumer Services, revenues increased14.0% y-o-y in Q2 with constant currency revenue growth of 5.8%. Overall, there was solid growth across all regions, with double-digit growth in Emerging Markets and Latin America,

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with the exception of low single-digit growth in the US, which was relatively flat across all product lines, largely as a result of price compression, with the exception of AnalyticalConsulting. In Media, revenues increased by 13.3% to USD 426 mn with constant currencyrevenue growth of 12.2% largely due to a 9.1% increase in NMR North America, a 19.2%increase in Online revenues with growth in the US and international markets, and USD 15 mnin revenues as a result of the Telephia acquisition from August 2007, partly offset by a 6.7%decrease in Entertainment revenues. In Business Media, revenues decreased by 5.7% andconstant currency revenues declined by 6.1% due to lower Publication advertising revenuesas a result of industry softness, while Exposition revenues were relatively flat versus the prioryear. The results in FY 2008 will continue to be affected by several acquisitions with an aggregate consideration (net of cash acquired) of USD 837 mn and some disposals in FY2007. Thereof: (a) February 8: Disposal of a significant portion of Business Media Europe(USD 414 mn), (b) June 4: Purchase of the remaining minority interest of Nielsen BuzzMetrics(USD 47 mn), (c) June 22: Purchase of the remaining minority interest of Nielsen/NetRatings(USD 328 mn), (d) August 9: Acquisition of Telephia, Inc. (USD 453 mn) and (e) October 30:Sale of 50% share in VNU Exhibitions Europe (USD 51 mn). On May 15, 2008, Nielsen completed the acquisition of IAG Research Inc. for a purchase price of USD 225 mn. Itrefinanced the acquisition with a private placement of USD 220 mn as an add-on to the 10% senior notes due 2014. During H1 2008, Nielsen incurred payments for its global restructuring initiatives of USD 55 mn (FY 2007: USD 101 mn), had USD 16 mn in charges (FY 2007: USD75 mn), and restructuring accruals of USD 61 mn at H1 2008 (FY 2007: USD 99 mn). Therestructuring initiatives are expected to be implemented by the end of 2008. In Q2 2008, reported EBITDA improved to USD 294 mn versus USD 232 mn in Q1 2008 and USD 212 mnin Q2 2007 and the EBITDA margin (adj.) improved to 25.2% compared to 19.1% in Q1 2008and 18.2% in Q2 2007. In Q2 2008, free cash flow slightly improved to USD 41 mn vs. USD28 mn a year earlier, mainly due to higher FFO despite higher capex. Net debt (excl. Nielsennet debt) increased from USD 7,806 mn in Q1 2008 to USD 7,940 mn, mainly due to theacquisition of IAG Research, which will expand the company's TV and Internet analyticsservices. In LTM Q2 2008, net debt/covenant EBITDA (adj.) was unchanged at 5.8x q-o-q.

Liquidity Nielsen's financial flexibility as of Q2 2008 was good. The company had a cash position of USD 403 mn and approx. USD 493 mn in an unused revolver. Short-term debt amounted to USD 352 mn. Nielsen stated that the bulk of the restructuring cash outflow occurred in H12008. We assumed USD 50 mn in restructuring cash outflows, mainly in H1 2008, free cash flow of USD -108 mn in FY 2008 and considered the USD 225 mn cash outflow for thepurchase of IAG Research Inc. in H1 2008. Nielsen has significant headroom in its covenants,e.g. consolidated net debt/covenant EBITDA was 5.8x at LTM H1 2008 vs. a covenant of 9.5x. This covenant will still be 9.5x in Q3 2008 and will decline to 8.75x in Q4 2008.


We expect a slight improvement in total debt/EBITDA (adj.) to 7.5x vs. 7.7x y-o-y.FFO/total debt (adj.) will remain rather unchanged and weak at around 5.6% in FY 2008 (FY2007: 4.7%) and will only improve starting from H2 2008 due to a decline in restructuringcash-outs.

Model assumptions/ risks

Major risks to our model estimates are: a higher-than-expected impact from a cyclical downturn or competitive pressure, continued cash outflow for acquisitions and restructuringcosts, acquisitions or recapitalization within current covenant headroom.

Things to watch ● Mid-November 2008: Q3 results


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CAPITALIZATION

Senior Secured Credit Facilities Borrower Nielsen Finance LLC Senior Credit Facility Amount (in mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee 7Y term loan USD 4,525 08/09/13 US LIBOR + 250 bp 7Y Term loan EUR 546 08/09/13 EURIBOR + 250 bp 6Y Revolver USD 688 08/09/12 US LIBOR +150 bp 50 bp on unused Covenants: Maximum ratio of consolidated total net debt/Covenant EBITDA of 10x, calculated for the trailing four quarters, commencing with the fiscal quarter ending September 30, 2007. For test periods commencing: (1) between October 1, 2007 and December 31, 2007, the maximum ratio is 10x; (2) between January 1, 2008 and September 30, 2008, the maximum ratio is 9.5x; (3) between October 1, 2008 and September 30, 2009, the maximum ratio is 8.75x; (4) between October 1, 2009 and September 30, 2010, the maximum ratio is 7.5x; and, (5) between October 1, 2011 and September 30, 2012, the maximum ratio is 7.0x. This covenant “steps down” over time to a maximum ratio of consolidated total net debt/Covenant EBITDA of 6.25x as of the first day of the fiscal quarter ending December 31, 2012. Minimum ratio of Covenant EBITDA/consolidated interest expense of 1.25x, calculated for the trailing four quarters, commencing with the fiscal quarter ending September 30, 2007. This covenant “steps up” over time to a minimum ratio of Covenant EBITDA to consolidated interest expense of 1.75x as of the last day of the fiscal quarter ending September 30, 2011. For test periods commencing: (1) between October 1, 2011 and September 30, 2012, the minimum ratio is 1.6x; and (2) after October 1, 2012 the minimum ratio is 1.5x. Nielsen also measures Secured Net Debt/Covenant EBITDA because Nielsen’s senior secured credit facility contains a provision which will result in an increase of the applicable interest rate by 25 bp when this ratio is higher than 4.25x

Notes at FYE 2007 Issuer The Nielsen Company bv (previously VNU Group nv) under EUR 2.5 bn EMTN Program Put resettable notes due 2010 or 2017

GBP 250 05/20/10 Bullet 5.625% (swapped into EUR 344 mn at 4.033%)

FRN EUR 50 05/20/10 Bullet EURIBOR + 50 bp Notes JPY 4,000 12/21/11 Bullet 2.5% Notes EUR 30 02/27/12 Bullet 6.75% FRN EUR 50 04/26/12 Bullet EURIBOR + 140 bp Issuer The Nielsen Company bv Senior discount notes EUR 343 08/01/16 First call: 08/01/11 at

105.5630% to 08/01/11, then 11.125% No poison put

Issuer Nielsen Finance LLC and Nielsen Finance Co Senior notes EUR 150 08/01/14 First call: 08/01/10 at 104.5 9% 101 poison put Senior notes USD 650 08/01/14 First call 08/01/10 at 105 10% 101 poison put Subordinated discount notes USD 1,070 08/01/16 First call 08/01/11 at

106.1250% to 08/01/11, then 12.5%

Other Indebtedness at H1 2007 Other loans USD 7 mn Capital lease obligations USD 126 mn Short-term debt USD 3 mn Bank overdrafts USD 97 mn Available Credit Lines atH1 2007 RCF was drawn with USD 195 mn


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BOND DOCUMENTATION: - SENIOR NOTES VNU 9% 08/01/14 (EUR 150 MN), VNU 10% 2014 (USD 650 MN), - SENIOR SUBORDINATED DISCOUNT NOTES 12.5% 08/01/16 (USD 1,070 MN) - SENIOR DISCOUNT NOTES VNU 11.125% 08/01/16 (EUR 343 MN)

Issuer Nielsen Finance LLC and Nielsen Finance Co. Call/Put Call Schedule Senior Notes (EUR): On or after August 1, 2010: 104.5%; 2011: 102.25%; 2012 and thereafter: 100%

Senior Notes (USD): On or after August 1, 2010: 105%; 2011: 102.5%; 2012 and thereafter: 100% Senior subordinated discount notes (USD): On or after December 1, 2011: 106.25%; 2012: 104.167%; 2013: 102.083% and thereafter: 100% Senior discount notes (EUR): On or after August 1, 2011: 105.563%; 2012: 103.708%; 2013: 101.854%; 2014 and thereafter: 100%

Equity claw back Senior Notes (EUR): Prior to August 1, 2009 up to 35% at 110% Senior Notes (USD): Prior to August 1, 2009 up to 35% at 109% Senior subordinated discount notes (USD): Prior to August 1, 2009 up to 35% at 112.5%

Make whole clause Senior Notes (EUR/USD): Prior to August 1, 2010: Bund plus 50 bp Senior subordinated discount notes (USD): Prior to August 1, 2011:Bund plus 50 bp Senior discount notes (EUR): Prior to August 1, 2011: Bund plus 50 bp

Change of control 101% (not at senior discount note) Guarantees Jointly and severally guaranteed by each of VNU, VNU Intermediate Holding B.V., VNU Holding and Finance B.V.

and, subject to certain exceptions, each of their direct and indirect wholly owned subsidiaries, in each case to the extent that such entity provides a guarantee under the new senior secured credit facilities.

Security --

Ranking - Senior Notes and senior discount notes are the Issuers’ senior unsecured obligations and rank senior ahead of the Senior Subordinated Discount Notes; the senior note guarantees will be the senior unsecured obligations of the guarantors and rank senior ahead of the guarantor’s guarantee under the Senior Subordinated Discount Notes - Senior Subordinated Discount Notes are the Issuers’ unsecured senior subordinated obligations and rank subordinated to the Senior Notes; the senior subordinated note guarantees will be the unsecured senior subordinated obligations of the guarantors and are subordinated the guarantor’s guarantee under our new senior secured credit facilities and the Senior Notes.

Certain Covenants Limitation on Debt Consolidated Leverage Ratio <6.75x Limitation on Sale of Certain Assets Most important carve outs/exceptions:

(a) the EBITDA of ACN (ACN Holdings) and its Restricted Subsidiaries on a consolidated basis for the four most recently ended fiscal quarters for which internal financial statements are available represented <45% of the EBITDA of the Covenant Parties and the Restricted Subsidiaries on a consolidated basis for the same four-quarter period and (b) the Covenant Parties and the Restricted Subsidiaries would be permitted to incur additional debt pursuant to the Consolidated Leverage Ratio test.

Limitation on Restricted Payments Receives consideration at least equal to fair market value and at least 75% thereof in cash or cash equivalents. Within 15 months has to apply the net proceeds from such asset sales for debt reduction or replacement assets; after that obliged to make offer to noteholders with excess proceeds exceeding USD 100 mn. Most important carve outs/exceptions: (a) EBITDA of the Covenant Parties and the Restricted Subsidiaries on a consolidated basis for the period beginning July 1, 2006, to the end of the Issuers’ most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment, less the product of 1.4x the Consolidated Interest Expense of the Covenant Parties and the Restricted Subsidiaries for the same period; plus (b) 100% of the aggregate net cash proceeds

Limitations on Transactions with Affiliates For amounts > USD 20 mn, if not less favorable to the issuer as in a comparable transaction in arms-length dealings with a person who is not such an affiliate; >USD 50 mn only when approved by a majority of the members of the Board of Directors



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Business Description – VNU/Nielsen The Nielsen Company B.V. (formerly known as VNU) is a global information and media company with leading market positions and recognized brands. Main end-customer industries of Nielsen are the consumer packaged goods and retail industry (for consumer behavior information in the Consumer Services segment), media companies, e.g. broadcast and cable television, motion pictures, music, print, internet, mobile telephone (for audience measurement information in the Media segment) and attendees, exhibitors, readers and advertisers in trade shows, and publications (Business Media segment). Nielsen is active in more than 100 countries, with its headquarters located in Haarlem, the Netherlands and New York, USA. Nielsen has approximately 34,700 full-time employees. On May 24, 2006, Nielsen was acquired through a tender offer to shareholders by Valcon Acquisition bv (an entity formed by AlpInvest Partners, Blackstone, Carlyle, Hellman & Friedman, KKR and Thomas H. Lee Partners) for USD 10.0 bn.


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2005 2006 2007


EBIT BY REGION (FY 2007)

-100 -50 0 50 100 150 200 250 300

United States

Other Americas

The Netherlands

Other Europe,Middle East & Africa

Asia Pacific

EBIT in EUR mn

200720062005




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B Stable Execution of business plan Moody's B2 Stable ND/EBITDAR<8x, focus on deleveraging,

execute restructuring/cost savings Fitch B Stable Powerful business profile, but high debt

leverage

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

VNU 11.125% 8/1/2016 Caa1s/CCC+s/ CCC+s

EUR 343 8/1/2011 (105.563)

VNU 9% 8/1/2014 Caa1s/CCC+s/ CCC+s

EUR 150 8/1/2010 (104.5)

BOND STRUCTURE

Valcon AcquisitionB.V.

VNU Group B.V.

VNU IntermediateHolding B.V.

VNU Holding and Finance B.V.

Operating Assets

Noteholders

Nielsen Finance LLCNilesen Finance Co.

Noteholders


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PROFIT AND LOSS (VNU/NIELSEN)

in USD mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 3,814.0 4,059.0 4,174.0 2,241.0 4,707.0 2,518.0 4,918.4 5,090.6 5,268.7Raw materials used -1,772.0 -1,904.0 -1,989.0 -1,022.0 -2,112.0 -1,123.0 -2,208.4 -2,285.7 -2,365.7Personnel costs -1,321.0 -1,464.0 -1,466.0 -785.0 -1,585.0 -853.0 -1,657.5 -1,715.5 -1,775.6EBITDA reported 685.0 685.0 549.0 379.0 873.0 526.0 977.5 1,089.4 1,127.5Depreciation and amortization -432.0 -312.0 -383.0 -223.0 -457.0 -242.0 -477.1 -493.8 -511.1Other operating income/expenses -36.0 -6.0 -170.0 -55.0 -137.0 -16.0 -75.0 0.0 0.0EBIT reported 253.0 373.0 166.0 156.0 416.0 284.0 500.5 595.6 616.4Income from investments 7.0 9.0 12.0 6.0 2.0 1.0 2.0 2.0 2.0Interest result -124.0 -109.0 -401.0 -297.0 -618.0 -312.0 -633.8 -647.9 -613.4Other financial items 182.0 -70.0 -136.0 -23.0 -64.0 -51.0 -64.0 -64.0 -64.0Discontinuing operations 0.0 0.0 0.0 0.0 0.0 -3.0 0.0 0.0 0.0EBT 318.0 203.0 -359.0 -158.0 -264.0 -78.0 -195.4 -114.3 -58.9Taxes on income -45.0 -31.0 66.0 20.0 -18.0 15.0 -20.0 -20.0 -20.0Net income 273.0 172.0 -293.0 -138.0 -282.0 -63.0 -215.4 -134.3 -78.9


in USD mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 5,621 7,491 12,960 13,085 13,688 13,992 13,530 13,165 12,792 thereof goodwill 3,557 5,023 6,664 7,456 7,786 8,034 7,786 7,786 7,786Cash & cash equivalents 2,161 1,142 782 514 399 403 403 403 403Total assets 8,691 10,663 16,099 15,706 16,254 16,693 16,168 15,838 15,500Equity incl. minorities 3,531 5,439 4,019 3,954 3,961 4,072 3,748 3,615 3,538Financial liabilities 2,926 2,731 7,973 7,888 8,250 8,712 8,512 8,279 7,984 short term (<1 year) 167 731 212 358 213 352 n.m. n.m. n.m. long term (>1 year) 2,759 2,000 7,761 7,530 8,037 8,360 n.m. n.m. n.m.Net working capital -379 -311 -302 -530 -643 -445 -440 -440 -440

CASH FLOW

in USD mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 602 551 332 -12 314 274 405 553 625Change in working capital -3 -41 179 0 -74 -204 -203 0 0Operating cash flow 599 510 511 -12 240 70 202 553 625CAPEX -269 -238 -236 -113 -266 -171 -310 -320 -330Free cash flow 330 272 275 -125 -26 -101 -108 233 295Dividends 0 0 -16 0 0 0 0 0 0Acquisitions/disposals 2,625 -207 -5,357 -20 -527 -235 -235 0 0Share buy back/issues 0 0 -170 -3 -10 72 72 0 0FCF after extraordinary items 2,955 65 -5,268 -148 -563 -264 -271 233 295

DEBT ADJUSTMENTS

in USD mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions 85 83 60 60 16 16 16 16 16For operating leases 467 405 479 479 568 568 568 568 568Others* 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (VNU/NIELSEN)

2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 18.0% 16.9% 13.2% 16.9% 18.5% 20.9% 19.9% 21.4% 21.4%EBITDA margin adj. 21.5% 19.6% 20.1% 22.1% 24.4% 24.3% 24.7% 24.1% 24.0%EBIT margin rep. 6.6% 9.2% 4.0% 7.0% 8.8% 11.3% 10.2% 11.7% 11.7%EBIT margin adj. 8.8% 10.3% 9.2% 10.5% 13.0% 13.0% 13.3% 12.8% 12.8%Return on capital (before tax) 2.0% 3.2% -2.0% -0.2% -1.7% 1.8% -1.1% -0.4% 0.0%


2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 685 685 549 379 873 526 978 1,089 1,128EBITDA adj. 819 794 841 495 1,148 611 1,215 1,227 1,266FFO rep. 602 551 332 -12 314 274 405 553 625FFO adj. 653 613 406 25 395 315 486 634 707Net debt rep. 765 1,589 7,191 7,374 7,851 8,309 8,109 7,876 7,581Net debt adj. 1,317 2,077 7,730 7,913 8,434 8,892 8,692 8,459 8,164Total debt 2,926 2,731 7,973 7,888 8,250 8,712 8,512 8,279 7,984EBITDA net interest cover rep. 5.5 6.3 1.4 1.3 1.4 1.7 1.5 1.7 1.8EBITDA gross interest cover rep. 4.9 5.3 1.3 1.2 1.3 1.6 1.5 1.6 1.8EBIT net interest cover rep. 2.0 3.4 0.4 0.5 0.7 0.9 0.8 0.9 1.0EBIT net interest cover adj. 2.0 2.8 0.9 0.7 0.9 1.0 1.0 0.9 1.0FFO rep. / total debt rep. 20.6% 20.2% 4.2% 2.5% 3.8% 6.9% 4.8% 6.7% 7.8%FFO rep. / net debt rep. 78.7% 34.7% 4.6% 2.7% 4.0% 7.2% 5.0% 7.0% 8.3%FFO adj. / net debt adj. 49.6% 29.5% 5.3% 3.5% 4.7% 7.7% 5.6% 7.5% 8.7%FOCF rep. / total debt rep. 11.3% 10.0% 3.4% 1.6% -0.3% -1.6% -1.3% 2.8% 3.7%FOCF rep. / net debt rep. 43.1% 17.1% 3.8% 1.7% -0.3% -1.7% -1.3% 3.0% 3.9%RCF rep. / net debt rep. 78.7% 34.7% 4.4% 2.6% 4.0% 7.2% 5.0% 7.0% 8.3%RCF adj. / net debt adj. 49.6% 29.5% 5.0% 3.4% 4.7% 7.7% 5.6% 7.5% 8.7%Total debt rep. / EBITDA rep. 4.3 4.0 14.5 11.1 9.5 8.5 8.7 7.6 7.1Net debt rep. / EBITDA rep. 1.1 2.3 13.1 10.4 9.0 8.1 8.3 7.2 6.7Net debt adj. / EBITDA adj. 1.6 2.6 9.2 8.2 7.3 7.0 7.2 6.9 6.5FFO rep. / net interest rep. 5.9 6.1 1.8 1.0 1.5 1.9 1.6 1.9 2.0FFO rep. / gross interest rep. 5.3 5.2 1.8 1.0 1.5 1.9 1.6 1.8 2.0Capex / sales 7.1% 5.9% 5.7% 5.0% 5.7% 6.8% 6.3% 6.3% 6.3%Capex / depreciation 233.9% 195.1% 166.2% 129.9% 148.6% 70.7% 160.6% 148.3% 120.0%

CAPITAL STRUCTURE

2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 45.3% 33.4% 66.5% 66.6% 67.6% 68.1% 69.4% 69.6% 69.3%Net debt / net capitalization rep. 17.8% 22.6% 64.1% 65.1% 66.5% 67.1% 68.4% 68.5% 68.2%Net debt / net capitalization adj. 27.7% 27.9% 66.1% 67.0% 68.1% 68.7% 70.0% 70.1% 69.9%Net working capital / sales -9.9% -7.7% -7.2% -12.1% -13.7% -8.9% -8.9% -8.6% -8.4%Fixed assets / sales 147.4% 184.6% 310.5% 297.7% 290.8% 280.7% 275.1% 258.6% 242.8%


Comment FY 2008 FY 2009 FY 2010Sales growth Like-for-like growth of around 3.5% 4.5% 3.5% 3.5%EBITDA growth Lower restructuring expenses; efficiency measures 12.0% 11.4% 3.5%EBIT growth Lower restructuring expenses; efficiency measures 20.3% 19.0% 3.5%Capex incl. acquisition Approx. 6% of sales 568 320 330Change in working capital Build-up in 2008 -203 0 0Funds from operations (FFO) Restructuring success, lower restructuring cash out 405 553 625


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NTCH / TDC (BUY) Investment rationale We keep our buy recommendation on the TDCDC 8.25% 05/01/2016 bond. We expect

further deleveraging via the group's non-core asset disposal program (e.g. Polkomtel, HTCC/Invitel). The company already used cash proceeds from asset disposals fordeleveraging and we assume that it will continue to do so in the future. NTCH's decliningFCF generation is mitigated by deleveraging via potential disposal proceeds and the moderate maturity profile. Hence, we continue to view the TDCDC 8.25% 05/01/2016, inparticular in the current market environment, as a safe haven that still offers a decent carry.

Recent developments On June 30, TDC announced that its 64.6% controlled subsidiary Hungarian Telephoneand Cable Corp. (HTCC), which is listed on the American Stock Exchange, has askedan investment banking firm to assist it in evaluating strategic alternatives for the company. HTCC's EV currently amounts to around USD 1.44 bn and it has a market cap ofapprox. USD 330 mn (~DKK 1,740 mn).

Latest results recap On August 13 and 15, respectively TDC/NTCH released Q2 2008 results, reflecting a clearly improved operating performance q-o-q, while pressure on the top-line remained. In Q2 2008, external revenues declined by 2% y-o-y to DKK 9,851 mn (Q1 2008: -0.7% to DKK 9,605 mn), mainly due to a strong revenue reduction of traditional landlinetelephony (Fixnet Nordic), lower handset/PC sales as well as fewer wholesale customers(Mobile Nordic) and lower retail prices as well as reduced mobile termination prices atSunrise in Switzerland. Adjusted for acquisition and divestment of enterprises, revenueswere down by 3.9%, which reflects a stronger decline than in Q1 2008 (2.9%), according toour calculations. Group EBITDA increased by 8.0% y-o-y to DKK 3,321 mn, mainly driven by strong EBITDA growth in Business Nordic (11.0%), in Fixnet Nordic (9.4%), and in YouSee(19.0%), partly offset by a 3.0% decrease in Sunrise. However, even Sunrise's EBITDAstrongly improved q-o-q from DKK 429 mn in Q1 2008 to DKK 559 mn in Q2 2008. Adjustedfor acquisition and divestment of enterprises, revenues rose by 1.85% y-o-y, a clear improvement from the organic 2.9% y-o-y decline in Q1 2008. Consequently, the Group EBITDA margin improved to 32.3% in Q2 2008 from 31.0% in Q1 2008 and 28.6% in Q22007, which appears to be a result of tight cost control measures.

TDC: OPERATING PERFORMANCE

Relatively stable profitability development EBITDA minus capex development

0

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In H1 2008, FCF (OCF minus capex) declined significantly y-o-y to DKK 8 mn from DKK 2,058 mn in H1 2007. This was due to the following: a) CF from operating activities declined by 32.2% to DKK 2,537 mn in H1 2008, mainly due to currency translation adjustments from

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hedging activities, which was partly offset by lower interest paid. b) Moreover, capex wasroughly DKK 444 mn higher y-o-y. Net interest-bearing debt increased since YE 2007 by DKK 306 mn to DKK 55,958 mn due to the acquisition of Memorix for DKK 0.3 bn.

Liquidity The liquidity of NTCH appears to be sufficient: Given the proceeds from asset disposals (Bite, One, Talkline), the company used its significant cash position to buy back DKK 6.3 bn ofits senior loan in the open market (in H2 2007 and H1 2008). The total maturing debt of less than DKK 2.5 bn in H2 2008 is well covered by the company's cash position in the amount of DKK 3,606 mn and by its FCF generation.


NTCH Group confirmed its 2008 outlook: It expects revenue in 2008 to be level with revenue in 2007, as the full-year effect of HTTC’s acquisition and growth in YouSee will offset the decrease in the domestic landline business and Sunrise. Net income from continuingoperations excluding special items and fair value adjustments is expected to increase by 10%-20%, as rising earnings from more efficient operations and decreasing interest expenses due to debt repayments in 2007 will be partly offset by higher tax expenses from the full-year impact of the tax legislation amendments in 2007.

The company's leverage remained relatively stable in Q2 2008. The reported net debt to EBITDA ratio was 3.4x (TDC) / 4.5x (NTCH) in Q1 2008 LTM compared to 3.3x (TDC) / 4.5x(NTCH) in Q2 2008. In 2008, we expect further leverage reductions from additional disposals(e.g. Polkomtel and HTCC/Invitel) and free cash flow generation.

Update on NTCH's potential disposals: Regarding its Polkomtel stake (19.6%) and the dispute with Vodafone, the company mentioned during the conference call that the recentarbitrage court ruling was not straightforward and that they are currently in negotiations (whichare moving in the right direction, but no decision has been made yet) with Vodafone regardinga solution. Moreover, with respect to HTCC's review of strategic alternatives, TDC/NTCH'smanagement stated that it expects conclusions on this review this autumn.

Model assumptions/risks We base our forecasts on the following major assumptions: a) Medium-term revenue growth potential of 2% annually; b) A stable EBITDA margin of around 31-32%; c) Capex of around DKK 5,000 mn in 2008-2009; d) Sale of stakes in Polkomtel (for EUR 860 mn ~ DKK6,416 mn) or HTCC/Invitel are not factored into our forecast.

Key risks to our model estimates:

a) Adverse regulatory measures and increasing competition

b) Asset disposals (e.g. Polkomtel in Poland, HTCC/Invitel, or TDC Switzerland/Sunrise)

c) Shareholder remuneration, refinancing activities.

Things to watch ● Asset disposals (i.e. HTCC) ; regulatory measures, especially in Switzerland

● Competition from Danish utility companies; early debt redemptions

● November 5: Q3 2008 results (TDC)


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CAPITALIZATION

Senior Credit Facilities Borrower TDC A/S (Term Loans and RCF); Nordic Telephone Company Holding ApS (RCF) Senior Credit Facility Initial Amount (in mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Term Loan A EUR 1,576 12/11 Amortizing 2.125% (margin ratchet) Term Loan B EUR 2,465 12/13 Bullet 2.375% (margin ratchet) Term Loan C EUR 2,465 12/14 Bullet 2.875% Revolving Credit Facility EUR 700 12/12 Bullet 2.125% (margin ratchet) 0.75% Security The Senior Facilities are guaranteed by Nordic Telephone Company Holding ApS and secured by a first-ranking pledge over the shares of Nordic Telephone Company ApS and are also secured by first-ranking security over certain assets of TDC A/S and its subsidiaries. Covenants The Senior Facilities contain financial covenants relating to the maintenance of certain ratios: I) minimum ratio of Consolidated Cash flow to Net Debt Service of 1.00x; II) minimum ratio of Consolidated EBITDA to Consolidated Net Finance Charges for specified annual periods increasing from 2.00x in Dec. 2006 to 3.00x in Sep. 2011; III) maximum ratio of Consolidated Total Net Debt to Consolidated EBITDA for specified annual periods decreasing from 6.95x in Dec. 2006 to3.40x in Dec. 2012; IV) maximum annual aggregate Capital Expenditure decreasing from DKK 6,373 mn in 2006 to DKK 5,869 mn in 2015. A Cash Sweep requires 50% of Excess Cashflow (above EUR 30 mn) to be prepaid until Consolidated Net Debt to Consolidated EBITDA is less than 3.75x. Notes Issuer Nordic Telephone Company Holding ApS

Senior Notes EUR 800 05/16 Bullet Coupon 8.250% Senior Notes USD 600 05/16 Bullet Coupon 8.875% Floating Rate Notes EUR 750 05/16 Bullet Euribor plus 550 bp Available Credit Lines EUR 700 mn under RCF undrawn as of June 30, 2008.


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BOND DOCUMENTATION – EURO FIXED RATE NOTES / DOLLAR NOTES / EURO FLOATING RATE NOTES

Issuer Nordic Telephone Company Holding ApS Call/Put Call Schedule EUR/USD Notes: On or after May 1, 2011: 104.125%/104.438%; May 1, 2012: 102.750%/102.958%; May 1, 2013:

101.375%/101.479%; May 1, 2014 and thereafter: 100% Floating Rate Notes: On or after May 1, 2007: 102%; May 1, 2008: 101%; May 1, 2009 and thereafter: 100%

Equity claw back EUR Notes: Prior to May 1, 2009 up to 40% at 108.250% USD Notes: Prior to May 1, 2009 up to 40% at 108.875% Floating Rate Notes: No

Make whole clause EUR Notes: Prior to May 1, 2011, Bund +50bp USD Notes: Prior to May 1, 2011, Treasury Rate +50bp Floating Rate Notes: Prior to May 1, 2007, Bund +50bp

Change of control 101% Guarantees The Notes are a general obligation of Nordic Telephone Company ApS. Security The Notes have the benefit of security in the form of a second-ranking pledge of the shares of Nordic Telephone

Company ApS, which will rank behind the security granted in favor of the Senior Facilities Agreement. Ranking The Notes will be general obligations of Nordic Telephone Company Holding ApS and will:

– Rank equally in right of payment with all existing and future liabilities of the Issuer that are not so subordinated, including the guarantee of the Indebtedness under the Senior Facilities Agreement given by the Issuer and borrowings under the RCF made by the Issuer;

– Be senior in right of payment to all existing and future Indebtedness that is expressly subordinated in right of payment to the Notes;

– Be effectively subordinated to any future secured Indebtedness of the Issuer secured by a first-priority interest in the Collateral or secured by other assets of the Issuer to the extent of the value of such other assets.

Certain Covenants Limitation on Debt Consolidated leverage ratio of less than 6.00x (incurrence covenant);

Most important carve-out/exceptions: – Indebtedness under Credit Facilities/Refinancing not exceeding EUR 7,250 mn, less the amount of any permanent

repayments of such debt with proceeds from asset sales – Incurrence of CLO or purchase money obligations not exceeding EUR 250 mn and 2.34% of total assets – General Basket not exceeding the greater of EUR 400 mn and 3.74% of total assets – Incurrence of Indebtedness to finance the acquisition of TDC shares not held by the Issuer not exceeding EUR

300 mn Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash, the assumption

of debt or replacement of assets and is within 365 days applied to debt reduction or invested in additional assets. Excess Proceeds exceeding EUR 100 mn used to redeem notes and pari passu debt at par

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of the following if the Issuer can incur additional debt of EUR 1.00: – 50% of Consolidated Net Income (minus 100% of such negative amount); – Equity proceeds; – Conversion of debt to equity proceeds; – Proceeds in case of disposition or repayment of any investment constituting a restricted payment (the lesser of the

return of capital with respect to such investment and the initial amount of such investment); – Fair market value of the issuer's interest in any unrestricted subsidiary subsequently designated as a restricted

subsidiary (amount does not exceed amount of restricted payment deemed made when subsidiary was subsequently designated)

Most important carve-out/exceptions: – Repurchase, redemption or other acquisitions of shares of capital stock or subordinated obligations not to exceed

EUR 30 mn plus EUR 15 mn multiplied by the number of the calendar years commenced since Issue Date – In case of an IPO, dividend payments are not allowed to exceed the greater of a) 6% of net cash proceeds and b)

7% of IPO market capitalization if the consolidated leverage ratio will be ≤ 4.0x and 5% of IPO market capitalization if the consolidated leverage ratio will be ≤ 4.5x

– General Basket not exceeding EUR 225 mn and 2.10% of total assets – Dividends from certain asset disposals not exceeding EUR 350 mn when at least EUR 1 bn of asset proceeds are

used to repay indebtedness Limitations on Transactions with Affiliates Board resolution if transaction greater than EUR 50 mn

Fairness opinion if transaction greater than EUR 50 mn Fall away/ Suspension Covenants Yes Negative pledge Yes Anti Layering No


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Business Description – TDC (NTCH) TDC A/S, headquartered in Copenhagen, Denmark, provides telecommunication solutions. The company delivers a broad range of services including fixed and mobile telephone, data communications, systems integration, website hosting, simple and broadband Internet access and cable television services. TDC’s international operations include activities in 12 European countries and Oman in the Middle East. TDC serves 13.6 million subscribers, thereof 3.5 in fixed line and 7.1 in mobile business. The company employs approximately 17,390 people.


Business Nordic32%

Fixnet Nordic24%

Mobile Nordic15%

YouSee7%

Sunrise22%



Business Nordic29%

Fixnet Nordic29%

Mobile Nordic11%

YouSee6%

Sunrise19%

Others6%


DEBT MATURITY PROFILE AS OF YE 2007 (HVB ESTIMATES)


ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB- Stable Able to defend domestic market positions Moody's Ba3 Positive Increased financial flexibility, de-

leveraging 5.9x Debt/EBITDA, growth in revenues, EBITDA and RCF

Fitch BB- Stable Up: leverage of 4-4.5x; Down: underperformance in domestic fixed-line, regulatory pressure and accelerated margin decline in CH

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

TDCDC 8.25% 5/1/2016

Bs/B2p/B+s EUR 800 5/1/2011 (104.13)

TDCDC Float + 550 bp 5/1/2016

Bs/B2p/B+s EUR 750 5/1/2007 (102)

BOND STRUCTURE

100%

Consortium and other investors

Nordic TelephoneCompany Holdings

ApS

Noteholders

TDC A/STerm and Revolving

Credit Facilities

88.2%

Nordic TelephoneCompany ApS

100%

Public minority

11.8% RevolvingCredit Facility

SeniorCreditFacilities


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PROFIT AND LOSS (TDC (NTCH))

in DKK mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 52,355 42,339 46,588 47,429 19,720 39,321 19,456 40,107 40,910Raw materials used -17,787 -15,630 -17,104 -17,258 -6,390 -12,326 -5,945 -12,573 -12,824Personnel costs -9,788 -6,833 -7,628 -7,559 -3,634 -7,101 -3,477 -7,243 -7,388EBITDA reported 15,287 11,996 13,003 13,655 6,141 12,427 6,267 12,676 12,929Depreciation and amortization -9,328 -6,661 -6,790 -6,551 -5,269 -8,085 -3,046 -8,247 -8,412Other operating income/expenses -9,493 -7,880 -8,853 -8,957 -3,555 -7,467 -3,767 -7,616 -7,769EBIT reported 5,959 5,335 6,213 7,104 872 4,342 3,221 4,429 4,517Income from investments 30 5,632 334 439 83 266 150 266 266Interest result -1,189 -894 -872 -2,861 -2,303 -4,662 -1,887 -5,810 -5,810Other financial items 572 178 -184 164 0 162 255 162 162Discontinuing operations 0 315 3,953 0 28 1,406 0 0 0EBT 5,372 10,251 5,491 4,846 -1,348 108 1,739 -953 -864Extraordinary result -1,719 385 -968 -309 679 506 -616 0 0Taxes on income -1,644 -1,041 -1,026 -1,094 1,141 536 -594 -832 -755Net income 2,009 9,910 7,450 3,443 500 2,556 529 -1,785 -1,619


in DKK mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 64,229 65,182 64,817 63,153 89,085 82,496 83,712 79,147 75,571Cash & cash equivalents 9,178 10,250 13,750 3,455 2,084 8,474 3,606 9,806 11,455Total assets 94,680 90,264 93,524 80,769 109,968 105,142 103,001 103,276 101,349Equity incl. minorities 34,204 38,850 43,795 3,571 15,333 16,752 17,900 14,720 12,793Pension provisions n.a. 264 332 239 311 322 296 322 322Financial liabilities 38,039 30,479 30,315 58,749 70,431 64,192 59,713 64,192 64,192 short term (<1 year) 3,714 1,337 5,425 1,975 1,732 4,146 4,947 4,146 4,146 long term (>1 year) 34,325 29,142 24,890 56,774 68,699 60,046 54,766 60,046 60,046Net working capital 14,546 -1,030 647 1,353 4,491 -1,383 -1,091 -1,398 -1,398

CASH FLOW

in DKK mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) 11,554 9,872 9,218 10,089 4,756 9,177 3,223 6,462 6,793Change in working capital -113 1,212 -527 52 -613 612 -686 15 0Operating cash flow 11,441 11,084 8,691 10,141 4,143 9,789 2,537 6,476 6,793CAPEX -6,631 -5,415 -5,557 -5,454 -2,085 -4,795 -2,529 -5,000 -5,000Free cash flow 4,810 5,669 3,134 4,687 2,058 4,994 8 1,476 1,793Dividends -2,453 -2,555 -2,440 -44,343 -83 -83 -85 -144 -144Acquisitions/disposals -5,900 9,662 4,757 792 2,878 8,138 86 0 0Share buy back/issues 0 -3,517 -178 799 0 0 213 0 0FCF after extraordinary items -3,543 9,259 5,273 -38,065 4,853 13,049 222 1,332 1,649

DEBT ADJUSTMENTS

in DKK mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions 0 0 0 0 0 0 0 0 0For operating leases 3,120 3,877 3,282 3,354 3,354 3,354 3,354 3,354 3,354Others* 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (TDC (NTCH))

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 26.8% 29.2% 28.3% 27.9% 28.8% 31.1% 31.6% 32.2% 31.6% 31.6%EBITDA margin adj. 28.2% 30.5% 30.6% 27.6% 30.8% 33.6% 34.1% 34.7% 34.0% 34.0%EBIT margin rep. 9.6% 11.4% 12.6% 13.3% 15.0% 4.4% 11.0% 16.6% 11.0% 11.0%EBIT margin adj. 10.3% 12.0% 13.6% 12.0% 15.7% 5.3% 11.9% 17.5% 11.9% 11.9%Return on capital (before tax) 6.0% 6.6% 6.4% 7.2% 6.8% 2.7% -0.4% 6.2% -1.8% -1.7%


2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 14,313 15,287 11,996 13,003 13,655 6,141 12,427 6,267 12,676 12,929EBITDA adj. 15,084 15,989 12,936 12,867 14,616 6,624 13,393 6,749 13,642 13,895FFO rep. 10,918 11,554 9,872 9,218 10,089 4,756 9,177 3,223 6,462 6,793FFO adj. 11,324 11,944 10,408 9,702 10,701 5,062 9,789 3,529 7,073 7,404Net debt rep. 25,557 28,861 20,229 16,565 55,294 68,347 55,718 56,107 54,386 52,737Net debt adj. 29,210 31,981 24,106 19,847 58,648 71,701 59,072 59,461 57,740 56,091Total debt 31,151 38,039 30,479 30,315 58,749 70,431 64,192 59,713 64,192 64,192EBITDA net interest cover rep. 12.8 12.9 13.4 14.9 4.8 2.7 2.7 3.3 2.2 2.2EBITDA gross interest cover rep. 12.8 12.9 13.4 14.9 4.8 2.7 1.8 2.0 2.2 2.2EBIT net interest cover rep. 4.6 5.0 6.0 7.1 2.5 0.4 0.9 1.7 0.8 0.8EBIT net interest cover adj. 3.7 4.2 4.5 4.7 2.3 0.4 0.9 1.7 0.8 0.8FFO rep. / total debt rep. 35.0% 30.4% 32.4% 30.4% 17.2% 13.8% 14.3% 12.8% 10.1% 10.6%FFO rep. / net debt rep. 42.7% 40.0% 48.8% 55.6% 18.2% 14.2% 16.5% 13.6% 11.9% 12.9%FFO adj. / net debt adj. 38.8% 37.3% 43.2% 48.9% 18.2% 14.5% 16.6% 13.9% 12.3% 13.2%FOCF rep. / total debt rep. 15.5% 12.6% 18.6% 10.3% 8.0% 8.3% 7.8% 4.9% 2.3% 2.8%FOCF rep. / net debt rep. 18.9% 16.7% 28.0% 18.9% 8.5% 8.5% 9.0% 5.2% 2.7% 3.4%RCF rep. / net debt rep. 33.5% 31.5% 36.2% 40.9% -61.9% 13.8% 16.3% 13.5% 11.6% 12.6%RCF adj. / net debt adj. 30.7% 29.7% 32.6% 36.6% -57.4% 14.1% 16.4% 13.7% 12.0% 12.9%Total debt rep. / EBITDA rep. 2.2 2.5 2.5 2.3 4.3 5.3 5.2 4.8 5.1 5.0Net debt rep. / EBITDA rep. 1.8 1.9 1.7 1.3 4.0 5.1 4.5 4.5 4.3 4.1Net debt adj. / EBITDA adj. 1.9 2.0 1.9 1.5 4.0 5.0 4.4 4.4 4.2 4.0FFO rep. / net interest rep. 10.8 10.7 12.0 11.6 4.5 3.1 3.0 2.7 2.1 2.2FFO rep. / gross interest rep. 10.8 10.7 12.0 11.6 4.5 3.1 2.3 2.0 2.1 2.2Capex / sales 14.4% 12.7% 12.8% 11.9% 11.5% 10.6% 12.2% 13.0% 12.5% 12.2%Capex / depreciation 100.1% 87.3% 81.3% 81.8% 83.3% 39.6% 59.3% 83.0% 60.6% 59.4%

CAPITAL STRUCTURE

2002 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. 46.5% 52.7% 44.0% 40.9% 94.3% 82.1% 79.3% 76.9% 81.3% 83.4%Net debt / net capitalization rep. 41.6% 45.8% 34.2% 27.4% 93.9% 81.7% 76.9% 75.8% 78.7% 80.5%Net debt / net capitalization adj. 44.9% 48.3% 38.3% 31.2% 94.3% 82.4% 77.9% 76.9% 79.7% 81.4%Net working capital / sales 27.8% 27.8% -2.4% 1.4% 2.9% 10.2% -3.5% -2.8% -3.5% -3.4%Fixed assets / sales 117.1% 122.7% 154.0% 139.1% 133.2% 202.5% 209.8% 214.3% 197.3% 184.7%


Comment 2008e 2009eSales growth Medium-term revenue growth potential of 2% p.a. 2.0% 2.0%EBITDA growth Driven by top-line growth (EBITDA margin 34%) 2.0% 2.0%EBIT growth Driven by top-line growth (stable cost margins) 2.0% 2.0%Capex incl. acquisition Relatively stable capex assumed 5,000 5,000Change in working capital Assumed to be almost negligible 15 0Funds from operations (FFO) EBITDA-driven increases 6,462 6,793


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NXP B.V. (SELL) Investment rationale We keep our sell recommendation on the NXPFLOAT and the NXPBV 8.625%

10/15/2015 bond. NXP's operating performance does not really demonstrate that it can copewith the currently moderate slowdown in the semiconductor industry. Hence, this indicatesthat, in case of a more severe cyclical downturn in the semiconductor industry, the situation ofthe company would be even worse. Although NXP's profitability and liquidity will improve from the significant asset disposal to STMicroelectronics (“ST”), we are uncertain about the assetsthe company may want to purchase with the cash proceeds from the disposal. NXP ruled out (extraordinary) dividend payments or debt buybacks. Hence, pressure on its liquidity appears to be only a matter of time, as the disposal proceeds have to be used for senior debtreduction or have to be reinvested (within 365 days after closing). NXP bonds might also suffer from the fact that NXP is on the preliminary iTraxx Crossover dismissal list (and might no longer be part of the iTraxx Series 10) and therefore trading liquidity for hedging is reduced.

Recent developments On July 28, NXP and STMicroelectronics announced the closing of the deal combiningthe key wireless operations of both companies into ST-NXP Wireless, a deal they announced on April 10. At closing, STMicroelectronics assumed an 80% stake in the joint venture and contributed USD 1.55 bn to NXP, including a control premium. NXP's rating was unaffected by the announcement that ST and Ericsson will merge the Ericsson Mobile Platforms with the ST-NXP Wireless joint venture (JV) into a 50-50 JV. ST will receive USD 0.7 bn from Ericsson in exchange for the contribution of all the ST-NXP wireless assets, and, at the same time, will pay significantly less than this amount to acquire NXP's remaining 20% stake in ST-NXP Wireless before the transaction closes. The expected additional cashreceipt for its remaining 20% stake in ST-NXP Wireless would be mildly positive for NXP's liquidity profile in the near term.

Moody's downgraded NXP's corporate family rating twice (on July 23 and on August29) to B3 from B1 and assigned a stable outlook to the credit. The rating action reflects, besides others, heightened concerns over NXP's financial flexibility, according to Moody's. By the indenture covenants, NXP is required to either reinvest the disposal proceeds from the STtransaction or apply them to senior debt redemptions within 12 months of receipt so that theywill be available for operations only for a limited period of time. This time window is available to execute the restructuring plans and return the company to sustained cash generation.According to Moody's, NXP's B3 rating still expects the company to achieve, by YE 2009, a level of net debt/EBITDA (at run-rate) not exceeding 7.0x.

On September 12, NXP announced a major restructuring program with cash-outs/costs of EUR 800 mn in response to a challenging economic environment, a weak USD, andthe reduction in the size of the company after moving its wireless business into a jointventure with STMicroelectronics. The restructuring measures will provide NXP with a strong base to achieve its mid-term targets to deliver profitable growth with 15% EBITA andpositive cash flow, according to the company. The announcement is not come completely unexpected, as its potential restructuring measures were already assumed in S&P's latestrating report. The restructuring costs will weigh on NXP's liquidity and are viewed as negative,even though they are necessary for the potential survival of the company.

On September 12, S&P downgraded its rating on NXP (B3s/B-wn) by two notches to B-and kept the rating on creditwatch with negative implications. The downgrade reflects S&P's assessment that NXP's liquidity position is further and significantly impaired, after NXP's announcement of a very large restructuring program aiming at saving USD 550 mnannually by 2010, following very weak profits and cash flow generation in H1 2008. Theprogram will cost NXP USD 800 mn, which will absorb a large part of the proceeds from the

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recent disposal of its wireless operation to STMicroelectronics N.V. The rating agency nowviews it as unlikely that the company will conduct significant acquisitions in the near future,which means that it will have to use part of the wireless net proceeds for debt repayment, inline with its bond indenture. In view of NXP's liquidity position, it believes that these debtrepayments will be challenging. NXP has very high leverage for the rating, with lease-adjusted gross debt representing almost 8x EBITDA (LTM) as of June 30, 2008, according to S&P.

Latest results recap On July 22, NXP announced disappointing Q2 2008 results below expectations,reflecting weakening profitability due to a lower load factor and increasing q-o-q cash burn. Improvements from the cost reduction measures are not visible, in our view.Sales decreased y-o-y by 0.9% on a reported basis and 1.9% on a comparable basis to USD1,524 mn, and remained almost flat q-o-q. For Q2 2008, NXP expected a y-o-y mid single-digit sales decrease on a comparable basis, translating into a low single-digit sequential sales decrease in Q2 2008 on a comparable basis. Hence, NXP's sales were in line with thecompany's guidance, but as total semiconductor sales excluding memory products were up 12.3% y-o-y in the first five months in 2008, according to the SIA, top-line development appears to be clearly below the industry average. Adjusted EBITDA strongly declined y-o-y (Q2 2007: USD 190 mn) and q-o-q (Q1 2008: USD 183 mn) to USD 114 mn. Higher gross margin and positive effects from the Business Renewal program in the reporting period wereoffset by the unfavorable currency translation effects on R&D, SG&A expenses (USD 70 mn according to the company). The factory loading rate was significantly down q-o-q to 78% in Q2 2008 compared with 87% in Q1 2008, 84% in Q4 2007 and 69% in Q1 2007. NXP's operating business suffers due to the following: a) Slightly (y-o-y) declining top-line development; b) The load factor improved y-o-y, but strongly declined on a q-o-q comparison; c) Profitability is strongly impacted by the weaker USD; d) The company's FCF is heavilynegatively impacted by working capital increases (USD 300 mn and USD 338 mn in Q1 andQ2 2008, respectively). The company's cash position declined q-o-q (excluding the drawing under its RCF of USD 450 mn) from USD 519 mn at the end of Q1 2008 to USD 210 mn. e)NXP's net debt increased q-o-q by USD 296 mn to USD 6,019 mn at the end of Q2 2008.

NXP BV: HIGHLY VOLATILE OPERATING PERFORMANCE

Operating performance impacted by… …volatile cash flow generation

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

in U

SD

mn

0%

5%

10%

15%

20%

25%Sales EBITDA EBITDA-margin

-300

-200

-100

0

100

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400

Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008

in U

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mn



Load factor development The utilization rate declined by nine percentage points q-o-q and further explanation was required: The company stated that due to efficiency improvements the capacity of a fab increases y-o-y by roughly 10%. If revenues remain flat the load factor declines. Moreover, there is a structural product mix change, as more advanced CMOS chips can only be produced by external factories, as a consequence of NXP's asset light strategy. These are the reasons for a declining load factor. However, it seems that these reasons must have been

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known already at the time of the last conference call. This leaves us with the question why management did not indicate this to market participants in advance.

Working capital development Working capital development is usually something that management should be able to control. The company buried roughly USD 638 mn in WC build-up during the last two quarters, while revenues were flattish or even declining. Asked regarding potential actionswith respect to WC management, the company only stated that it will take decisive measures, which might include reducing capacity. NXP's management was not able or willing to providea timeline regarding its WC development. Moreover, NXP gave no commitment as to reducing the drawings under its RCF via WC reductions until YE 2008.

Liquidity According to Moody's, NXP burned net cash of about USD 830 mn in H1 2008, which reduced the liquidity buffer (cash balances net of cash held at non-guarantors plus the undrawn portion of a EUR 500 mn revolving credit facility) to about USD 630 mn fromUSD 930 mn at the end of March 2008. Even though in July 2008 a special dividend of about USD 120 mn was received from its subsidiary SSMC, the company's liquidity isincreasingly reliant on the completion of the ST/NXP wireless JV and the receipt of the USD 1.55 bn payment for a 30% stake in the JV from ST as well as on the return to FCF generation.


According to NXP, the market remains soft. NXP's management continues to see a relatively flat market development. The company expects a y-o-y comparable mid single-digit sales decrease in Q3 2008, translating into a close to flat sequential sales development. The Home segment suffers from a weak TV market environment with further declining revenues inanalogue TV chips. In the mobile segment, NXP's business suffers from the general shift to low-price handsets and a related product mix change to lower margin chips. In the automotivesegment, the company foresees a flattish top-line development, while the identification business is a project-related business that is difficult to predict.

Leverage increased in Q2 2008. In Q2 2008, the reported adjusted EBITDA (LTM) amounted to EUR 956 mn compared to EUR 1,032 mn in Q1 2008. The net debt to adjustedEBITDA (LTM) ratio climbed q-o-q to 6.3x from 5.5x. However, total (adj.) debt to adj. EBITDA was 7.2x (6.3x in Q1 2008) according to our calculations, while we used the adjusted EBITDAof the company and just added our off-balance sheet adjustments to its total debt. Rating agencies may arrive at higher calculations if, for example, EBITDA is not adjusted for restructuring costs. The asset disposal to ST will reduce the net debt to EBITDA ratio, while the long-term impact on leverage after the reinvestment of the disposal proceeds is uncertain.

Model assumptions/risks We base our forecast on the following major assumptions: a) Revenue decline of around 3% in 2008-2009; b) EBITDA margin of 15%-16% in 2008 and 2009; c) Capex-to-sales ratio of 7.5%-7.0% in 2008-2009, respectively. The deconsolidation with respect to the ST/NXP Wireless JV is not yet factored into our model.

Key risks to our model estimates are: a) Unexpected/severe downturn in the semiconductor industry; b) EBIT margin weakness; c) Higher-than-expected capex requirements; d) M&A activities and other initiatives to improve top-line growth.

Things to watch ● Semiconductor volume growth and price development; EBIT margin development; M&A

activities; October 21, 2008: Q3 2008 results


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CAPITALIZATION

Senior Credit Facilities Borrower NXP B.V. and NXP Funding LLC (jointly and severally) Senior Credit Facility Initial Amount (in mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Revolving Credit Facility EUR 500 09/12 Bullet 2.75% (margin ratchet) 0.5% Security All of the guarantors of the notes are also guarantors of NXP's obligations under the senior secured revolving credit facility. In addition, KASLION and NXP Semiconductors France SAS are guarantors under the senior secured revolving credit facility. The senior guarantee of the RCF is a first priority lien versus the senior guarantee for secured noteholders. Covenants The senior secured revolving credit facility agreement does not contain any financial maintenance covenants. Notes Issuer NXP B.V. and NXP Funding LLC (jointly and severally) Floating Rate Senior Secured Notes

EUR 1,000 10/13 Bullet Euribor plus 275 bp

Floating Rate Senior Secured Notes

USD 1,535 10/13 Bullet US Libor plus 275 bp

Senior Secured Notes EUR 1,026 10/14 Bullet Coupon 7.875% Senior Notes EUR 525 10/15 Bullet Coupon 8.625% Senior Notes USD 1,250 10/15 Bullet Coupon 9.500% Available Credit Lines EUR 500 mn under RCF of which USD 450 mn were drawn in April 2008. In Q3 2008, the drawings under the RCF were repaid from the USD 1.55 bn cash proceeds from ST in connection with the ST-NXP wireless JV.


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BOND DOCUMENTATION – EUR FLOATING RATE SENIOR SECURED NOTES / EUR SENIOR NOTES

Issuer NXP B.V. and NXP Funding LLC (jointly and severally) Call/Put Call Schedule Floating Rate Senior Secured Notes: On or after October 15, 2007: 102%; October 15, 2008: 101%; October 15, 2009

and thereafter: 100% EUR Senior Notes: On or after October 15, 2011: 104.313%; October 15, 2012: 102.875%; October 15, 2013: 101.438%; October 15, 2014 and thereafter: 100%

Equity claw back Floating Rate Senior Secured Notes: No EUR Senior Notes: Prior to October 15, 2009 up to 40% at 108.6250%

Make whole clause Floating Rate Senior Secured Notes: Prior to October 15, 2007, Bund +50bp EUR Senior Notes: Prior to October 15, 2011, Bund +50bp

Change of control 101% Guarantees Security The notes will be fully and unconditionally guaranteed, jointly and severally, on a senior basis by certain NXP current

and future material wholly-owned subsidiaries. Ranking The Notes and the secured guarantees will be general obligations of NXP B.V. and NXP Funding LLC (jointly and

severally) and will rank: – equal in right of payment with all of NXP's and the guarantors’ existing and future senior indebtedness but,

together with indebtedness under the senior secured revolving credit facility and any other first lien credit facilities and secured obligations, effectively senior in right of payment to the existing and future unsecured obligations, including the senior notes, to the extent of the value of the collateral;

– senior in right of payment to NXP's and the guarantors’ existing and future subordinated indebtedness; and – effectively junior in right of payment to all of the liabilities, including trade payables, of NXP's subsidiaries that

have not guaranteed the notes. With respect to the collateral, the indebtedness and obligations under the secured notes, the senior secured revolving credit facility and certain other existing and future indebtedness and obligations permitted under the indenture governing the secured notes will have first-priority liens.

Certain Covenants Limitation on Debt Fixed Charge Coverage Ratio is greater than 2.00x;

Most important carve-out/exceptions: – Indebtedness under Credit Facilities/Refinancing not exceeding EUR 750 mn, less the amount of any permanent

repayments of such debt with proceeds from asset sales – Incurrence of CLO or purchase money obligations not exceeding EUR 100 mn and 1.00% of total assets – General Basket not exceeding the greater of EUR 350 mn and 3.74% of total assets

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 100% of consideration consists of cash, the assumption of debt or replacement of assets and is within 365 days applied to debt reduction or invested in additional assets. Excess Proceeds exceeding EUR 100 mn used to redeem notes and pari passu debt at par

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of the following if the issuer can incur additional debt of EUR 1.00: – 50% of Consolidated Net Income (minus 100% of such negative amount); – Equity proceeds; – Conversion of debt to equity proceeds; – Proceeds in case of disposition or repayment of any investment constituting a restricted payment (the lesser of the




EUR 40 mn plus EUR 20 mn multiplied by the number of the calendar years commenced since Issue Date – In case of an IPO, dividend payments are not allowed to exceed the greater of a) 6% of net cash proceeds and b)

7% of IPO market capitalization if the consolidated leverage ratio will be 2.75x and 5% of IPO market capitalization if the consolidated leverage ratio will be 3.25x

– General Basket not exceeding EUR 200 mn Limitations on Transactions with Affiliates Board resolution if transaction greater than EUR 50 mn

Fairness opinion if transaction greater than EUR 20 mn Fall away/ Suspension Covenants Yes Negative pledge Yes Anti Layering No


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Business Description – NXP B.V. NXP B.V., headquartered in Eindhoven, in the Netherlands, is a global semiconductor company. NXP ranks at number 10 among the world's largest semiconductor companies based on sales of EUR 4.766 bn (USD 5.647 bn). In its core area, applications-specific integrated circuits, NXP ranks number 4 behind Texas Instruments, STMicroelectronics and Intel. NXP is a spun-off of Philips' former semiconductor division, which was sold to private equity sponsors in August 2006. With over 50 years of operating history, it is also one of the longest-established companies in the semiconductor industry. Philips still holds an 19.9% stake in the company, while it is not expected to a long-term investor. NXP BV provides and designs semiconductors and software for mobile communications, consumer electronics, security applications, contactless payment and connectivity, and in-car entertainment and networking.


Multimarket Semiconductors

25.6%

Automotive & Identification

21.1%

Mobile & Personal33.8%

Home14.7%

IMO3.3%

Corprate and Other1.5%


OPERATING INCOME BY SEGMENT (FY 2007)

-118

-171

110

120

-159

-357

-400 -300 -200 -100 0 100 200

Mobile & Personal

Home

Automotive &Identification

MultimarketSemiconductors

IMO

Corprate and Other




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B- Cwn High leverage, liquidity concerns Moody's B3 Stable Declining revenues, eroding sources of

liquidity, concerns about a further weakening credit profile

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

NXPBV Float + 275 bp 10/15/2013

Bwn/B3s/-- EUR 1,000 10/15/2007 (102)

NXPBV 8.625% 10/15/2015

CCC+wn/Caa2s/-- EUR 525 10/15/2011 (104.31)

BOND STRUCTURE

PhilipsStichting Management Co-Investment NXPConsortium

Noteholdersjointly and severely

NXP B.V.Netherlands

Non-guarantor restricted subsidaries

KASLION Acquisition B.V.

NXP Funding LLCUnited States

Co-borrower under the senior secured

Co-issuer of the notes

Guarantor restricted subsidaries

Non-guarantor unrestricted subsidaries

and other entities


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PROFIT AND LOSS (NXP B.V.)

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 4,823 4,766 4,960 2,999 6,326 3,043 6,141 5,957Cost of goods and services sold -2,955 -2,933 -3,093 -2,198 -4,286 -1,980 -3,930 -3,812Distribution expenses -297 -304 -363 -224 -425 -218 -413 -400R&D expenses -979 -1,028 -995 -591 -1,276 -673 -1,388 -1,340Administration -437 -435 -380 -614 -1,232 -640 -1,167 -1,132Other operating income/expenses 79 36 -769 -2 118 17 50 50EBITDA reported 1,083 920 642 146 757 242 827 856EBIT reported 234 102 -640 -630 -776 -451 -706 -678Adj. EBIT (bef. pension interest) 223 180 163 -626 -765 -445 -695 -666Income from investments 12 -5 3 -1 -38 -11 5 5Interest result -93 -63 -128 -223 -453 -234 -355 -355Other financial items 0 0 -96 28 273 119 0 0EBT reported 153 34 -861 -826 -994 -577 -1,056 -1,028Taxes on income -113 -101 -113 135 388 192 -110 -110Net income 40 -67 -974 -691 -606 -385 -1,166 -1,138


in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 2,616 2,375 7,437 9,861 10,200 10,426 9,189 8,072 thereof goodwill 178 213 2,032 3,035 3,716 3,994 3,716 3,716Cash & cash equivalents 75 110 939 696 1,041 660 867 846Total assets 4,057 4,005 9,867 12,801 13,816 13,889 12,708 11,570Equity incl. minorities 1,580 1,299 3,847 4,478 4,785 4,602 3,375 2,237Pension provisions 0 55 112 0 0 0 0 0Other provisions 126 42 386 662 904 858 904 904Financial liabilities 1,432 1,483 4,449 5,923 6,078 6,679 6,679 6,679 short term (<1 year) 123 757 23 8 6 464 464 464 long term (>1 year) 1,309 726 4,426 5,915 6,072 6,215 6,215 6,215Net working capital 767 813 746 944 975 1,167 1,167 1,167

CASH FLOW

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) 882 757 678 53 139 39 183 396Change in working capital 96 35 82 44 410 -588 -336 0Operating cash flow 978 792 760 97 548 -549 -153 396CAPEX -662 -388 -593 -232 -610 -290 -522 -417Free cash flow 316 404 167 -135 -62 -839 -675 -21Dividends 0 0 0 0 0 0 0 0Acquisitions/disposals 72 30 -48 -393 -119 77 0 0Share buy back/issues 0 0 0 0 0 0 0 0FCF after extraordinary items 388 434 119 -528 -180 -762 -675 -21

DEBT ADJUSTMENTS

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions 42 114 191 206 117 118 118 118For operating leases n.a. 40 66 90 112 113 113 113Others* n.a. 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (NXP B.V.)

2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 22.5% 19.3% 12.9% 4.9% 12.0% 8.0% 13.5% 14.4%EBITDA margin adj. 24.9% 21.9% 19.2% 12.9% 16.7% 10.1% 15.6% 16.4%EBIT margin rep. 4.9% 2.1% -12.9% -21.0% -12.3% -14.8% -11.5% -11.4%EBIT margin adj. 4.6% 3.8% 3.3% -20.9% -12.1% -14.6% -11.3% -11.2%Return on capital (before tax) 4.7% 1.4% -9.3% -15.1% -11.3% -7.4% -10.6% -11.6%


2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 1,083 920 642 146 757 242 827 856EBITDA adj. 1,202 1,044 951 388 1,054 309 961 979FFO rep. 882 757 678 53 139 39 183 396FFO adj. 882 764 694 64 151 45 195 408Net debt rep. 1,357 1,373 3,510 5,227 5,037 6,019 5,812 5,833Net debt adj. 1,399 1,526 3,768 5,523 5,266 6,250 6,043 6,064Total debt 1,432 1,483 4,449 5,923 6,078 6,679 6,679 6,679EBITDA net interest cover rep. 11.6 14.6 5.0 0.7 1.7 1.0 2.3 2.4EBITDA gross interest cover rep. 11.6 14.6 5.0 0.7 1.7 1.0 2.3 2.4EBIT net interest cover rep. 2.5 1.6 -5.0 -2.8 -1.7 -1.9 -2.0 -1.9EBIT net interest cover adj. 2.4 2.7 1.2 -2.7 -1.6 -1.9 -1.9 -1.8FFO rep. / total debt rep. n.a. 51.0% 15.2% 6.7% 2.3% 1.9% 2.7% 5.9%FFO rep. / net debt rep. n.a. 55.1% 19.3% 7.6% 2.8% 2.1% 3.1% 6.8%FFO adj. / net debt adj. n.a. 50.1% 18.4% 7.6% 2.9% 2.1% 3.2% 6.7%FOCF rep. / total debt rep. n.a. 27.2% 3.8% -6.9% -1.0% -9.9% -10.1% -0.3%FOCF rep. / net debt rep. n.a. 29.4% 4.8% -7.8% -1.2% -11.0% -11.6% -0.4%RCF rep. / net debt rep. n.a. 55.1% 19.3% 7.6% 2.8% 2.1% 3.1% 6.8%RCF adj. / net debt adj. n.a. 50.1% 18.4% 7.6% 2.9% 2.1% 3.2% 6.7%Total debt rep. / EBITDA rep. n.a. 1.6 6.9 15.0 8.0 7.8 8.1 7.8Net debt rep. / EBITDA rep. n.a. 1.5 5.5 13.2 6.7 7.1 7.0 6.8Net debt adj. / EBITDA adj. n.a. 1.5 4.0 6.0 5.0 6.4 6.3 6.2FFO rep. / net interest rep. n.a. 13.0 6.3 1.2 1.3 1.2 1.5 2.1FFO rep. / gross interest rep. n.a. 13.0 6.3 1.2 1.3 1.2 1.5 2.1Capex / sales n.a. 8.1% 12.0% 7.7% 9.6% 9.5% 8.5% 7.0%Capex / depreciation n.a. 51.8% 95.2% 29.9% 39.8% 41.8% 34.0% 27.2%

CAPITAL STRUCTURE

2004 2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. n.a. 53.3% 53.6% 56.9% 56.0% 59.2% 66.4% 74.9%Net debt / net capitalization rep. n.a. 51.4% 47.7% 53.9% 51.3% 56.7% 63.3% 72.3%Net debt / net capitalization adj. n.a. 54.5% 50.0% 56.4% 53.0% 58.2% 65.0% 74.1%Net working capital / sales n.a. 17.1% 15.0% 17.3% 15.4% 18.3% 19.0% 19.6%Fixed assets / sales n.a. 49.8% 149.9% 180.2% 161.2% 163.7% 149.6% 135.5%


Comment 2008e 2009eSales growth Sales decline driven by semiconductor cycle -2.9% -3.0%EBITDA growth Increase due to less restructuring costs 9.2% 3.5%EBIT growth Negative EBIT; negative growth means less EBIT loss -9.0% -4.1%Capex incl. acquisition Asset-light strategy 522 417Change in working capital Spin-off driven; assumed to be negligible -336 0Funds from operations (FFO) Driven by top-line and less restructuring costs 183 396


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ONO (SELL) Investment rationale We change our hold recommendation to sell for the ONOFIN 8% 05/14 bond, despite

the improving operating performance of the company. Even though the main (short-term) obstacle, a potential breach of its syndicated loan covenants, is mitigated by theapproved covenants amendment proposal, the company remains a high beta name.Short-term liquidity concerns are further mitigated by the deferred AUNA acquisition payments. We are also particularly pleased to see the relatively strong support of its core banks in the covenant amendment process, which might be important going forward.However, a couple of concerns remain:

– Given the fact that ONO is currently FCF negative and operates in an increasinglycompetitive environment, the likelihood of the company to become FCF positive (after finishing its investment program) is probably less important than the question of how much FCF can be generated going forward.

– After the approved more benign covenant schedule, liquidity problems can still arise in2010 if the company cannot strongly improve FCF and cannot renew its maturing bilateral credit lines, in our view.

– ONO's management was very clear in communicating that the macroeconomicenvironment in Spain is slowing down considerably and that competition, especially with Telefonica, is fierce. Both factors will negatively influence ONO's results.

– Given the current volatile market environment and the fact that ONO is trading as ahigh-beta name, significant changes in sentiment towards the name are unlikely. The company might be able to show that its operating performance and FCF developmentwill be in line with management's guidance or even better. However, even in thisscenario, rapid improvements of the company's bond and CDS spreads are rather unlikely, while the risk of operating underperformance due to a deteriorating macro picture is an imminent risk.

ONO'S MAIN FINANCIAL COVENANTS (FORMER/NEW) APPLICABLE UNDER THE SENIOR FACILITY

Debt interest ratio Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10Former 2.25x 2.25x 2.25x 2.50x 2.75x 2.75x 3.00x 3.00x 3.25x 3.25x 3.50xNew 2.25x 2.25x 2.25x 2.35x 2.40x 2.40x 2.50x 2.50x 2.50x 2.50x 2.50xTotal debt/consolidated annualized EBITDA

Jun-08

Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Mar-10

Jun-10 Sep-10 Dec-10

Former 6.75x 6.50x 6.25x 6.00x 5.75x 5.50x 5.25x 5.00x 4.75x 4.50x 4.25xNew 6.75x 6.45x 6.20x 6.15x 6.10x 6.05x 5.95x 5.85x 5.75x 5.50x 5.35xSenior debt/consolidated annualized EBITDA

Jun-08

Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Mar-10

Jun-10 Sep-10 Dec-10

Former 5.75x 5.75x 5.50x 5.25x 5.00x 4.75x 4.50x 4.25x 4.00x 3.75x 3.50xNew 5.75x 5.70x 5.45x 5.15x 5.10x 5.05x 4.95x 4.90x 4.75x 4.60x 4.40x

Source: ONO

Recent developments On July 31, ONO announced that it signed an amendment agreement, which modifies a number of its financial covenants in 2009 and 2010 and that it received almost unanimous approval from its bank group. In addition, ONO agreed with the bank syndicate on the reinstatement of a maximum capital expenditure covenant for the years 2008, 2009 and 2010. Moreover, ONO has negotiated a further extension of the payment terms for theremaining part of the deferred AUNA acquisition consideration. Half of the remaining paymentof EUR 143 mn has now been deferred until January 15, 2010, from its previous due date of January 15, 2009. Finally, ONO has agreed that the Equity Value Certificates ("EVCs"),

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warrant-like instruments that were attached to bonds issued in 1999 and 2001 (andsubsequently cancelled), will no longer represent a liability for Cableuropa, S.A.U. Thepayment obligations for the EVCs, which mature in 2009 and 2011, will be met by the ONOshareholder investment vehicle, Grupo Corporativo ONO, S.A. ONO indicated in itsconference call that the amendment of the senior bank facility was designed to provide thecompany with sufficient liquidity and to remain unchanged until 2011. The senior loan facilitywas not repriced. The lenders received an upfront fee in return for the waiver but no marginreset or fresh equity.

Latest results recap On July 31, ONO released strong Q2 2008 results above our expectations andannounced positive details of its successful covenants amendment proposal. In Q2 2008, revenues decreased by 0.3% y-o-y, but increased q-o-q by 2.0% to EUR 410 mn, mainly driven by a stronger-than-expected development of the residential direct access business. The top-line development of ONO can basically be divided into three parts: In thedirect access business, subscribers increased by 11k to 1,889k, while the ARPU increased by EUR 1.3 and churn remained almost stable q-o-q at 19.4% (Q1 2008: 19.3%). EBITDA increased 11.8% y-o-y and 9.1% q-o-q to EUR 179 mn in Q2 2008. The y-o-y increase was mainly due to a direct cost decline mainly as a consequence of a change in revenue mix (increasing direct access revenues with higher margins) and higher ARPUs. The EBITDAmargin increased to 43.8% from 39.1% in Q2 2007 or from 41.0% in Q1 2008.

ONO: DEVELOPMENT OF KEY OPERATING STATISTICS

Operating performance Expected FCF development

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

FY 2005 FY 2006 FY 2007 FY 2008e FY 2009e30.0%

32.0%

34.0%

36.0%

38.0%

40.0%

42.0%

44.0%

Sales EBITDA EBITDA margin

-800

-600

-400

-200

0

200

400

600

FY 2005 FY 2006 FY 2007 FY 2008e FY 2009e

OCF (after financing costs) CAPEX FCF

Customer penetration is stabilizing … … while customer churn remains at a high level

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Q3

2005

Q4

2005

Q1

2006

Q2

2006

Q3

2006

Q4

2006

Q1

2007

Q2

2007

Q3

2007

Q4

2007

Q1

2008

Q2

2008

in '0

00 s

ubsc

riber

s

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

HRTM (LS)Residential Cable Customers (LS)Internet customers (LS)Penetration (RS)

1.84

1.89

1.94

1.99

2.04

2.09

Q3

2005

Q4

2005

Q1

2006

Q2

2006

Q3

2006

Q4

2006

Q1

2007

Q2

2007

Q3

2007

Q4

2007

Q1

2008

Q2

2008

RG

Us

per s

ubsc

riber

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%RGU per customer (LS) Churn (RS)


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Liquidity The short-term liquidity until June 30, 2009 should be sufficient, in our opinion: As of March 31, 2008, the company had EUR 296 mn (EUR 623 mn at YE 2007) in available credit lines versus debt maturities of EUR 44 mn, EUR 191 mn and EUR 418 mn in 2008, 2009 and2010, respectively. The company still aims to become FCF positive in Q4 2008 and the negative FCF for 2008 is planned to be in the area of EUR 120-190 mn. Bilateral credit lines of EUR 172 mn, of which EUR 125 mn matured in Q1 2008, were, so far, no problem to rollover (EUR 122 mn at similar, attractive conditions, according to the company) for another 12 months.


During the conference call, ONO's management indicated that it is clearly aiming toachieve the upper end of its 2008 guidance (lower end for capex), after the company missed its EBITDA guidance in 2007: Revenue growth is expected to be between EUR 1,590-1,640 mn (-2% to +2%); EBITDA should be between EUR 650-680 mn (+1% to +6%) and capex between EUR 410-450 mn (-24% to -16%). However, ONO advised not toextrapolate the good Q2 2008 results into the future. In particular, Q3 is seasonally a weakquarter and, given the current environment, will probably be even weaker than normal.

FCF was still negative with EUR 52 mn in Q2 2008 and EUR 148 mn in H1 2008. In Q2 2008, one of the main drivers for negative FCF was a further cash outflow for working capitalof EUR 65 mn as well as EUR 27 mn for integration costs, commitments & contingencies,refinancing costs and other one-off items. The negative impact from working capital is expected to decline in H2 2008. The company still aims to become FCF positive in Q4 2008 and the negative FCF for 2008 is planned to be in the area of EUR 120-190 mn. ONO's net debt increased q-o-q by EUR 51 mn to EUR 3,866 mn, driven by negative FCF. The total debt to EBITDA (LTM) ratio amounted to 5.4x compared to 5.8x in Q1 2008. So far, we hadexpected that this ratio would be quite stable in 2008 (at around 5.4x as EBITDAimprovements would offset debt increases leverage-wise). The company's strong results, if sustainable, would indicate significantly lower leverage in 2008.

Model assumptions/risks We base our forecast on the following major assumptions:

a) Revenues of EUR 1,598-1,581 mn in FY 2008-2009

b) Adjusted EBITDA in FY 2008-2009 of EUR 658-654 mn

c) Capex of EUR 430-350 mn in FY 2008-2009

Key risks to our model estimates:

Apart from the competitive landscape in the Spanish cable market, the main risks to ourmodel remain an acceleration of churn and the failure to realize targeted cost savings and capex outlays for the roll-out of ONO's network, as well as the target to become FCF positive in Q4 2008.

Things to watch ● Churn rate; FCF development and liquidity; covenants of senior credit facility

● November 14, 2008 (est.): Q3 2008 results


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CAPITALIZATION

Senior Credit Facilities Borrower Cableuropa Senior Credit Facility Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Tranche A 1,000 12/11 Nine installments starting

31/2007(Margin grid) +2.25% n.a.

Tranche B 550 12/12 Nine installments starting 06/2008

(Margin grid) +2.25% n.a.

Tranche C 500 12/12 Bullet (Margin grid) +2.25% n.a. Tranche D 550 12/13 Bullet (Margin grid) +2.75% n.a. Tranche I 400 12/12 Eight installments starting

06/2009(Margin grid) +2.25% n.a.

Tranche S 100 12/13 Bullet (Guarantee line) (Margin grid) +2.25% n.a. Covenants: see Standard covenant package for transaction of this type. Limitation on capex, Total Interest Cover Ratio, Consolidated Leverage Ratio, Consolidated Senior Leverage Ratio Notes Issuer Ono Finance PLC* / Ono Finance II PLC** Senior Notes* 180 05/14 Bullet 10.5% Senior Notes * 100 05/14 Bullet Float + 850 bp Senior Notes ** 270 05/14 Bullet 8% Other Indebtedness EUR 110 mn Subordinated Facility 05/2014, bullet, interest initially for the first two years 6.5%, thereafter the lesser of Tranche D margin + 300 bp or average spread to worst on the ONOFIN 2014 notes for the three business days immediately preceding the second anniversary of the signing date. EUR 20 mn Participative Loan 05/2014. Maturity 05/2007, but can be renewed on the option of the borrower with final maturity 05/2014.


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BOND DOCUMENTATION – ONOFIN 8% 05/16/14

Issuer ONO Finance II Call/Put Call Schedule On or after 05/15/09: 104%, 05/15/10: 102%, 05/15/11: 101%, 05/15/12: 100.0% Equity claw back On or prior to May 15, 2009, 35% from a rights offering at 108% Make whole clause On or prior to May 15, 2009, Bund +50 bp Change of control 101% Guarantees Senior subordinated guarantees by Cableuropa, Auna and S.A.U. Security None

Ranking Senior in right to future subordinated debt and equal in right with existing and future unsecured debt that is not subordinated in right of payment.

Certain Covenants Limitation on Debt Consolidated leverage Ratio of at maximum 7.0x two years following the issue date of the 2014 notes and 5.5x

thereafter. The most important carve outs are: – Indebtedness under the senior credit facilities not exceeding EUR 3.2 bn, less net cash proceeds from asset sales – Capital lease obligations and acquisition of assets not exceeding EUR 200 mn – Additional indebtedness not exceeding the greater of EUR 25 mn or 25% of annualized Pro Forma EBITDA

Limitation on Sale of Certain Assets – Consideration at least equal to the fair market value – 75% of the disposal proceeds received in cash unless it is not a permitted asset swap as defined by the indenture – application of the net proceeds after receipt to debt reduction, to make investments into additional assets. If proceeds exceed EUR 20 mn are not applied to buy additional assets or debt reduction within 360 days. Ono must launch an offer for its notes on a pro rata basis at a price of 100% thereof.

Limitation on Restricted Payments The most important carve outs are: – Amount not to exceed 50% of cumulative consolidated net income earned from the issue date of the notes, less

net losses – Proceeds of the sale of Capital Stock other than that portion in excess of EUR 20 mn used for Permitted

Investments. – Dividend payments on its capital stock – Payments towards Equity Value Certificate not to exceed EUR 45 mn – Following an IPO of up to 6% p.a. of its net cash proceeds. – Additional Restricted Payments not to exceed EUR 15 mn p.a. – Repayment of the Participative Loan not to exceed EUR 20 mn

Limitations on Transactions with Affiliates Board resolution if transaction is greater than EUR 10 mn. Fairness Opinion if transaction is greater than EUR 50 mn.



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Business Description – Ono Finance PLC Madrid-based ONO/Cableuropa, incorporated in 1992, is a leading provider of telephony, broadband Internet and cable television services. Following the acquisition of competitor Auna in 2005, the company operates networks in most regions of Spain, making it the only truly national cable operator in Spain. Major shareholders include Grupo Multitel (16.1%), JP Morgan Partners, Providence Equity Partners and Thomas H. Lee Partners (15.2% each), GE Structured Finance (8.9%) and Quadrangle Capital Partners (9.1%) and three other smaller shareholders.


Residential direct access

72%

SMEs5%

Business Services

11%

Wholesale and operator

10%

Indirect access2%



Residential direct access

67.4%

SMEs4.7%

Business Services11.5%

Wholesale and operator11.8%

Indirect access4.6%




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B Positive Positive FCF after capex, interest and integration costs

Moody's B1 Stable Down: Erosion of margins, cash flows, Up: improved EBITDA margins, leverage, cash flows

Fitch B+ Stable Up: Quick improvement in leverage

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

ONOFIN 8% 5/16/2014 CCC+p/ B3s/B-s EUR 270 5/15/2009 (104)

ONOFIN 10.5% 5/15/2014

CCC+p/ B3s/B-s EUR 180 5/15/2009 (105.25)

BOND STRUCTURE

GCO

EUR 280 mnNotes 2014

Cableuropa

ONO FinancePlc

EUR 270 mnNotes 2014

ONO Finance II

Proceed Loan

Proceed Loan

MidCo Guarantees


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PROFIT AND LOSS (ONO FINANCE PLC)

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 358.6 443.4 774.0 1,633.0 812.0 1,616.0 808.0 1,598.0 1,581.0Cost of goods and services sold -221.5 -227.7 -494.0 -932.0 -422.0 -809.0 -382.0 -763.8 -743.1Distribution expenses -152.7 -163.2 -272.0 -558.0 -272.0 -531.0 -271.0 -542.0 -540.0Other operating income/expenses -2.4 7.8 1.0 0.0 0.0 0.0 0.0 0.0 0.0EBITDA reported 84.5 160.7 276.0 558.0 308.0 642.0 342.0 658.2 663.9EBIT reported -18.0 60.3 9.0 143.0 118.0 276.0 155.0 292.2 297.9Adj. EBIT (bef. pension interest) -18.0 60.3 9.0 143.0 118.0 276.0 155.0 292.2 297.9Interest result -130.2 -104.0 -133.0 -187.0 -111.0 -260.0 -122.0 -270.0 -270.0EBT reported -148.3 -43.7 -124.0 -44.0 7.0 16.0 33.0 22.2 27.9Extraordinary result 298.3 -61.2 -418.0 -3.0 -203.0 -234.0 -3.0 -3.0 -3.0Taxes on income -53.0 21.5 76.0 2.0 -5.0 20.0 -10.0 -5.0 -5.0Net income 97.0 -83.4 -466.0 -45.0 -201.0 -198.0 20.0 14.2 19.9


in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 1,984 2,103 5,760 6,004 5,908 6,056 6,069 6,120 6,104 thereof goodwill 130 181 1 17 20 28 32 28 28Cash & cash equivalents 26 14 7 7 17 4 5 4 4Total assets 2,124 2,205 6,086 6,315 6,231 6,310 6,362 6,372 6,356Equity incl. minorities 313 638 275 1,235 1,092 1,095 1,114 1,109 1,129Shareholder loans 398 0 1,000 0 0 0 0 0 0Pension provisions 0 0 0 0 0 0 0 0 0Other provisions 147 112 923 838 740 603 430 603 603Financial liabilities 967 1,164 2,742 3,316 3,607 3,651 3,932 3,837 3,801 short term (<1 year) 16 31 79 177 181 187 195 177 177 long term (>1 year) 951 1,133 2,663 3,139 3,426 3,464 3,737 3,660 3,624Net working capital -243 -236 -872 -634 -501 -660 -567 -592 -592

CASH FLOW

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) -42 82 131 197 126 343 157 312 386Change in working capital 92 23 -14 -228 -151 -163 -106 -68 0Operating cash flow 50 105 117 -31 -25 201 51 244 386CAPEX -204 -232 -334 -590 -257 -534 -199 -430 -350Free cash flow -155 -127 -217 -621 -282 -333 -148 -186 36Dividends 0 0 0 0 0 0 0 0 0Acquisitions/disposals 9 0 0 0 0 0 -71 0 0FCF after extraordinary items -145 -127 -217 -621 -282 -333 -219 -186 36

DEBT ADJUSTMENTS



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PROFITABILITY RATIOS (ONO FINANCE PLC)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 23.6% 36.3% 35.7% 34.2% 37.9% 39.7% 42.3% 41.2% 42.0%EBITDA margin adj. 23.6% 36.3% 35.7% 34.2% 37.9% 39.7% 42.3% 41.2% 42.0%EBIT margin rep. -5.0% 13.6% 1.2% 8.8% 14.5% 17.1% 19.2% 18.3% 18.8%EBIT margin adj. -5.0% 13.6% 1.2% 8.8% 14.5% 17.1% 19.2% 18.3% 18.8%Return on capital (before tax) -11.6% -2.4% -4.1% -1.0% 1.6% 0.3% 3.8% 0.4% 0.6%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 84 161 276 558 308 642 342 658 664EBITDA adj. 84 161 276 558 308 642 342 658 664FFO rep. -42 82 131 197 126 343 157 312 386FFO adj. -42 82 131 197 126 343 157 312 386Net debt rep. 941 1,151 2,735 3,309 3,590 3,647 3,927 3,833 3,797Net debt adj. 941 1,151 2,735 3,309 3,590 3,647 3,927 3,833 3,797Total debt 967 1,164 2,742 3,316 3,607 3,651 3,932 3,837 3,801EBITDA net interest cover rep. 0.6 1.5 2.1 3.0 2.8 2.5 2.8 2.4 2.5EBITDA gross interest cover rep. 0.6 1.5 2.1 3.0 2.8 2.5 2.8 2.4 2.5EBIT net interest cover rep. -0.1 0.6 0.1 0.8 1.1 1.1 1.3 1.1 1.1EBIT net interest cover adj. -0.1 0.6 0.1 0.8 1.1 1.1 1.3 1.1 1.1FFO rep. / total debt rep. -4.4% 7.0% 4.8% 5.9% 6.1% 9.4% 9.5% 8.1% 10.2%FFO rep. / net debt rep. -4.5% 7.1% 4.8% 6.0% 6.1% 9.4% 9.5% 8.1% 10.2%FFO adj. / net debt adj. -4.5% 7.1% 4.8% 6.0% 6.1% 9.4% 9.5% 8.1% 10.2%FOCF rep. / total debt rep. -16.0% -10.9% -7.9% -18.7% -20.4% -9.7% -0.6% -4.8% 0.9%FOCF rep. / net debt rep. -16.4% -11.1% -7.9% -18.8% -20.5% -9.7% -0.6% -4.8% 0.9%RCF rep. / net debt rep. -4.5% 7.1% 4.8% 6.0% 6.1% 9.4% 9.5% 8.1% 10.2%RCF adj. / net debt adj. -4.5% 7.1% 4.8% 6.0% 6.1% 9.4% 9.5% 8.1% 10.2%Total debt rep. / EBITDA rep. 11.4 7.2 9.9 5.9 6.1 5.7 5.8 5.8 5.7Net debt rep. / EBITDA rep. 11.1 7.2 9.9 5.9 6.0 5.7 5.8 5.8 5.7Net debt adj. / EBITDA adj. 11.1 7.2 9.9 5.9 6.0 5.7 5.8 5.8 5.7FFO rep. / net interest rep. 0.7 1.8 2.0 2.1 2.1 2.3 2.3 2.2 2.4FFO rep. / gross interest rep. 0.7 1.8 2.0 2.1 2.1 2.3 2.3 2.2 2.4Capex / sales 57.0% 52.4% 43.2% 36.1% 31.7% 33.0% 24.6% 26.9% 22.1%Capex / depreciation 199.4% 231.6% 125.1% 142.2% 135.3% 145.9% 106.4% 117.5% 95.6%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. 75.5% 64.6% 90.9% 72.9% 76.8% 76.9% 77.9% 77.6% 77.1%Net debt / net capitalization rep. 75.0% 64.3% 90.9% 72.8% 76.7% 76.9% 77.9% 77.6% 77.1%Net debt / net capitalization adj. 75.0% 64.3% 90.9% 72.8% 76.7% 76.9% 77.9% 77.6% 77.1%Net working capital / sales -67.7% -53.2% -112.7% -38.8% -31.0% -40.8% -35.2% -37.0% -37.4%Fixed assets / sales 553.2% 474.4% 744.2% 367.7% 366.0% 374.8% 376.5% 383.0% 386.1%


Comment FY 2008e FY 2009eSales growth Growth according to company mid-guidance in 2008 -1.1% -1.1%EBITDA growth Company mid-guidance in 2008 2.5% 0.9%EBIT growth EBITDA-driven 5.9% 2.0%Capex incl. acquisition Declining capex driven by top-line development 430 350Change in working capital Restructuring provisions result in negative w/c in 2008 -68 0Funds from operations (FFO) Benefits from improved profitability 312 386


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Seat Pagine (SELL) Investment rationale We continue to have a sell recommendation for the SEAT 8% 04/14 bond. Although the

bond price already fell to the mid-70s, a covenant breach – caused by the lower than initially planned FCF generation – could lead to bond price volatility and a lower bond recovery value.S&P's calculation from March 2008 shows a recovery rate for the notes of 50-70%. We still view the loan covenant headroom as comparatively small, the amortization schedule of EUR 232 mn in FY 2009 as aggressive and the risk for negative guidance deviations as high (e.g.due to operating underperformance or unexpectedly high working capital absorption due to increasing competition from Internet competitors like Google Italy, the general shift from printto online and a cyclical downturn in Italy). Seat still generates positive FCF and has amoderate senior debt leverage, which has been reduced in 2008 with prepayments. Thisshould increase the likelihood for potentially necessary bank support (covenant waiver, change of debt amortization schedule). The release of Seat's new industrial plan (expected with Q3 results in November), which likely includes asset disposals (although difficult in thecurrent environment for a decent price) might stabilize the credit story.

EBITDA IS MAINLY GENERATED IN ITALY ITALIAN DIRECTORIES EBITDA MARGIN >50%

-100

0

100

200

300

400

500

600

2004 2005 2006 2007 H1 07 H1 08

in E

UR

mn

Italian Directories UK Directories Directory Assistance Other Activities

-10%

0%

10%

20%

30%

40%

50%

60%

2004 2005 2006 2007 H1 07 H1 08

EB

ITD

A M

argi

n

Italian Directories UK Directories Directory Assistance Other Activities


Recent developments On July 1, Seat confirmed that it would fully meet its debt covenants and announced another voluntary early repayment of EUR 51.75 mn of a total installment of EUR 81.75mn due at FYE 2008 on the senior debt, effective on June 30. The company also said that, as part of the strategic focus on the Italian market and the announced strategic review of its equity investment portfolio, it has decided to mandate a bank to analyze the various possiblescenarios for some of its foreign subsidiaries (e.g. Telegate, Thomson). After the trading of Seat's shares were suspended several times over the last few months, on August 13 thecompany issued a stock exchange release clarifying that there aren't any new elements relatively to what has been already communicated to the market regarding the timing for theapproval of the new industrial plan and the ongoing strategic review of the participation'sportfolio. Furthermore, it said that there are no developments from what is already public knowledge regarding the private agreements among Seat's private equity shareholders.

Latest results recap On August 7, the company released H1 2008 results with revenues declining by 1.0% y-o-y and reported EBITDA down to EUR 186.7 mn vs. EUR 197.1 mn y-o-y. The core Italian business revenues declined by 1.5%, whereas the international business revenues (incl. Thomson, Telegate, Europages and WLW (consolidated in Q4 2007)) increased by0.3% y-o-y. Free cash flow (after capex, dividends) improved to EUR 154 mn vs. EUR 85 mn mainly on a higher working capital reduction of EUR 100.1 mn vs. EUR 86.6 mn y-o-y and

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lower capex. Reported net debt (in our definition) declined to EUR 3,078 mn vs. EUR 3,136mn q-o-q. Credit metrics remained rather unchanged in LTM H1 2008 compared to one quarter earlier, with total debt/EBITDA (adj.) of 5.4x vs. 5.3x q-o-q and FFO/net debt (adj.) at 13.1% vs. 13.0% q-o-q.

Liquidity Seat's liquidity situation at Q2 2008 was tight but sufficient with EUR 202 mn in cash and an unused revolver (Tranche C) of EUR 90 mn at short-term debt of EUR 191 mn.On the positive side, the company usually generates positive FCF in every quarter of its fiscalyear and expects cash available for debt repayment at about EUR 180 mn in FY 2008. When deducting the difference to H1 2008 numbers, this means approx. EUR 58 mn of positivecash flow in H2 2008. As of H1 2008, Seat has only EUR 30 mn of debt still to be paid in2008. We note, however, that Seat has EUR 232 mn to amortize in FY 2009.


The 2008 outlook is for flat revenues and EBITDA of EUR 610 mn (FY 2007: EUR 650 mn in the company's definition) that will be impacted by one-offs and investments for growth, which are expected to have a positive effect starting from 2009 on. Net result for FY 2008 is expected to show a profit at a consolidated level. The company said that in the current credit market environment its financial policy is to devote available financial resourcesto debt repayment and Internet development in Italy. Subsequently, the company skipped its dividend cash-out (FY 2007: EUR 62.2 mn) and expects cash available for deleveraging in 2008 to be about EUR 180 mn (after cash outflow for the acquisition of Klicktel and to finance its JV in Turkey; the possible favorable outcome of certain data claims (EUR 65 mn) is not included). During H2 2008, Seat Pagine intends to continue making investments in initiativesand new projects aimed at securing sustainable growth in coming years. Despite the difficult economic environment, the strategy will continue to be focused on Italy, where its key assets are located and where online growth in 2007 has given rise to new business developmentopportunities. In Italy, core business revenues are expected to remain stable although overallrevenues are expected to fall slightly (by about 1%) as a result of the underperformance of minor products harder hit by the difficult market situation. The company’s goal is to supportEBITDA performance, expected at about EUR 530 mn (FY 2007: EUR 553 mn), through operating cost management, while dedicating adequate resources for enhancing online products and services and developing the sales network. Since investments for reinforcingpenetration of the foreign online markets have now been completed, Seat will focus mainly on implementing the business plans of the various investee companies. With regard to Katalog, the JV with Dogan Media Group, the first Turkish directories are scheduled to be published byYE 2008. Management intends to provide quarterly updates on the execution of new action plans and the first operational results are expected to be visible in H2 2008. It also mentioned that guidance on medium/long-term developments (industrial plan) will only be given as soon as results will allow solid forecasts.

Model assumptions/risks Based on the company's 2008 guidance, we expect total debt/EBITDA (adj.) of 5.3x vs. 5.4x y-o-y and FFO/total debt (adj.) of 9.5% vs. 12.1% y-o-y. We expect free cash flow of EUR 225 mn in FY 2008 as well as a cash outflow of EUR 45 mn for the Klicktel acquisition.Main risks to our expectations are deviations from its 2008 plan in terms of operating underperformance or working capital increases leading to an increase in debt leverage and apotential covenant breach or liquidity issues as well as concerns about increasing Internetcompetition and macroeconomic risks affecting advertising activity in Italy.

Things to watch ● November 11: Q3 results; guidance on medium/long-term developments


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CAPITALIZATION

Senior Credit Facilities Borrower Seat Pagine Gialle S.p.A. Senior Credit Facility Initial Amount (in EUR mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Tranche A 1,282.4 06/12 June/December 143.5 bp (margin ratchet) Tranche B 464.5 06/13 Bullet 206 bp (margin ratchet) Tranche C (revolver) 90 06/12 143.5 bp (margin ratchet) 56 bp Covenants Cash flow/net debt, EBITDA/net interest, net debt/EBITDA, senior debt/EBITDA, maximum annual capex covenant, margin ratchet linked to net debt/EBITDA Other Indebtedness EUR 1,300 mn due to Lighthouse International Company S.A. (8% due in 04/14) EUR 256 mn ABS (until 01/14) at CP rate +51 bp all in


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BOND DOCUMENTATION – SEAT 8% 04/30/2014

Issuer Lighthouse International Company S.A. Call/Put Call Schedule On or after April 30, 2009: 104%; 2010: 102.667%%; 2011: 101.333%; 2012 and thereafter: 100% Equity claw back Prior to April 30, 2007 up to 35% at 108% Make whole clause Prior to April 30, 2009, Bund plus 50 bp Change of control 101% (if more than 30% of the total voting power) Guarantees On a senior subordinated basis by New SEAT and by each future restricted subsidiary and certain future holding

companies of New SEAT subject to certain conditions Security Second-priority security interest in the share capital of New SEAT held by Sub Silver S.A., in the share capital of Sub

Silver, held by Société de Participations Silver S.A., or its successors; second priority assignment of the notes proceeds loan agreement

Ranking – Equal with all future senior indebtedness of Lighthouse International Company S.A., – Senior to all future subordinated obligations of Lighthouse International Company S.A.

Certain Covenants Limitation on Debt Consolidated Leverage Ratio equal or less than 6.5x (prior to second anniversary of the issue date), 6.0x (if on or

after the second anniversary of the issue date) Most important carve-out/exceptions: – Indebtedness under any Revolving Credit Facility up to an amount of EUR 150 mn less net cash proceeds of

asset dispositions – Indebtedness under any Term Loan Facility up to the sum of EUR 2,750 mn and GBP 75 mn less net cash

proceeds of asset dispositions – Indebtedness in respect of CLO and Purchase Money Debt not exceeding EUR 55 mn – General Basket EUR 200 mn

Limitation on Sale of Certain Assets – Consideration is at least equal to fair market value and at least 75% of consideration consists of cash, the assumption of liabilities, any securities subsequently converted into cash or all of the assets of a related business if it becomes a restricted subsidiary and is applied to reduce senior indebtedness within one year or used to acquire additional assets within one year.

– Excess Proceeds used to redeem notes and pari passu debt at par – General Basket EUR 20 mn

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of: – 50% of consolidated net income (minus 100% of such deficit), – Equity proceeds and cash capital contributions; – Conversion of debt to equity proceeds, – Sum of the net reduction in the investments made by the company in any person resulting from repurchases of

such investments, proceeds realized on the sale of such investment and proceeds representing the return of capital; and to the extent such person is an unrestricted subsidiary, the portion of the fair market value of the net assets of such unrestricted subsidiary at the time such unrestricted subsidiary is designated a restricted subsidiary

Most important carve-out/exceptions: – Repurchase of capital stock held by employees or management not exceeding EUR 7 mn in any calendar year

and EUR 15 mn in total – Dividends paid in respect of management fees not exceeding EUR 3 mn in any calendar year – Payments of dividend, if after giving pro forma effect to the dividend payment no event of default has occurred and

company can incur EUR 1 of indebtedness, not exceeding the sum of i) 3% of the company public equity market capitalization plus ii) an amount equal to 6% multiplied by the aggregate amount of the net cash proceeds received by the company from the issuance of capital stock (further regulations apply in case dividend is less than 3% of market capitalization)

– General Basket EUR 50 mn Limitations on Transactions with Affiliates Board resolution if transaction greater than EUR 5 mn

Fairness opinion if transaction greater than EUR 25 mn Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering Yes


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Business Description – Seat Pagine Gialle SpA Seat Pagine Gialle, headquartered in Turin, Italy, is the leading publisher of directories services in Italy (through Seat Pagine Gialle S.p.A) with a 95% market share. The company is also the number two directories publisher in the UK (through TDL Infomedia, with the brand Thomson Directories) with a 14% market share. In addition, Seat Pagine offers telephone directory assistance services in Germany (number 2 with a 32% market share), Spain (number 2), Austria, Italy and France through its subsidiary Telegate. The company is 50.1% owned by a group of private equity firms, including BC Partners, CVC Capital Partners, Investitori Associati and Permira. The remainder of the shares is widely spread. The market cap of the company is approx. EUR 0.9 bn.


Italian Directories (Seat PG)

72.0%

UK Directories (Thomson Directories

Group)10.5%

(Online b-t-b directories and other activities

5.3%

Directory Assistance

(Telegate group and Prontoseat

Srl)12.3%



Italian Directories (Seat PG)

85.1%

Other Activities

1.5%

Directory Assistance

(Telegate group and Prontoseat

Srl)7.7%

UK Directories (Thomson Directories

Group)5.7%




ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB- Negative Deteriorating EBITDA Moody's Ba3 Negative Downgrade, if deviation from 2008

targets, FCF worsens and leads to pressure on liquidity, any cash outflow for other than debt repayment

Fitch BB- Negative Development of Italian printed directory business, leverage levels

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

SEAT 8% 4/30/2014 B2n/BB-n/B+n EUR 1,300 4/30/2009 (104)

BOND STRUCTURE

Funds advised byBC Partners

Senior notes

Société deParticipations

Silver SA

Sub Silver SA

SEAT


Senior CreditFacilities

Funds advised byPermira

Funds advised byInvstitori Associati

Funds advised byCVC Capital Partn.

PublicShareholders

Lighthouse InternationalCompany SA

52.0% 48.0%

NotesProceeds


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PROFIT AND LOSS (SEAT PAGINE GIALLE SPA)

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 1,405.7 1,424.6 1,460.2 582.3 1,453.6 576.5 1,460.6 1,466.1 1,473.5Raw materials used -518.1 -519.0 -573.3 -224.6 -507.9 -226.1 -545.8 -543.9 -546.7Personnel costs -209.2 -219.1 -231.9 -121.7 -246.4 -127.0 -248.3 -249.2 -250.5EBITDA reported 578.4 614.6 597.5 197.1 633.3 186.7 578.9 620.2 623.3Depreciation and amortization -199.0 -194.5 -195.3 -101.4 -204.2 -118.2 -204.5 -205.3 -206.3Other operating income/expenses -100.0 -71.8 -43.6 -28.4 -49.2 -25.7 -52.6 -52.8 -53.0EBIT reported 379.4 420.2 402.1 95.7 429.1 68.5 374.4 414.9 417.0Income from investments 6.6 4.2 0.0 -3.3 0.0 -0.9 0.0 0.0 0.0Interest result -251.0 -260.6 -246.2 -120.0 -239.3 -119.8 -234.0 -220.0 -205.1Other financial items 0.0 0.0 0.0 0.0 -3.3 0.0 0.0 0.0 0.0Discontinuing operations 0.0 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0EBT 135.0 164.1 155.9 -27.6 186.4 -52.2 140.4 194.9 211.9Taxes on income -49.0 -25.4 -74.1 -0.6 -80.2 9.5 -65.0 -87.0 -95.0Net income 86.0 138.7 81.8 -28.3 106.2 -42.7 75.4 107.9 116.9


in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 4,383 4,250 4,117 4,041 4,099 4,030 3,991 3,856 3,722 thereof goodwill 3,565 3,574 3,579 3,578 3,687 3,668 3,926 3,787 3,652Cash & cash equivalents 140 205 308 211 205 202 127 142 154Total assets 5,393 5,317 5,227 5,079 5,106 5,008 4,962 4,856 4,746Equity incl. minorities 860 1,000 1,075 1,007 1,124 1,068 1,199 1,307 1,424Pension provisions 53 53 57 48 47 64 64 64 64Financial liabilities 3,953 3,741 3,613 3,472 3,406 3,281 3,148 2,928 2,696 short term (<1 year) 192 214 229 210 216 191 n.m. n.m. n.m. long term (>1 year) 3,761 3,527 3,384 3,263 3,190 3,090 n.m. n.m. n.m.Net working capital 287 261 293 246 286 180 306 314 322

CASH FLOW

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 392 381 374 87 429 81 313 313 323Change in working capital -133 -16 -59 87 -44 100 -19 -8 -8Operating cash flow 258 365 315 173 385 181 294 305 315CAPEX -40 -54 -48 -26 -66 -24 -69 -70 -72Free cash flow 219 312 267 147 318 157 225 235 243Dividends 0 0 -46 -62 -62 -4 0 0 0Acquisitions/disposals -3,557 -24 52 1 -158 -31 -45 0 0Share buy back/issues 0 6 20 4 8 0 0 0 0FCF after extraordinary items -3,338 293 293 90 106 122 180 235 243

DEBT ADJUSTMENTS



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PROFITABILITY RATIOS (SEAT PAGINE GIALLE SPA)

2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 41.1% 43.1% 40.9% 33.9% 43.6% 32.4% 39.6% 42.3% 42.3%EBITDA margin adj. 44.9% 45.1% 41.2% 37.1% 45.9% 33.8% 43.3% 43.5% 43.5%EBIT margin rep. 27.0% 29.5% 27.5% 16.4% 29.5% 11.9% 25.6% 28.3% 28.3%EBIT margin adj. 30.2% 31.0% 27.3% 19.0% 31.3% 12.7% 28.7% 29.0% 29.0%Return on capital (before tax) 2.7% 3.4% 3.3% 7.2% 4.2% 6.5% 3.2% 4.6% 5.1%


2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 578 615 597 197 633 187 579 620 623EBITDA adj. 631 643 601 216 667 195 632 638 641FFO rep. 392 381 374 87 429 81 313 313 323FFO adj. 399 388 381 91 436 85 321 321 331Net debt rep. 3,813 3,536 3,305 3,262 3,201 3,079 3,021 2,786 2,543Net debt adj. 4,025 3,748 3,529 3,479 3,399 3,282 3,235 3,000 2,757Total debt 3,953 3,741 3,613 3,472 3,406 3,281 3,148 2,928 2,696EBITDA net interest cover rep. 2.3 2.4 2.4 1.6 2.6 1.6 2.5 2.8 3.0EBITDA gross interest cover rep. 2.2 2.2 2.3 1.5 2.5 1.6 2.5 2.8 3.0EBIT net interest cover rep. 1.5 1.6 1.6 0.8 1.8 0.6 1.6 1.9 2.0EBIT net interest cover adj. 1.7 1.7 1.6 0.9 1.9 0.6 1.7 1.9 2.0FFO rep. / total debt rep. 9.9% 10.2% 10.3% 12.2% 12.6% 12.9% 10.0% 10.7% 12.0%FFO rep. / net debt rep. 10.3% 10.8% 11.3% 13.0% 13.4% 13.7% 10.4% 11.2% 12.7%FFO adj. / net debt adj. 9.9% 10.4% 10.8% 12.4% 12.8% 13.1% 9.9% 10.7% 12.0%FOCF rep. / total debt rep. 5.5% 8.3% 7.4% 8.6% 9.3% 10.9% 7.2% 8.0% 9.0%FOCF rep. / net debt rep. 5.7% 8.8% 8.1% 9.1% 9.9% 11.6% 7.5% 8.4% 9.6%RCF rep. / net debt rep. 10.3% 10.8% 9.9% 10.5% 11.5% 13.6% 10.4% 11.2% 12.7%RCF adj. / net debt adj. 9.9% 10.4% 9.5% 10.0% 11.0% 13.0% 9.9% 10.7% 12.0%Total debt rep. / EBITDA rep. 6.8 6.1 6.0 5.4 5.4 5.3 5.4 4.7 4.3Net debt rep. / EBITDA rep. 6.6 5.8 5.5 5.1 5.1 4.9 5.2 4.5 4.1Net debt adj. / EBITDA adj. 6.4 5.8 5.9 5.3 5.1 5.1 5.1 4.7 4.3FFO rep. / net interest rep. 2.6 2.5 2.5 1.7 2.8 1.7 2.3 2.4 2.6FFO rep. / gross interest rep. 2.5 2.3 2.5 1.7 2.7 1.7 2.3 2.4 2.6Capex / sales 2.8% 3.8% 3.3% 4.5% 4.5% 4.1% 4.7% 4.8% 4.9%Capex / depreciation 20.0% 27.6% 24.7% 25.8% 32.4% 20.1% 33.7% 34.1% 34.9%

CAPITAL STRUCTURE



Comment FY 2008 FY 2009 FY 2010Sales growth Weak print growth 0.5% 0.4% 0.5%EBITDA growth Restructuring in FY 2008 -8.6% 7.1% 0.5%EBIT growth Restructuring in FY 2008 -12.7% 10.8% 0.5%Capex incl. acquisition EUR 45 mn acquisitions in FY 2008 114 70 72Change in working capital In line with top-line growth -19 -8 -8Funds from operations (FFO) Cash generative business 313 313 323


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Truvo/WDAC (SELL) Investment rationale After the release of H1 results and a disappointing 2008 guidance concerning revenues

and EBITDA, we changed our recommendation to sell from hold for the WDAC 12/14bond. CDS levels already price in a cumulative default probability of 66% in 5 years.Nevertheless, the main question is if the company can generate enough EBITDA to pay for its huge cash interest bill and constant restructuring costs. Should the (already) relatively weakliquidity not be sufficient, another negative factor would be the excessive (senior) debtleverage. This high leverage currently makes it less likely that banks or investors would be willing to grant further loans if the company were to apply for them. During the conferencecall, the company indicated that net proceeds for the disposal of its Netherlands businesswould be only EUR 200 mn as it would have to pay around EUR 90 mn in capital gains tax if it were to choose to fully use the proceeds to pay down debt. The company, however, said thatgiven the current difficult earnings environment there would be a high likelihood that it wouldfully use the proceeds to pay down debt. Such a move would, of course, positively reduceTruvo's cash interest payments. Otherwise, the remaining stakes in its South African and Portuguese operations (our EV estimate is EUR 100 mn for both remaining stakes) would be possible assets for reinvestment. Positive for Truvo's financial flexibility is that the company refinanced in May 2007 its senior credit facility as well as the PIK notes with a new "covenant-lite" senior facility and a new PIK loan facility at the most attractive point in the credit cycle.

BELGIUM EBITDA DOWN ONLINE GROWTH ALMOST OFFSETS PRINT DECLINE IN 2008

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Recent developments Truvo released a statement on August 29, saying that the Dutch competition authority (NMa) approved the proposed transaction with European Directories in The Netherlands. The granting of a license by the NMa allows for the sale of its operations in The Netherlands to proceed. A positive decision has also been obtained from the Works Councils of Truvo Nederland and De Telefoongids and completion is expected in September.According to Truvo, the purchase price implies an EV of EUR 290 mn. Truvo has the option to re-invest the proceeds in other assets within a 12-month timeframe or use the proceeds to reduce debt.

Latest results recap On September 4, Truvo released H1 2008 results, which were below the company's expectations as the weak environment had a more severe impact on 2008 print results than anticipated. Nevertheless, the company said that operating revenues (incl. Portugal) declined by 2.0% in H1 2008 (print: -9.8%, online: +15.6%). Revenues in Belgium went down by 5.8% and the EBITDA margin declined to 48.3% vs. 50.7% y-o-y. Truvo's reported EBITDA declined to EUR 33.9 mn vs. EUR 41.4 mn y-o-y and the EBITDA margin declined to 30.7%

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vs. 34.9% y-o-y. The company's free cash flow slightly improved, however, to EUR 4.2 mn vs.EUR -3.9 mn. Reported net debt (excl. shareholder loan, incl. PIK) increased slightly to EUR1,587 mn vs. EUR 1,561 mn q-o-q. All in all, credit metrics remained rather unchanged, with LTM H1 2008 net debt/EBITDA (adj.) of 10.1x vs. 9.4x in FY 2007 and FFO/net debt (adj.) of 5.2% vs. 5.1% y-o-y.

Liquidity Truvo's liquidity situation is comparatively weak, but there are no substantial debt maturities over the next few years. At the end of Q2 2008, Truvo had a cash position of around EUR 29.7 mn, an unused RCF of EUR 50 mn and short-term debt of EUR 30.4 mn at Q2 2008. We note, however, that Truvo generates the bulk of its FCF in H2 each fiscal year.


Truvo for the first time issued a full-year guidance. For FY 2008, Truvo expects total net operating revenues to decline between 4.5-6%, with print performance not expected to improve. However, it expects a higher online growth rate than H1 2008 and online revenues approaching 30% of net operating revenues. The EBITDA decline is intended to be limited to 6-8% through cost reductions. The CEO presented the key area of focus in his Action Plan:

● Strengthened and more focused management team: New Managing Director in Ireland,David McGuffey (May 2008); New Managing Director in Belgium, Martine Bayens (August2008); Recruitment of Head of New Media (Q4 2008).

● Customer-centric approach (segmentation, products and pricing) to the new cycle basedon customer needs: cross-media approach for customers with basic online needs, dedicated approach for customers with more sophisticated needs (2009 cycle commencesin Q4 2008).

● Increased investment in New Media (online & wireless): New user-focused initiatives include user generated video, aerial views on maps and increased focus on ratings &reviews, new advertiser focused initiatives include additional search engine, marketingproducts, landing pages, cross-media solutions, self-service customer reporting (Q4 2008).

● Organizational discipline: emphasis on cost reduction and continuous cash management.

Model assumptions/risks Our model assumptions are for a sales decline of 5% and an EBITDA decline of 7% in 2008. We assumed a rather unchanged FFO margin of 23%, which leads to free cash flowgeneration of approx. EUR 50 mn in FY 2008. We also assumed that the full EUR 200 mn indisposal proceeds will be used to repay debt. This leads to a slight improvement in credit metrics in FY 2008 vs. FY 2007. Major risks to our model estimates are negative guidance deviations, which might lead to a potential liquidity crisis; or the usage of the disposalproceeds for investments instead of debt reduction.

Things to watch ● By the end of September: Completion of disposal of Netherlands business

● Mid-November 2008: Q3 results


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CAPITALIZATION

Senior Credit Facilities Borrower WDAC Intermediate Corp. Amount (in EUR) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee PIK facility 144.6 11/29/15 Bullet EURIBOR + 600 bp* *Note: After March 31, 2008, this margin may be retroactively increased by a ratchet margin of 1% if the ratio of all net (external) borrowings/EBITDA is above certain thresholds at the end of a six month interest period. Interest is payable semiannually in arrears and will be payable, at the company’s option: in cash or through an addition to the principal amount of the PIK Facility. The PIK Facility contains covenants restricting the ability of WDAC Intermediate Corp. and its subsidiaries to, among other things, incur or guarantee additional indebtedness, pay dividends or make other distributions or repurchase or redeem its stock, make investments or other restricted payments, create liens, enter into certain transactions with affiliates, and consolidate, merge or sell all or substantially all of our assets. WDAC Intermediate Corp. may prepay the principal of the PIK Facility in total or in multiples of EUR 1 mn, at the redemption price plus unpaid interest. The redemption price is: - 100% if prepayment is before November 29, 2009, - 102% if between November 29, 2009 and November 29, 2010, - 101% if between November 29, 2010 and November 29, 2011, - 100% if on or after November 29, 2012. - If the PIK Facility is prepaid before May 29, 2008, a make whole premium becomes due. Borrower World Directories Acquisition Corp. Senior Credit Facility Amount (in EUR) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Term 1 Facility 648.0 05/31/14 Bullet EURIBOR +200 bp Term 2 Facility 287.0 05/31/14 Bullet EURIBOR +200 bp Multi-currency RCF 50.0 11/30/13 Bullet EURIBOR +200 bp 50 bp for unused Notes Issuer WDAC Subsidiary Corp. EUR 395 mn 12/01/14 Bullet 8.5% USD 200 mn 12/01/14 Bullet 8.375% Other Indebtedness at Q2 2008 EUR 21.9 mn Currency Swap – Senior Dollar notes Portuguese credit facility: EUR 42.4 mn fully drawn by Paginas Amarelas, expires May 2, 2013 at 6m-EURIBOR +50 bp and will be reduced by EUR 2.12 mn per quarter as from May 2, 2008 10% Shareholder loan: EUR 650.8 mn Available Credit Lines at Q2 2008 RCF was completely undrawn


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BOND DOCUMENTATION – WDAC 8.5% 12/01/14

Issuer WDAC Subsidiary Corp. Call/Put Call Schedule On or after December 1, 2009: 104.25%; 2010: 102.125%; 2011 and thereafter: 1001.063%; 2012 and thereafter:

100% Equity claw back Prior to December 1, 2007 up to 40% at 108.5% Make whole clause Prior to December 1, 2009: Bund plus 50 bp Change of control 101% Guarantees The notes will be guaranteed, subject to certain limits imposed by local law, on a senior subordinated basis (the

“subsidiary guarantees”) by the following subsidiary guarantors: World Directories Acquisition Corp.; World Directories; Promedia; Publimedia; Publitec; and World Directories CVBA. The subsidiary guarantees will be senior subordinated obligations of the subsidiary guarantors and will rank junior in right of payment to all existing and future senior indebtedness of the subsidiary guarantors, including indebtedness under our new Senior Facilities. The subsidiary guarantees will rank equal in right of payment with all existing and future senior subordinated indebtedness of the subsidiary guarantors. The subsidiary guarantees will rank senior to any existing or future indebtedness of the subsidiary guarantors that is expressly subordinated to the subsidiary guarantees. The notes and the subsidiary guarantees will effectively rank junior to all of the existing and future indebtedness and other liabilities of the other subsidiaries of the issuer which are not subsidiary guarantors. In addition, each subsidiary guarantee will effectively rank junior to all existing and future secured obligations of the subsidiary guarantors to the extent of the value of the assets securing such obligations. The terms of the indenture and the Intercreditor Agreement provide that payments may not be made by a subsidiary guarantor under its subsidiary guarantee if a default in payment or certain other matters have occurred and are continuing under the Senior Facilities or during the continuation of a payment blockage period. The subsidiary guarantees will be subject to a standstill on enforcement in certain circumstances. The subsidiary guarantees will also be subject to release under certain circumstances.

Security The notes will be secured by: a first-ranking pledge of the WDAC Proceeds Loan; and a second-ranking pledge of 65% of the shares of World Directories Acquisition Corp. The subsidiary guarantee of World Directories Acquisition Corp. will be secured by: a second-ranking pledge of the World Directories Proceeds Loan; and a second-ranking pledge of 65% of the shares of World Directories. The subsidiary guarantee of World Directories will be secured by: a second-ranking pledge of the Promedia Proceeds Note; a second-ranking pledge of the WD Antilles Proceeds Loan; and a second-ranking pledge of approximately 65% of the shares of Promedia (held by World Directories). The security interests in favor of the notes and the subsidiary guarantees will be subject to release under certain circumstances.

Ranking The notes will be senior obligations of the issuer and will rank equal in right of payment with all of the issuer’s existing and future senior debt. The notes will rank senior to any of the issuer’s existing or future indebtedness that is expressly subordinated to the notes. The issuer is a holding company with no revenue-generating operations of its own. In order to make payments on the notes or meet other obligations, it will be dependent upon receiving payments from World Directories Acquisition Corp. under the WDAC Proceeds Loan or otherwise.

Certain Covenants Limitation on Debt Consolidated leverage ratio <7.5x prior to the second anniversary of the issue date 11/30/04 (<7x on or after the

second anniversary of the issued date); Most important carve outs/exceptions: Maximum aggregate amount not exceeding (i) EUR 1,075 mn plus (ii) in the case of any refinancing of any Credit Facility or any portion thereof, the aggregate amount of fees, underwriting discounts, premiums and other costs and expenses incurred in connection with such refinancing, plus (iii) EUR 140 mn in connection with the exercise and/or the satisfaction of the obligations of the Issuer or its Restricted Subsidiaries under the Belgacom Call and the Belgacom Restructuring, less (iv) the aggregate amount of all Net Cash Proceeds of Asset Disposals since the Issue Date applied by the Issuer.

Limitation on Sale of Certain Assets Receives at least fair market value and at least 75% in cash, cash equivalents, replacement assets or a combination thereof; within 365 days to repay debt or to invest in replacement assets; after that obliged to an offer to noteholders if excess proceeds exceed EUR 20 mn

Limitation on Restricted Payments 50% of consolidated net income for the period plus 100% aggregate net cash proceeds from capital stock issue/sale plus amount of debt reduction after conversion/exchange of convertible/exchangeable for capital stock plus net reduction in restricted investments made by WDAC or restricted subsidiaries Most important carve outs/exceptions: Not exceed an amount (net of repayments of any such loans or advances) equal to (1) EUR 15 mn, plus (2) EUR 7.5 mn multiplied by the number of calendar years that have commenced since the Issue Date, plus (3) the Net Cash Proceeds received by the Issuer since the Issue Date.

Limitations on Transactions with Affiliates Not less favorable to the issuer as in a comparable transaction in arms-length dealings with a person who is not such an affiliate; >EUR 10 mn only when approved by a majority of the members of the Board of Director >EUR 40 mn only with written opinion from an independent investment banking, accounting or appraisal firm of internationally recognized standing

Fall away/ Suspension Covenants Yes Negative pledge No Anti Layering Yes


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Business Description – Truvo Intermediate Corp. World Directories (Acquisition Corp.; WDAC) is a leading publisher of print and online directories. The company operates wholly-owned businesses in Belgium (Promedia), Netherlands (Gouden Gids) and Ireland (Golden Pages) and jointly controlled entities in Portugal (Paginas Amarelas) and Romania (Pagini Aurii). WDAC is also present in South Africa, with a 33.3% minority stake of the directories publisher Telkom Directories Services (TDS) and in Puerto Rico, with a 40% interest in Verizon Information Services (VIS). World Directories is the number one provider of classified directories in the markets in which it operates, with an estimated market share of 90% or more of the directory advertising in most of its key markets. The average number of full time employees (sales and non-sales combined) was 1,946 people in FY 2007. 100% shareholders are Apax Partners and Cinven, which acquired the company from VNU in November 2004 for a total consideration of EUR 2,165 mn.


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ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B Stable Positive revenue trend, modest margin improvement

Moody's B2 Cwn Focus on outlook for 2008-2009 Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

WDAC 8.5% 12/1/2014 Caa1cwn/CCC+s/-- EUR 395 12/1/2009 (104.25)

WDAC 8.375% 12/1/2014

Caa1cwn/CCC+s/-- USD 200 12/1/2009 (104.188)

BOND STRUCTURE

WDAC Intermediate Corp.

Senior Notes

Holdco PIK Notes

WDAC Subsidiary

Corp.

World Directories Acquisition Corp.Senior Facilities

World Directories(operating assets)


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PROFIT AND LOSS (TRUVO INTERMEDIATE CORP.)

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 495.4 482.9 480.7 308.2 118.6 322.4 110.6 306.3 306.3 306.3Raw materials used -64.9 -66.6 -67.2 -32.8 -11.7 -31.8 -9.6 -30.3 -30.3 -30.3Personnel costs -132.1 -134.1 -145.6 -98.1 -52.2 -102.9 -51.7 -97.7 -97.7 -97.7EBITDA reported 215.0 205.7 185.1 147.5 41.3 157.9 34.0 150.1 150.1 150.1Depreciation and amortization -48.3 -58.7 -180.9 -66.9 -36.4 -84.1 -36.1 -81.2 -81.2 -81.2Other operating income/expenses -83.4 -76.5 -82.8 -29.8 -13.4 -29.7 -15.4 -28.2 -28.2 -28.2EBIT reported 166.7 147.0 4.2 80.6 4.9 73.8 -2.1 68.9 68.9 68.9Income from investments 7.9 15.1 13.5 13.9 -2.8 7.1 -0.5 8.0 9.0 10.0Interest result -108.1 -103.6 -163.3 -173.4 -105.3 -187.8 -78.7 -162.8 -154.7 -154.7Other financial items 0.0 0.0 -6.8 0.0 0.0 0.0 0.0 -6.8 -6.8 0.0EBT 66.5 58.5 -152.4 -79.0 -103.2 -106.8 -81.4 -92.7 -83.6 -75.8Taxes on income -48.4 -24.1 21.0 12.6 26.5 36.2 9.4 29.0 26.0 24.0Net income 18.1 34.4 -131.4 -66.4 -76.7 -70.6 -72.0 -63.7 -57.6 -51.8


in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 1,974 2,255 2,355 2,227 2,180 1,817 1,716 1,564 1,546 1,536 thereof goodwill 1,947 2,231 2,326 1,330 1,330 1,119 1,119 1,461 1,433 1,412Cash & cash equivalents 29 84 67 51 64 36 30 36 36 36Total assets 2,471 2,833 2,851 2,544 2,522 2,558 2,453 2,319 2,301 2,291Equity incl. minorities -184 223 91 -46 -129 -128 -266 -195 -222 -243Shareholder loans n.a. 415 512 564 592 620 651 682 750 825Pension provisions n.a. 33 41 41 41 17 17 17 17 17Financial liabilities 2,015 1,604 1,717 1,627 1,627 1,615 1,616 1,367 1,308 1,244 short term (<1 year) 0 0 0 62 -2 31 30 n.m. n.m. n.m. long term (>1 year) 2,015 1,604 1,717 1,565 1,629 1,585 1,586 n.m. n.m. n.m.Net working capital -158 131 113 34 9 362 355 362 362 362

CASH FLOW

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 62 60 89 94 -20 80 -17 70 76 82Change in working capital 26 15 10 -7 21 -7 29 0 0 0Operating cash flow 88 75 99 88 1 72 12 70 76 82CAPEX -10 -6 -12 -10 -3 -23 -6 -17 -17 -18Free cash flow 78 70 87 78 -1 50 6 53 59 64Dividends -2 0 0 0 -3 0 -2 -2 0 0Acquisitions/disposals -8 -285 -307 -3 2 -27 -3 197 0 0Share buy back/issues 0 0 0 0 0 0 0 0 0 0FCF after extraordinary items 69 -215 -219 75 -2 22 1 248 59 64

DEBT ADJUSTMENTS

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFor pensions n.a. 33 62 62 62 28 28 28 28 28For operating leases n.a. 43 40 62 62 33 33 33 33 33Others* n.a. 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (TRUVO INTERMEDIATE CORP.)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 43.4% 42.6% 38.5% 47.9% 34.8% 49.0% 30.7% 49.0% 49.0% 49.0%EBITDA margin adj. 43.4% 47.4% 44.7% 56.1% 45.5% 54.2% 37.6% 54.3% 53.7% 53.7%EBIT margin rep. 33.6% 30.4% 0.9% 26.1% 4.1% 22.9% -1.9% 22.5% 22.5% 22.5%EBIT margin adj. 33.6% 33.6% 5.2% 30.9% 10.1% 26.1% 2.2% 25.7% 25.2% 25.2%Return on capital (before tax) 3.2% 2.4% -8.8% -5.9% 1.1% -7.7% -0.9% -8.0% -7.9% -8.6%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 215 206 185 148 41 158 34 150 150 150EBITDA adj. 215 229 215 173 54 175 42 166 165 165FFO rep. 62 60 89 94 -20 80 -17 70 76 82FFO adj. 62 68 98 105 -14 86 -14 76 82 88Net debt rep. 1,987 1,520 1,650 1,576 1,564 1,579 1,587 1,331 1,272 1,208Net debt adj. 1,987 1,595 1,751 1,699 1,687 1,640 1,647 1,392 1,333 1,269Total debt 2,015 1,604 1,717 1,627 1,627 1,615 1,616 1,367 1,308 1,244EBITDA net interest cover rep. 2.0 2.0 1.1 0.9 0.4 0.8 0.4 0.9 1.0 1.0EBITDA gross interest cover rep. 2.0 1.9 1.1 0.7 0.3 0.7 0.3 0.9 1.0 1.0EBIT net interest cover rep. 1.5 1.4 0.0 0.5 0.0 0.4 0.0 0.4 0.4 0.4EBIT net interest cover adj. 1.5 1.5 0.1 0.5 0.1 0.4 0.0 0.5 0.5 0.5FFO rep. / total debt rep. 3.1% 3.7% 5.2% 5.8% 3.5% 4.9% 5.1% 5.1% 5.8% 6.6%FFO rep. / net debt rep. 3.1% 4.0% 5.4% 6.0% 3.7% 5.0% 5.2% 5.2% 6.0% 6.8%FFO adj. / net debt adj. 3.1% 4.3% 5.6% 6.2% 4.1% 5.2% 5.2% 5.5% 6.2% 6.9%FOCF rep. / total debt rep. 3.9% 4.3% 5.1% 4.8% 2.9% 3.1% 4.6% 3.9% 4.5% 5.2%FOCF rep. / net debt rep. 3.9% 4.6% 5.3% 4.9% 3.0% 3.1% 4.7% 4.0% 4.6% 5.3%RCF rep. / net debt rep. 3.0% 4.0% 5.4% 6.0% 3.5% 5.0% 5.2% 5.1% 6.0% 6.8%RCF adj. / net debt adj. 3.0% 4.3% 5.6% 6.2% 3.9% 5.2% 5.3% 5.3% 6.2% 6.9%Total debt rep. / EBITDA rep. 9.4 7.8 9.3 11.0 12.3 10.2 10.7 9.1 8.7 8.3Net debt rep. / EBITDA rep. 9.2 7.4 8.9 10.7 11.8 10.0 10.5 8.9 8.5 8.1Net debt adj. / EBITDA adj. 9.2 7.0 8.2 9.8 10.8 9.4 10.1 8.4 8.1 7.7FFO rep. / net interest rep. 1.6 1.6 1.5 1.5 0.8 1.4 0.8 1.4 1.5 1.5FFO rep. / gross interest rep. 1.6 1.6 1.5 1.4 0.8 1.3 0.8 1.4 1.5 1.5Capex / sales 1.9% 1.2% 2.4% 3.2% 2.1% 7.1% 5.0% 5.4% 5.5% 5.7%Capex / depreciation 10.5% 5.1% 3.3% 7.4% 287.0% 13.7% 555.0% 11.0% 11.2% 11.6%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 110.0% 87.8% 95.0% 102.9% 108.6% 108.6% 119.7% 116.6% 120.5% 124.3%Net debt / net capitalization rep. 110.2% 87.2% 94.8% 103.0% 109.0% 108.8% 120.1% 117.2% 121.2% 125.2%Net debt / net capitalization adj. 110.2% 86.7% 94.8% 102.4% 107.9% 108.5% 119.2% 116.3% 120.0% 123.7%Net working capital / sales -31.9% 27.1% 23.5% 11.0% 3.6% 112.2% 112.9% 118.1% 118.1% 118.1%Fixed assets / sales 398.6% 467.1% 489.8% 722.7% 886.6% 563.6% 545.6% 510.6% 504.8% 501.5%


Comment FY 2008 FY 2009 FY 2010Sales growth Competitive and cylical pressure, but online growth -5.0% 0.0% 0.0%EBITDA growth Cost savings offset by price pressure -5.0% 0.0% 0.0%EBIT growth Cost savings offset by price pressure -6.6% 0.0% 0.0%Capex incl. acquisition Capex/Sales stays approx. 5.5% 22.4 17.0 17.5Change in working capital WC built up of approx. EUR 12 mn p.a. 0.0 0.0 0.0Funds from operations (FFO) FFO/Sales margin approx. 25% 69.7 75.8 81.6


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Unitymedia GmbH (BUY) Investment rationale We change back to our buy recommendation for IESYRP bonds and FRNs (Senior

Secured Floating Rate Notes) and remain neutral on the company's CDS based on the following considerations:

– The operating performance of Unitymedia (UM) is improving due to general price increases and growth in new services. The company confirmed its promising 2008outlook with strong EBITDA growth.

– There is some uncertainty regarding the upcoming Bundesliga license auction.However, so far it appears unlikely that UM will bid for exclusive national rights like thelast time. It may acquire non-exclusive or regional rights, but only if it makes economic sense.

– The development of arena (UM’s premium sports platform) is no longer a significantdriver for the UM group. arena will have roughly EUR 50 mn in negative FCF p.a. until June 30, 2009. Thereafter, arena is expected to generate roughly EUR 20 mn p.a. with its satellite platform.

– Even in the case of smaller bolt-on acquisitions of Level 4 assets via FCF or its existing sizable cash position, leverage (total debt/EBITDA) should decline due to the positiveimpact on the (already organically rising) EBITDA.

– Main uncertainty stems from a potential exit of the PE sponsors and/or a potential combination of UM with Kabel BW, while the latter currently appears unlikely.

We like the credit given the current market environment as cyclicality of the business is low, the business develops well, and as credit metrics and the ratings are improving.

Recent developments On June 16, S&P announced that it revised its outlook on Unitymedia GmbH to positivefrom stable, reflecting the group's significantly improving credit measures and good near-term trading prospects. The B+ long-term corporate credit rating was affirmed. The outlook revision acknowledges the strong operating performance at the core cable segmentover the past two quarters, with a positive impact on credit measures, significant gross debt reduction, and the turnaround at its subsidiary arena Sport Rechte & Marketing GmbH (arena). As a negative factor, S&P pointed out the negative free operating cash flow (FOCF)of EUR 76 mn in the 12 months ending March 31, 2008, primarily due to significantly negativefree cash flow generation at arena. Moreover, the rating agency mentioned uncertaintiesrelating to shareholder returns and financial policy as potential obstacles for an upgrade. Apotential upgrade in the near term would require Unitymedia to deleverage further, rapidlyapproaching a ratio of 5x adjusted total debt to EBITDA (excluding EBITDA generated atarena), which is currently 6.1x, and improve its FOCF generation at Unitymedia Cable, S&P stated.

On August 10, Unitymedia announced that it signed an agreement to acquirePrimaCom's networks in Aachen and Wiesbaden, serving approximately 100,000subscribers, for around EUR 49 mn. Even though the multiple of 10x on expected 2008 EBITDA is in line with previous acquisition multiples, it appears, however, high if compared tomultiples of telecom incumbents or multiples of alternative telecom operators. This acquisitionhas already been indicated several times in the past and is a logical consequence of Unitymedia's strategy to combine Level 3 and 4 assets in its footprint to better attractcustomers and realize synergies. The company is relatively cash rich and, in our opinion, cancope with this acquisition without encountering rating pressure.

Latest results recap On August 21, Unitymedia GmbH released strong Q2 2008 results in line with previous quarters. We will continue to discuss the cable business separate from the arenabusiness. The cable business performed very much in line with our expectations. Cable revenues increased by 14.5% y-o-y and 4.2% q-o-q to EUR 208.9 mn. Q2 2008 adjusted

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EBITDA rose by 19.5% y-o-y and by 4.2% q-o-q to EUR 98.7 mn, and the EBITDA marginjumped to 47.2% from 45.3% in Q2 2007 and remained almost stable q-o-q (47.3% in Q1 2008). Growth for new services was still strong with 141k new RGUs in Q1 2008 (+141k in Q12008 vs. +51k in Q2 2007). Capex increased y-o-y to EUR 49.0 mn compared to EUR 37.8 mn in Q2 2007, however, the increase is in line with the company guidance.

UNITYMEDIA CABLE

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In Q2 2008, arena generated revenues of EUR 87.6 mn and adjusted EBITDA of EUR 9.1mn. arena continues to be EBITDA positive, in line with the company guidance and our expectation. The arena business can be divided into the broadcasting business and thestand-alone satellite platform business. Cash-flow-wise, the broadcast business has around EUR 240 mn (Bundesliga, etc.) in licensing rights costs, which are roughly covered by EUR 170 mn in subscriber revenues, resulting in a cash outflow p.a. of around EUR 70 mn. Thisbusiness case and therefore the related cash flow will end on June 30, 2009 with theexpiration of the Bundesliga license rights period. Separated from this is the stand-alone satellite platform business, which roughly generates an annual EBITDA run-rate of EUR 20 mn, leading to a combined annual cash outflow of EUR 50 mn.

ARENA

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For 2008, UM expects full-year EBITDA of between EUR 365-375 mn for the cable segment. The company plans capex of around EUR 200 mn, mainly for network upgrades,CPEs and in-house wiring. The EBITDA for arena is expected to be positive in the area ofEUR 30 mn, mainly driven by the revenue contributions from Premiere share disposals(although the shares were sold in one package to News Corp., the disposal proceeds will flowthrough the P&L on a pro rata basis (EUR 15 per Premiere share x 16.4 mn Premiere shares /divided by number of remaining broadcasting days of Bundesliga rights).

Hence, UM group's (cable & arena) EBITDA in 2008 is expected to be in the range of EUR 395-405 mn. Our EBITDA forecast is even a bit higher at EUR 415 mn and will remainrelatively stable in 2009 and 2010, as diminishing EBITDA contributions from arena will becompensated by further EBITDA increases in new cable services. Total debt to EBITDA isexpected to decline to 4.7x from currently 5.9x. This improvement of credit metrics does notinclude further total debt reduction via the application of UM's sizable cash position or higher EBITDA from potentially acquired Level 4 assets in its region. The net debt to EBITDA ratio isexpected to be at around 4.0x at YE 2008, according to our calculations/assumptions.

Liquidity As of June 30, 2008, UM had EUR 371.4 mn in cash on its balance sheet, of which EUR 141.3 mn were at arena and are partially restricted due to the DFL Bank Guarantee forthe second Bundesliga season. The next scheduled debt repayment is due in October 2011 (EUR 100 mn), while the remaining debt is due in April 2013 and February 2015. Hence, we assume that liquidity is sufficient for the next 12-18 months in the absence of major cash outflows, e.g. acquisition-related. The acquisition of PrimaCom's networks in Aachen and Wiesbaden is also well financed by the company's cash portion.

Model assumptions/risks In the past, Unitymedia's CEO stated that the company is interested in acquisitions,such as the recent acquisition of PrimaCom's Level 4 networks in Wiesbaden andAachen. We view such investments (e.g. Level 4 assets from Orion Cable/ewt in its regions Hesse, NRW) as likely and believe that current liquidity is still sufficient to cover theseinvestments. UM may even resell the portion of its floater that it recently bought back via thedebt capital market if needed. These potential activities are not factored into our forecast.

Key risks to our model estimates are:

a) Increasing capex needs; b) participation in the Bundesliga rights auction for exclusivenational rights; c) M&A activities; d) exit of PE sponsors (mainly BC Partners/ Apollo).

Things to watch

● End of November: Q3 2008 results and conference call

● Capex development, potential debt buybacks and shareholder background

● Consolidation process in the German broadband market.


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CAPITALIZATION

Senior Credit Facilities Borrower iesy Hessen GmbH & Co. KG and ish NRW GmbH Senior Credit Facility Initial Amount (in mn) Maturity Amortization schedule Margin (LIBOR/EURIBOR ) Commitment fee Revolving Credit facility EUR 130 04/13 Bullet 2.00% 2%Covenants Equal to senior secured notes Notes Issuer (1) iesy Hessen GmbH & Co. and ish NRW GmbH and (2) KG Unity Media GmbH Senior secured floating rate notes (1)

EUR 1,350 04/13 Bullet Euribor 287.5 bp

Senior Notes (2) EUR 215 02/15 Bullet Coupon 8.75% Senior Notes (2) EUR 235 02/15 Bullet Coupon 10.125% Senior Notes (2) USD 151 02/15 Bullet Coupon 10.75% Available Credit Lines EUR 130 mn from undrawn RCF as of June 30, 2008


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BOND DOCUMENTATION – IESYRP FLOAT 04/15/13

Issuer iesy Hessen GmbH & Co. KG and ish NRW GmbH Call/Put Call Schedule On or after April 15, 2007 at 102.0%; 2008 at 101.00%; 2009 and thereafter at 100.00% Equity claw back No Make whole clause No Change of control and a rating decline 101% Guarantees ish, Arena and each other restricted subsidiary of the company will, jointly and severally, irrevocably guarantee as

primary obligors the notes

Security Notes are secured by the equity interests of Unity Media Management GmbH, iesy and iesy GP on a second-ranking basis. Pursuant to the Intercreditor Agreement, the security interest granted for the benefit of the holders of the February 2005 Notes is subject to limitations on enforcement and is subordinated to the first-ranking revolving credit facility.

Ranking Second-ranking after RCF

Certain Covenants Limitation on Debt Consolidated leverage ratio of less than 7x prior to August 14, 2007 or 6x thereafter;

Senior consolidated leverage ratio of less than 5x prior to August 14, 2007 or 4x thereafter: Most important carve-out/exceptions: – Approximately EUR 100 mn in case of merger between UM and TC – Incurrence of CLO, mortgage finance, purchase money obligations not exceeding EUR 25 mn and 25% of

consolidated EBITDA – Workers' compensation claims – General Basket not exceed the greater of EUR 25 mn and 25% of consolidated EBITDA

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash, the assumption of debt or replacement of assets and is within 365 days applied to debt reduction or invested in replacement assets. Excess Proceeds exceeding EUR 15 mn used to redeem notes and pari passu debt at par

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of: – 50% of consolidated net income (minus 100% of such negative amount), if consolidated leverage ratio is less than

5.25x – Equity proceeds; – Conversion of debt to equity proceeds, – Proceeds in case of disposition or repayment of any investment constituting a restricted payment (the lesser of the






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BOND DOCUMENTATION – IESYRP 10.125% 02/15/15

Issuer Unity Media GmbH (formally IESY Repository GmbH -iesy) Call/Put Call Schedule On or after February 15, 2010 at 105.063; 2011 at 103.375%; 2012 at 101.688%, 2013 and thereafter at 100.00% Equity claw back No Make whole clause Prior to February 15, 2010, Bund plus 50 bp Change of control and a rating decline 101% Guarantees The Notes will be guaranteed on a senior subordinated basis by iesy, iesy Hessen, iesy GP, iesy Services, Kabelnetz

and certain other subsidiaries. Security Notes are secured by the equity interests of Unity Media Management GmbH, iesy and iesy GP on a third-ranking

basis. Pursuant to the Intercreditor Agreement, the security interest granted for the benefit of the holders of the February 2005 Notes is subject to limitations on enforcement and is subordinated to the first-ranking revolving credit facility.

Ranking The Notes will be general, senior secured obligations of the Issuer and will rank equal with all existing and future debt of the Issuer (including the Existing Notes) other than debt expressly subordinated to the Notes. The Notes will be structurally subordinated to any existing and future liabilities of our subsidiaries that do not guarantee the Notes.

Certain Covenants Limitation on Debt Consolidated leverage ratio of less than 7x prior to 30 months after the issue or 6x thereafter;

Senior consolidated leverage ratio of less than 5x prior to 30 months after the issue or 4x thereafter: Most important carve-out/exceptions: – Incurrence of CLO, mortgage finance, purchase money obligations not exceeding EUR 25 mn and 25% of

consolidated EBITDA – Workers' compensation claims – General Basket not to exceed the greater of EUR 25 mn and 25% of consolidated EBITDA


Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of: – 50% of consolidated net income (minus 100% of such negative amount), if consolidated leverage ratio is less than

5.25x – Equity proceeds; – Conversion of debt to equity proceeds, – Proceeds in case of disposition or repayment of any investment constituting a restricted payment (the lesser of the






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Business Description – Unity Media GmbH Unity Media (iesy/ish) is the largest cable television operator in the federal states of Hesse and North-Rhine Westphalia. As of December 31, 2007, the company served approximately 4.7 mn subscribers and its network passed approximately 8.5 mn homes. The company provides basic and premium cable television services (analog and digital) as well as broadband Internet services to its subscribers. It owns the Bundesliga pay-TV viewing rights in Germany until June 30, 2009, and sublicensed those to Premiere. Via arenaSAT the company is also acting as a satellite-TV provider.


Basic cable sales55%

Arena33%

Digital TV pay6%

Other0%

Internet3%

Telephony3%



Basic cable sales68.0%

Arena11.2%

Other14.5%

Digital TV pay3.5%

Telephony1.2%

Internet1.6%


DEBT MATURITY PROFILE AS OF YE 2007


ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B+ Positive Up: adj. debt/EBITDA approaching 5.0x Moody's B2 Positive Up: Decrease in leverage to 6.0x

debt/EBITDA, reduced liquidity requirements; Down: deterioration of operational performance, insufficient cash utilization

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

IESYRP 8.75% 2/15/2015

B-p/Caa1p/-- EUR 215 2/15/2010 (104.38)

IESYRP 10.125% 2/15/2015

B-p/Caa1p/-- EUR 235 2/15/2010 (105.06)

IESYRP Float + 287.5 bp 4/15/2013

BBp/B2p/-- EUR 1,350 4/15/2007 (102)

BOND STRUCTURE

Unity Media GmbHSenior notes

IESYRP

shareholders (indirect ownerhip)

Tele ColumbusKabel

Holding GmbH

TeleColumbusGmbH &Co. KG


Unity MediaManagement

GmbH

iesy HessenGmbH & Co. KG

Arena SportRechte undMarketing

GmbH

ish NRWGmbH

iesyHessen

BeteiligungsGmbH

NotesTELEC

Senior secured notesIESYRP

RCF


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PROFIT AND LOSS (UNITY MEDIA GMBH)

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 137.9 135.9 366.0 870.2 490.0 1,058.0 594.9 1,178.2 1,020.7 861.9Raw materials used -27.8 -25.8 -78.9 -210.9 -69.2 -140.1 -71.1 -145.7 -145.8 -144.8Personnel costs -23.0 -22.0 -50.9 -105.7 -47.6 -104.1 -49.1 -108.3 -107.3 -106.4EBITDA reported 55.9 56.5 170.9 213.4 112.7 291.4 216.2 415.7 421.3 426.8Depreciation and amortization -41.9 -42.4 -189.1 -374.7 -112.5 -230.7 -123.3 -231.5 -227.6 -224.0Other operating income/expenses -31.1 -31.6 -65.3 -340.1 -260.5 -522.4 -258.4 -508.5 -346.3 -184.0EBIT reported 14.1 14.1 -18.2 -161.3 0.2 60.7 93.0 184.2 193.7 202.8Interest result -9.7 -4.4 -66.7 -166.9 -73.2 -146.9 -18.2 -83.4 -128.9 -130.6EBT 4.3 9.7 -85.0 -328.2 -73.0 -86.2 74.8 100.8 64.7 72.2Extraordinary result -9.9 0.0 -116.8 43.1 0.0 0.0 0.0 75.4 0.0 0.0Taxes on income 0.1 -3.7 103.0 89.1 -6.9 37.4 -18.4 -47.2 -16.2 -18.0Net income -5.5 6.0 -98.8 -196.1 -79.9 -48.8 56.4 129.1 48.6 54.1


in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets 250 284 3,025 2,113 2,044 2,134 2,102 2,104 2,077 2,053 thereof goodwill 19 85 903 487 457 556 0 556 556 556Cash & cash equivalents 58 43 45 444 338 227 371 549 625 703Total assets 327 346 3,155 2,672 2,820 2,774 2,630 2,853 2,902 2,956Equity incl. minorities 115 191 357 133 25 215 304 294 342 396Pension provisions 1 1 5 5 5 8 8 8 8 8Financial liabilities 150 94 2,172 2,080 2,025 1,938 1,753 1,938 1,938 1,938 short term (<1 year) 8 10 0 0 0 45 16 45 45 45 long term (>1 year) 142 84 2,172 2,080 2,025 1,893 1,736 1,893 1,893 1,893Net working capital 4 8 -79 -45 259 18 -181 -195 -195 -195

CASH FLOW

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) 35 49 139 164 -27 34 51 361 276 278Change in working capital -8 -1 -9 20 50 47 35 0 0 0Operating cash flow 27 48 130 184 23 81 86 361 276 278CAPEX -3 -7 -32 -152 -75 -168 -91 -200 -200 -200Free cash flow 23 42 98 32 -51 -87 -5 161 76 78Dividends 0 0 -1 0 0 0 0 0 0 0Acquisitions/disposals 25 0 -938 41 0 1 286 162 0 0Share buy back/issues 10 0 0 0 0 0 0 0 0 0FCF after extraordinary items 58 42 -841 73 -51 -86 281 322 76 78

DEBT ADJUSTMENTS



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PROFITABILITY RATIOS (UNITY MEDIA GMBH)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 40.6% 41.6% 46.7% 24.5% 23.0% 27.5% 36.4% 35.3% 41.3% 49.5%EBITDA margin adj. 47.6% 57.0% 73.9% 36.5% 33.6% 39.2% 45.4% 44.3% 51.7% 61.9%EBIT margin rep. 10.2% 10.3% -5.0% -18.5% 0.0% 5.7% 15.6% 15.6% 19.0% 23.5%EBIT margin adj. 17.2% 17.2% 4.9% -14.3% 3.8% 9.1% 18.6% 18.7% 22.5% 27.7%Return on capital (before tax) 1.6% 3.4% -3.4% -14.8% -11.2% -4.0% 6.6% 4.5% 2.8% 3.1%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 56 56 171 213 113 291 216 416 421 427EBITDA adj. 66 78 270 318 165 415 270 522 528 533FFO rep. 35 49 139 164 -27 34 51 361 276 278FFO adj. 35 49 202 232 7 105 87 431 347 349Net debt rep. 92 50 2,127 1,636 1,687 1,711 1,381 1,389 1,313 1,235Net debt adj. 230 184 2,643 2,160 2,212 2,221 1,892 1,898 1,822 1,744Total debt 150 94 2,172 2,080 2,025 1,938 1,753 1,938 1,938 1,938EBITDA net interest cover rep. 5.7 12.8 2.6 1.3 1.5 2.0 11.9 5.0 3.3 3.3EBITDA gross interest cover rep. 5.1 9.9 2.5 1.2 1.4 1.8 2.7 2.5 2.6 2.6EBIT net interest cover rep. 1.4 3.2 -0.3 -1.0 0.0 0.4 5.1 2.2 1.5 1.6EBIT net interest cover adj. 1.2 1.7 0.2 -0.6 0.2 0.5 3.1 1.9 1.4 1.4FFO rep. / total debt rep. 23.2% 52.3% 6.4% 7.9% 3.0% 1.7% 6.4% 18.6% 14.2% 14.4%FFO rep. / net debt rep. 37.8% 97.2% 6.5% 10.1% 3.6% 2.0% 8.1% 26.0% 21.0% 22.5%FFO adj. / net debt adj. 15.1% 26.6% 7.7% 10.7% 5.9% 4.7% 9.7% 22.7% 19.0% 20.0%FOCF rep. / total debt rep. 15.6% 44.3% 4.5% 1.5% -0.3% -4.5% -5.0% 8.3% 3.9% 4.0%FOCF rep. / net debt rep. 25.4% 82.3% 4.6% 1.9% -0.3% -5.1% -6.4% 11.6% 5.8% 6.3%RCF rep. / net debt rep. 37.8% 97.2% 6.5% 10.1% 3.6% 2.0% 8.1% 26.0% 21.0% 22.5%RCF adj. / net debt adj. 15.1% 26.6% 7.6% 10.7% 5.9% 4.7% 9.7% 22.7% 19.0% 20.0%Total debt rep. / EBITDA rep. 2.7 1.7 12.7 9.7 14.1 6.7 4.4 4.7 4.6 4.5Net debt rep. / EBITDA rep. 1.6 0.9 12.4 7.7 11.8 5.9 3.5 3.3 3.1 2.9Net debt adj. / EBITDA adj. 3.5 2.4 9.8 6.8 8.8 5.4 3.6 3.6 3.5 3.3FFO rep. / net interest rep. 4.6 12.1 3.1 2.0 0.6 1.2 3.8 5.3 3.1 3.1FFO rep. / gross interest rep. 4.2 9.6 3.0 1.9 0.7 1.2 1.6 3.2 2.7 2.7Capex / sales 2.5% 4.9% 8.8% 17.5% 15.3% 15.8% 15.2% 17.0% 19.6% 23.2%Capex / depreciation 8.2% 15.7% 17.0% 40.7% 66.5% 72.6% 73.5% 86.4% 87.9% 89.3%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. 56.5% 32.9% 85.9% 94.0% 98.8% 90.0% 85.2% 86.8% 85.0% 83.0%Net debt / net capitalization rep. 44.3% 20.9% 85.6% 92.5% 98.5% 88.9% 82.0% 82.6% 79.3% 75.7%Net debt / net capitalization adj. 66.4% 49.0% 88.0% 94.1% 98.7% 91.0% 85.9% 86.4% 84.0% 81.3%Net working capital / sales 2.8% 5.6% -21.5% -5.1% 27.0% 1.7% -15.5% -16.5% -19.1% -22.6%Fixed assets / sales 181.5% 209.2% 826.6% 242.8% 213.2% 201.7% 180.7% 178.6% 203.5% 238.1%


Comment FY 2008e FY 2009e FY 2010eSales growth Driven by price increases; 2008/2009 diminishing arena business 11.4% -13.4% -15.6%EBITDA growth EBITDA increase in 2008 from price increases 42.7% 1.3% 1.3%EBIT growth Top-line driven 203.5% 5.1% 4.7%Capex incl. acquisition Company guidance in 2008 200 200 200Change in working capital Assumed to be negligible 0 0 0Funds from operations (FFO) Top-line driven 361 276 278


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Versatel (SELL) Investment rationale We change our hold recommendation to sell for the VERSTL Floater 06/15/2014. Despite

the success of its cost reduction program, the risk that Versatel's operating performance willbe hurt again by fierce competition in the German broadband market (mainly from DT andcable operators like Kabel Deutschland, but also from United Internet, Freenet,TI/Hansenet/Alice, Telefonica, and Vodafone/Arcor) high. Upside potential might stem fromthe potential consolidation in the German broadband market, but this is not expected in the short term and nothing we would like to rely on our receommendation. The liquidity of the company appears to be sufficient for the next 12 months at least.

Recent developments On June 18, Versatel AG announced the acquisition of all shares in cable network operator AKF Telekabel TV und Datennetze GmbH (AKF) for EUR 30 mn (including EUR10 mn of debt). Frankfurt-based AKF is a network level 4 cable operator which gives Versateldirect physical access to end customers (76,000 as of YE 2007 in Berlin, Wuppertal, Gera and Frankfurt). The transaction offers Versatel a few advantages: a) more independence fromDeutsche Telekom AG and therefore ULL-fee savings; market share increase in core regions (by 50,000 households); c) improving competitiveness in the residential segment. After purchasing AKF, Versatel is the only provider to combine a high-density city network with a cable network that supplies last-mile access. AKF is expected to have revenues and EBITDA of EUR 7.6 mn and EUR 3.2 mn, respectively at the end of 2008. This translates into an EV/EBITDA multiple of 9.3x, which looks aggressive for German alternative telcos, butappears in line with recent transactions in the German cable industry for large-sized deals. However, as this is at best a medium-sized transaction and Versatel was able to outbid cable operators, which should have higher synergies with Level 4 assets, we believe the pricing washigh (at least from a cable operator's point of view). Versatel anticipates annual costsynergies of more than EUR 3 mn from 2010 onwards. Surprisingly, the acquisition does notimpact the company's guidance for 2008. The transaction is interesting due to the following: First, the infrastructure of a level 4 cable operator seems to be an alternative to FTTx-technology. Second, according to Versatel's calculation, level 4 infrastructure can be cheaperto access the customer than FTTx, something that was recently also indicated by cable operators.

VERSATEL

Improving operating results expected … … but KPIs of the residential segment move in a different direction

0

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Latest results recap On August 13, Versatel released Q2 2008 results clearly above expectations, howeversupported by a one-off customer transaction in the wholesale business. In Q2 2008,

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consolidated revenues increased by 29.1% y-o-y and 13.9% q-o-q to EUR 211.0 mn (EUR 185.2 mn in Q1 2008), as the wholesale (+137.5% y-o-y) and this time also the residential (+29.1%) segment showed strong top-line growth. Adjusted EBITDA rose by 68.2% y-o-y to EUR 65.1 mn (EUR 47.3 mn in Q1 2008), mainly driven by the Residential and Wholesalesegments as well as the success of the cost savings program "30+". The adjusted EBITDA margin was 30.9% compared to 25.5% in Q1 2008 and 23.7% in Q2 2007. In the Residentialsegment, the DSL customer base was expanded by only 25.7k to 691.6k at the end of Q22008 versus 30.1k in Q1 2008 and 44.8K in Q2 2007, while this was largely expected afterVersatel's peers already reported disappointing subscriber growth numbers in Q2 2008.Actually, Versatel's DSL customer net adds compared quite favorably with its peers. The ARPU in the Residential segment declined further q-o-q from EUR 40.40 to EUR 38.90, which was in line with expectations. The Wholesale business increased revenues by EUR 28.9 mnq-o-q to EUR 75.3 mn and EBITDA by EUR 18.2 mn to EUR 41.1 mn. Roughly EUR 30 mn ofrevenues stemmed from a 15Y financial-lease contract with a national carrier, which had to be fully booked in Q2 2008. The contract had a margin of 50% and impacted EBITDA by roughlyEUR 15 mn. If we adjust the company's Q2 2008 results by this transaction (revenues of EUR181 mn, EBITDA of EUR 50.1 mn), it would have still exceeded the market consensus (rev. of EUR 182.7 mn, EBITDA of EUR 47.7 mn) with respect to EBITDA development.

Liquidity Versatel's liquidity appears to be sufficient for the next 12 months at least, according toour assessment. At the end of June 2008, the company had cash & cash equivalents of EUR 84.9 mn on its balance sheet. The company has scheduled debt maturities of around EUR 32mn during the next five years. According to our calculations, Versatel generated negative FCFof EUR 70.5 mn in 2007 and minus EUR 31.8 mn in H1 2008, but we estimate the company to be FCF neutral in 2008 due to diminishing IPO and debt restructuring costs as well aslower capex. In the case of negative FCF, Versatel seems to have enough liquidity from its cash position and from the undrawn part of its RCF (EUR 58.5 mn).


Versatel raised its previously conservative company outlook for 2008, which now alsoincludes the AKF Telekabel acquisition: It now targets revenues of between EUR 760-770 mn (previously EUR 730-740 mn) and an adjusted EBITDA of EUR 210-220 mn (previously at least EUR 200 mn). Given that the one-off transaction in the Wholesale business already generated revenues/EBITDA of EUR 30 mn/EUR 15 mn, respectively, and that the acquisitionof AKF is expected to contribute revenues/EBITDA of EUR 3.5 mn/EUR 1.5 mn in H2 2008,the company guidance became even more conservative. The forecast for DSL new adds isstill relatively low in that they are only expected to be expanded by 100,000-120,000 in 2008 (vs. 173.2k in 2007). This also explains the lower new capex guidance of approximately EUR150 mn (previously EUR 160 mn for 2008 vs. EUR 187.1 mn in 2007), while the capex declineis still under-proportional to the net adds reduction. FCF continued to be negative in Q2 2008 at EUR 12.2 mn after negative contributions over the last four quarters, as capexexceeded operating cash flow. Net debt excluding IRU increased q-o-q from EUR 417 mn to EUR 431 mn at the end of Q2 2008. Net debt excluding IRU to adj. EBITDA (LTM) was 2.2x compared to 2.3x in Q1 2008. Leverage reductions will mainly stem from EBITDA increases ("30+") in coming years, as FCF generation is expected to be modest, at least in2008, according to our estimates.

Model assumptions/risks Key risks to our model estimates are: a) Consolidation in the sector; b) M&A activities; c) more severe ARPU declines and a fiercer competitive environment.

Things to watch ● November 12, 2008: Q3 2008 results


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CAPITALIZATION

Senior Credit Facilities Borrower Versatel AG Senior Credit Facility Initial Amount (in mn) Maturity Amortization schedule Margin (LIBOR/EURIBOR ) Commitment fee Revolving Credit facility EUR 75 05/12 Bullet 2.00% 0.625%Covenants Net consolidated senior leverage ratio (as defined in the revolving facility agreement) should not be more than 5.50:1. Notes Issuer Versatel AG Senior secured floating rate notes

EUR 525 05/14 Bullet Euribor 275.0 bp

Available Credit Lines EUR 75 mn from RCF, of which EUR 16.5 mn have been reserved for bank guarantee facilities, as of June 30, 2008


BOND DOCUMENTATION – VERSTL FLOAT 04/15/13

Issuer Versatel AG Call/Put Call Schedule On or after June 15, 2008 at 102.0%; 06/2009 at 101.00%; 06/2010 and thereafter at 100.00% Equity claw back No Make whole clause No Change of control and a rating decline 101% Guarantees On the issue date of the Notes, the Company's obligations under the Notes and the indenture governing the Notes will

be guaranteed (Subsidiary Guarantees) on a senior basis by the Subsidiary Guarantors. The Subsidiary Guarantors include certain subsidiaries of the Company organized under the laws of Germany. For the three months ending March 31, 2007, the Subsidiary Guarantors represented 77.2 percent of the Versatel Group's revenues on a consolidated basis. For the same period, EBITDA for the Subsidiary Guarantors aggregated to 80.3 percent of the Versatel Group's EBITDA and, as at March 31, 2007, total assets of the Subsidiary Guarantors (before adjustments for purchase price allocations (PPA) and deferred taxes) aggregated to 84.8 percent of the Versatel Group's total assets, each on an unconsolidated basis.

Security The obligations will be secured as of the issue date by a first-priority security interest in the following assets, subject to certain security principles: a) all of the present and future capital stock in certain subsidiaries of the Company; b) account pledges covering bank accounts of the Company and certain of its subsidiaries; c) and security assignments of all the receivables, rights and claims of the Company and certain of its subsidiaries. Each additional Subsidiary Guarantor will, subject to certain security principles, grant a security interest in certain of its assets. The same collateral is also pledged to secure the Revolving Facility on a first-priority basis. Under the terms of the Intercreditor Agreement, the proceeds of any enforcement of the security interests will be applied to repayment of the Revolving Facility prior to the repayment of the Notes and any hedging obligations. The collateral granted in order to secure the Notes may be shared ratably with certain other debtholders in the future, including any additional notes issued in accordance with the indenture governing the Notes.

Ranking Second-ranking after RCF

Certain Covenants Limitation on Debt Consolidated leverage ratio of less than 5.5x; Senior consolidated leverage ratio of less than 3.75x;

Most important carve-out/exceptions: a) Approximately EUR 75 mn; b) Incurrence of CLO, mortgage finance, purchase money obligations not exceeding EUR 50 mn and 4% of total assets; c) General Basket not exceed the greater of EUR 100 mn and 8% of total assets


Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of: a) 50% of consolidated adjusted net income; b) Equity proceeds; c) Conversion of debt to equity proceeds; d) Declaration or payment of dividends on the common stock or common equity interests of Versatel is limited to an annual amount of the greater of a) 6% of IPO-net cash proceeds, and b) an amount equal to the greater of (1) 7% of the market capitalization or 7% IPO market capitalization, provided that the consolidated leverage ratio shall be less or equal than 3.25x, and (2) the greater of (x) 5% of the Market Capitalization and (y) 5% of the IPO Market Capitalization; provided that after giving pro forma effect to such loans, advances, dividends or distributions, the cons. Leverage Ratio shall be equal to or less than 3.75x.

Limitations on Transactions with Affiliates Board resolution if transaction greater than EUR 10 mn; Fairness opinion if transaction greater than EUR 40 mn Fall away/ Suspension Covenants Yes Negative pledge Yes Anti Layering No


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Business Description – Versatel AG Versatel, headquartered in Berlin, Germany, is the one of the leading facilities-based alternative telecommunications operators (Altnet) in Germany. Among the predominantly facilities-based providers, Versatel is the second largest Altnet based on total revenue and the third largest Altnet based on the number of broadband contracts. On a consolidated basis, Versatel generated revenues and adjusted EBITDA of EUR 700.6 mn and EUR 191 mn in FY 2007. Versatel divides its business into three core business units: a) Residential segment: provides mainly bundled DSL broadband and voice products to residential customers; b) Business segment: markets a broad range of telecommunications products and services to business customers of every size; c) Wholesale segment: delivers both standard and customized products and services to wholesale customers. Approximately 8.2 million households, or 21.1% of the total number of addressable German households, are within Versatel's network coverage area.

REVENUES BY SEGMENT (FY 2007)

Residential segment49.1%

Business segment28.4%

Wholesale segment22.4%



Residential segment47.1%

Business segment18.4%

Wholesale segment34.5%


DEBT MATURITY PROFILE AS OF YE 2007


ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B+ Stable Mounting competitive pressures in Germany may gradually affect margins and cash flow generation

Moody's B2 Negative Weaker-than-expected operating performance in Q2 exhausted financial flexibility at the B1 rating level

Fitch n.r.

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

VERSTLFLOAT Float + 275 bp 6/15/2014

BBs/B2n/-- EUR 525 6/15/2008 (102)

BOND STRUCTURE

Versatel AG

Versatel West-Deutschland

GmbH

Senior SecuredFloating Rate Notesdue 2014 €525 million

RevolvingCredit Facility

€75 million

Vienna II PublicShareholders

Versatel NRWGmbH

56.5%43.5%

Additional SubsidiaryGuarantors

Non-Guarantor

Subsidiaries


Non-Guarantor

Subsidiaries


Non-Guarantor

Subsidiaries

SubsidiaryGuarantors


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PROFIT AND LOSS (VERSATEL AG)

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eSales 409.4 560.7 675.5 343.0 712.4 403.8 757.0 792.4 815.7Raw materials used -201.3 -242.8 -277.0 -139.6 -307.3 -185.6 -319.3 -327.2 -336.9Personnel costs -70.9 -81.9 -84.1 -45.0 -90.2 -51.2 -91.5 -100.0 -102.8EBITDA reported 78.5 142.0 181.3 83.9 171.3 97.2 204.0 218.2 224.0Depreciation and amortization -108.2 -138.9 -194.8 -114.9 -215.4 -97.8 -195.6 -178.3 -175.0Other operating income/expenses -58.7 -94.0 -133.1 -74.5 -143.6 -69.8 -142.2 -147.0 -152.0EBIT reported -29.7 3.1 -13.6 -31.0 -44.1 -0.6 8.4 39.9 49.0Interest result -25.0 -24.4 -56.1 -59.8 -46.8 -23.2 -45.8 -45.8 -45.8Other financial items -2.3 1.3 -9.0 6.0 -23.2 0.0 0.0 0.0 0.0EBT -57.0 -19.9 -78.6 -84.8 -114.2 -23.8 -37.4 -5.9 3.2Taxes on income -3.4 -9.4 26.4 20.3 25.2 1.9 6.8 0.3 -0.8Net income 20.1 -28.0 -52.2 -64.5 -89.0 -22.0 -30.6 -5.6 2.4


in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFixed assets n.a. 765 969 947 953 921 918 879 824 thereof goodwill n.a. 109 166 149 163 163 163 163 163Cash & cash equivalents n.a. 33 78 160 121 85 127 157 214Total assets n.a. 1,002 1,147 1,212 1,190 1,160 1,161 1,155 1,158Equity incl. minorities n.a. 348 56 393 360 345 330 324 327Financial liabilities n.a. 466 853 602 606 596 606 606 606 short term (<1 year) n.a. 39 16 10 8 7 8 8 8 long term (>1 year) n.a. 427 837 592 599 589 599 599 599Net working capital n.a. -58 -87 -97 -94 -71 -95 -92 -92

CASH FLOW

in EUR mn 2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eFFO (Funds from operations) n.a. n.a. 161 45 95 68 165 173 177Change in working capital n.a. n.a. -18 9 18 -29 1 -3 0Operating cash flow n.a. n.a. 144 54 114 39 166 170 177CAPEX n.a. n.a. -178 -92 -184 -70 -160 -140 -120Free cash flow n.a. n.a. -35 -38 -70 -32 6 30 57Dividends n.a. n.a. 0 0 0 0 0 0 0Acquisitions/disposals n.a. n.a. -118 -10 4 0 0 0 0Share buy back/issues n.a. n.a. -8 394 394 0 0 0 0FCF after extraordinary items n.a. n.a. -161 347 327 -32 6 30 57

DEBT ADJUSTMENTS



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PROFITABILITY RATIOS (VERSATEL AG)

2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA margin rep. 19.2% 25.3% 26.8% 24.5% 24.0% 24.1% 26.9% 27.5% 27.5%EBITDA margin adj. 20.6% 27.1% 34.5% 30.2% 32.2% 28.8% 32.0% 32.4% 32.1%EBIT margin rep. -7.3% 0.6% -2.0% -9.0% -6.2% -0.2% 1.1% 5.0% 6.0%EBIT margin adj. -6.4% 1.1% -1.2% -8.2% -5.3% 0.7% 2.0% 5.9% 6.8%Return on capital (before tax) -7.1% -2.6% -7.7% -10.5% -9.4% -3.9% -4.0% -0.6% 0.3%


2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eEBITDA rep. 79 142 181 84 171 97 204 218 224EBITDA adj. 85 152 233 103 229 116 242 256 262FFO rep. n.a. 127 161 45 95 68 165 173 177FFO adj. n.a. 134 177 53 127 84 197 204 209Net debt rep. n.a. 433 775 441 486 511 479 449 392Net debt adj. n.a. 466 857 523 580 606 574 544 487Total debt n.a. 466 853 602 606 596 606 606 606EBITDA net interest cover rep. n.a. 5.8 3.2 1.4 3.7 4.2 4.5 4.8 4.9EBITDA gross interest cover rep. n.a. 5.8 3.2 1.4 3.2 3.8 4.5 4.8 4.9EBIT net interest cover rep. n.a. 0.1 -0.2 -0.5 -0.9 0.0 0.2 0.9 1.1EBIT net interest cover adj. n.a. 0.2 -0.1 -0.4 -0.7 0.1 0.3 0.9 1.1FFO rep. / total debt rep. n.a. 27.3% 18.9% 34.3% 15.7% 19.8% 27.2% 28.5% 29.3%FFO rep. / net debt rep. n.a. 29.4% 20.8% 46.8% 19.6% 23.0% 34.4% 38.4% 45.3%FFO adj. / net debt adj. n.a. 28.8% 20.6% 44.0% 21.8% 26.0% 34.2% 37.5% 42.9%FOCF rep. / total debt rep. n.a. -19.3% -4.1% 1.3% -11.6% -24.9% 1.0% 5.0% 9.5%FOCF rep. / net debt rep. n.a. -20.8% -4.5% 1.8% -14.5% -29.1% 1.3% 6.7% 14.6%RCF rep. / net debt rep. n.a. 29.4% 20.8% 46.8% 19.6% 23.0% 34.4% 38.4% 45.3%RCF adj. / net debt adj. n.a. 28.8% 20.6% 44.0% 21.8% 26.0% 34.2% 37.5% 42.9%Total debt rep. / EBITDA rep. n.a. 3.3 4.7 2.3 3.5 3.2 3.0 2.8 2.7Net debt rep. / EBITDA rep. n.a. 3.0 4.3 1.7 2.8 2.8 2.3 2.1 1.7Net debt adj. / EBITDA adj. n.a. 3.1 3.7 1.6 2.5 2.5 2.4 2.1 1.9FFO rep. / net interest rep. n.a. 6.2 3.9 1.8 3.0 3.9 4.6 4.8 4.9FFO rep. / gross interest rep. n.a. 6.2 3.9 1.8 2.8 3.7 4.6 4.8 4.9Capex / sales n.a. 27.3% 26.4% 26.8% 25.8% 17.4% 21.1% 17.7% 14.7%Capex / depreciation n.a. 110.2% 91.5% 80.1% 85.4% 71.9% 81.8% 78.5% 68.6%

CAPITAL STRUCTURE

2004 2005 2006 H1 07 2007 H1 08 2008e 2009e 2010eTotal debt / capitalization rep. n.a. 57.3% 93.9% 60.5% 62.7% 63.3% 64.8% 65.2% 65.0%Net debt / net capitalization rep. n.a. 55.4% 93.3% 52.9% 57.4% 59.7% 59.2% 58.1% 54.5%Net debt / net capitalization adj. n.a. 57.2% 93.9% 57.1% 61.7% 63.7% 63.5% 62.7% 59.8%Net working capital / sales n.a. -10.4% -12.8% -9.6% -13.2% -9.1% -12.6% -11.7% -11.3%Fixed assets / sales n.a. 136.5% 143.4% 92.9% 133.8% 119.2% 121.2% 111.0% 101.1%


Comment 2008e 2009e 2010eSales growth Depressed by fierce price competition 6.3% 4.7% 2.9%EBITDA growth Improvement due to 30+ program 19.1% 7.0% 2.7%EBIT growth Improvement due to 30+ program -119.0% 375.0% 22.8%Capex incl. acquisition Company guidance in 2008; thereafter declining NGN investments 160 140 120Change in working capital Assumed to be negligible 1 -3 0Funds from operations (FFO) Benefiting from improving EBITDA 165 173 177


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Virgin Media (HOLD) Investment rationale We keep our hold recommendation for the VMED 8.75% 04/14 bond. We view the

improving operating performance of VMED as positive, while we remain cautious with regardto 2008, as Virgin will have to prove the sustainability of the positive development in its KPIs. Overall, we keep our neutral stance on VMED's CDS, while 1Y survival trades appearrelatively safe.

In the short term, we assume that event risk is relatively low. The company's share pricedevelopment might also be depressed by the uncertainty regarding the scheduled repaymentsdue in 2010. If this issue could be tackled via the disposal of Content assets, this would benefit the share price as well as bond prices. However, there is high uncertainty with regard to the disposal of the Content assets due to the current market environment.

In the medium term, we expect event risk to continue to be the main driver for VMED's CDSspreads, while we view bondholders as comparatively well protected by the bond indenture. Event risk could stem from potential asset disposals and combined shareholder remunerationmeasures, acquisitions, e.g. ITV (Virgin Media is appealing the regulator's decision regardingBSKYB and ITV) and a potential sale of the company, which was already intended in H1 2007, but then called off due to market conditions.

Recent developments On April 16, Virgin Media announced that it had raised USD 1 bn in convertible bondsdue 2016 (including a 30-day over-allotment option of up to USD 150 mn in additional notes). The cash proceeds from these bonds were used for the early redemption of the GBP261 mn tranche A (due in September 2009) and the GBP 243 mn tranche B (due September2012) loans under its senior credit facilities. This is the second refinancing of near- to medium-term maturities after the term loan B drawdown in April 2007 and indicates that thecompany's FCF is not able to cope with medium-term amortizations (of about GBP 1.0 bn in 2010) if EBITDA and free operating cash flow do not grow at a sufficient rate in coming years. Another possibility to tackle the repayments is via asset disposals. VMED is rumored to beconsidering the sale of its content business including the JV, called UKTV, with the BBC.Thus, VMED might be able to address remaining liquidity doubts of investors, which may also weigh on the company's equity valuations. Given that the Content business contributed just1% of the company's EBITDA in FY 2007, the potential disposal proceeds (e.g. for its cablechannels BSkyB was rumored to consider a GBP 600 mn bid) would significantly reduceindebtedness and repayment concerns.

VIRGIN MEDIA: NO SIGNIFICANT OCF CONTRIBUTION FROM THE CONTENT BUSINESS

Revenue development OCF development

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Latest results recap On August 7, Virgin Media released decent Q2 2008 results with EBITDA aboveexpectations, while KPIs remained solid despite some seasonal weakness. Total revenues declined to GBP 990.5 mn (consensus estimate of GBP 991 mn) from GBP 1,001.8 m in Q1 2008 and GBP 995.0 mn in Q2 2007. The sequential decrease was mainly due toseasonally reduced Cable and Content revenues. The year-on-year decrease was mainly due to reduced Consumer revenues due to lower ARPU (GBP 41.63 in Q2 2008 compared to GBP 41.91 in Q1 2008 or GBP 42.16 in Q2 2007). The sequential ARPU decline is due to a continuing shift of existing customers to lower priced bundles partly offset by cross-selling and up-selling. All in all, the top-line development was in line with expectations in Q2 2008. OCF (~EBITDA) increased quite strongly y-o-y by 5.6% to GBP 332.9 mn (consensus estimate of GBP 322 mn) and q-o-q up by 2.7%. Year-on-year OCF benefited mainly due to a reduction in branding/marketing expenses and cost savings in the Cable segment. Quarter-on-quarter OCF mainly benefited from the mobile business.

VIRGIN MEDIA

Slowly improving operating performance … … despite declining ARPUs and customer losses

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PU

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Net customer adds ARPU


VIRGIN MEDIA: KEY PERFORMANCE INDICATORS

Subscribers are slowly rising … …while churn is at a very low level

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Customers (RS)Penetration (Homes marketable) (LS)% of triple plays (LS)Broadband (LS)

1.0%

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Monthly customer churn (LS) RGU per Customer (RS)


Despite the fact that the second quarter traditionally is the weakest quarter for gross additions, net customer disconnections amounted to 19.5k in Q2 2008, which, however,

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compares quite favorably with Q2 2007 of 70.3k, suffering from the "Sky channel removal effect". Moreover, the quality of the customer seems to improve, as the number of RGUs per customer continues to rise steadily. As usual, gross additions are expected to be higher in thesecond half of the year than the first.

In this context, we want to point out in particular the strong y-o-y decline in churn to 1.3% compared to 1.2% in Q2 2007, while q-o-q churn modestly increased seasonally from 1.2% in Q1 2008. The churn development was positively influenced by the successful up-selling and marketing efforts, as triple play penetration reached a record high with 53.1%. Total net cable RGUs increased by 82.8k versus 154.2k in Q1 2008 and minus 8.9k in Q2 2007. The totalnumber of RGUs per customer continued to steadily increase to 2.36 compared to 2.32 in Q12008.

Liquidity The company's liquidity situation appears to be sufficient for the next 12-18 months at least. As of the end of Q2 2008, Virgin Media had cash/cash equivalents of GBP 432.8 mn onits balance sheet compared to GBP 288.3 mn in Q1 2008. We estimate that the companymight generate FCF of GBP 270-350 mn annually in 2008 and 2009. Virgin Media has the next significant debt maturities under its syndicated bank loan in March 2010 (GBP 526 mn).


As usual, the company gave only very little guidance regarding its outlook. Virgin Media indicated that the broader economic environment in the UK became more challenging andthat it has seen some impact on gross customer additions, while the business has showngood resilience as it reduced customer disconnects and is improving efficiency and product development. VM's management aims to stabilize the company's performance in 2008. TheARPU is expected to stabilize for the rest of 2008, as the company continues to effectivelyuse cross-selling and up-selling to mitigate pricing pressure and raised prices in June 2008. "Some" revenue growth should stem from RGU growth in combination with reduced churn,while OCF should benefit from cost savings. Accrued capex for full-year 2008 is expected to be between 13-15% of sales.

Due to strong FCF generation, net debt declined to GBP 5,586.5 mn in Q2 2008 from GBP5,726.3 mn in Q1 2008. Virgin's reported leverage (net debt to annualized OCF) was downq-o-q to 4.2x from 4.4x. While we expect the company's leverage to remain relatively stable in2008 unless it benefits from asset disposals, a further positive EBITDA development couldlead to stronger-than-expected leverage reduction.

Model assumptions/risks We base our forecast on the following major assumptions: a) Revenues of GBP 4,135-4,200 mn (low single-digit organic revenue growth in 2008-2009; b) Adjusted EBITDA in FY 2007-2009 of GBP 1,280 to 1,320 mn; c) Capex-to-sales ratio of around 13%.

Key risks to our model estimates: Potential M&A activity, following the failed ITV bid and the ongoing quarrel with Sky, is not factored into our model. Moreover, if market conditionsimprove, we expect the risk of a leveraged buyout sale of VMED will resurface. The operatingperformance could be unexpectedly hit by increasing competition resulting in ARPU andsubscriber number declines.

Things to watch ● ARPU, churn and customer net adds development, as indicators for the level of

competition; M&A activity, potential secondary LBO; November 8: Q3 2008 results


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CAPITALIZATION

Senior Credit Facilities Borrower Virgin Media Investment Holdings Ltd. and other permitted borrowers Senior Credit Facility Initial Amount (in mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Tranche A GBP 3,525 2011 Sept 2007 LIBOR+1.875% (margin grid) n.a. Tranche B GBP 1,340 2012 LIBOR +2.06% n.a. Tranche C GBP 300 2013 LIBOR +2.75% n.a. Revolving Credit Facility GBP 100 2011 n.a. LIBOR+ 1.875% (margin grid) n.a. Notes Issuer Virgin Media Finance Plc Senior Notes GBP 375 04/14 Bullet 9.75% Senior Notes USD 425 04/14 Bullet 8.75% Senior Notes EUR 225 04/14 Bullet 8.75% Senior Notes USD 550 08/16 Bullet 9.125% Other Indebtedness Capital lease obligations of GBP 190 mn Available Credit Lines GBP 100 mn under RCF, undrawn as of June 30, 2008


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BOND DOCUMENTATION – VMED EUR 225 MN 8.75% 2014 / GBP 375 MN 9.75% 2014 / USD 425 MN 8.75% 2014

Issuer Virgin Media Finance Plc Call/Put Call Schedule On or after April 15, 2009: 104.375%; 2010: 102.92%; 2011: 101.46%; 2012 and thereafter: 100% Equity claw back Prior to April 15, 2007 up to 40% at 108.75% Make whole clause Prior to April 15, 2009, Bund plus 50 bp Change of control 101% (if more than 50% of the total voting power) Guarantees Senior unsecured guarantee by NTL investment Holdings Limited and the issuer. Security Notes and guarantees are unsecured obligations of the issuer and subsidiary guarantees Ranking – Subordinated to all existing and future senior indebtedness of the issuer

– Equal to any future senior subordinated indebtedness of the issuer Certain Covenants Limitation on Debt Leverage ratio of at least 5.5x

Most important carve-out/exceptions: – Bank indebtedness up to GBP 2,667.5 mn, to be increased by of up to GBP 1.250 mn Merger related

indebtedness – Capital lease obligations not exceeding the greater of GBP 150 mn or 2.75% of total assets – Securitization of receivables not exceeding GBP 100 mn – General Basket not exceeding GBP 150 mn or 3.0% of total assets

Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of the consideration is in the form of cash/cash equivalents. Proceeds to be applied for the purchase of additional assets or is at 100% within 360 days applied for repayment of indebtedness.

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of: – following two quarters of positive net income 50% of consolidated net income (minus 100% of such deficit), – Equity proceeds; – Conversion of debt to equity proceeds, – Amount equal to net reduction in restricted investments resulting from repurchase, sale, repayments of loans or

re-designation of unrestricted subsidiaries as restricted subsidiaries Most important carve-out/exceptions: – Purchase or redemption of capital stock in connection with provisions under employee stock options not

exceeding GBP 10 mn in any calendar year´ – Investments up to GBP 15 mn, if Broadcast Business subsidiary is declared unrestricted subsidiary – General Basket GBP 75 mn

Limitations on Transactions with Affiliates Board approval if transaction greater than GBP 25 mn Fairness opinion if transaction greater than GBP 50 mn Most important carve-out/exceptions: Loans to employees and management not exceeding GBP 10 mn



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Business Description – Virgin Media Group Virgin is the largest cable operator in the UK, offering voice, data and video/television as well as mobile telephone services ("quadruple play") to residential, business and wholesale customers. By customer numbers, the company is the U.K.’s largest residential broadband and mobile virtual network operator and the second largest provider in the U.K. of pay television and fixed line telephone services.


Cable76.1%

Mobile15.1%

Content8.8%



Cable90.5%

Mobile8.5%

Content1.0%



<1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years >5 yearsFinancial debt 29 267 1,106 966 2,168 1,422

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B+ Positive Up: deleveraging below 4x adj. debt/EBITDA, increasing FOCF

Moody's Ba3 Negative Up: EBITDA margins > 35%, debt to EBITDA below 4x; Down: Debt/EBITDA >5.5x

Fitch BB- Stable Stabilisation of VM’s operational performance despite the highly competitive market environment

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

VMED 8.75% 4/15/2014

B-/B2/B EUR 225 4/15/2009 (104.38)

BOND STRUCTURE

Virgin Media Inc.

Intermed. holding companies(incl. Virgin Media Holdings Inc.)

Virgin Media Investment Holdings Ltd

Noteholders

Virgin MediaHoldings (UK) LtdVirgin Media Ltd Telewest UK Ltd

Virgin Media Finance Plc


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PROFIT AND LOSS (VIRGIN MEDIA GROUP)

in GBP mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 1,887.4 2,000.3 1,947.6 3,602.2 2,016.9 4,073.7 1,992.3 4,134.8 4,196.8Raw materials used -788.9 -827.7 -808.3 -1,572.8 -884.4 -1,830.0 -895.3 -1,778.0 -1,783.7Personnel costs -500.8 -502.2 -483.0 -906.9 -511.5 -960.2 -439.9 -1,025.4 -1,040.8EBITDA reported 575.4 646.6 631.5 1,055.5 606.3 1,254.8 654.2 1,277.7 1,317.8Depreciation and amortization -769.8 -699.1 -651.2 -1,045.7 -618.6 -1,238.2 -991.9 -1,166.0 -1,175.1Other operating income/expenses -22.3 -23.8 -24.8 -67.0 -14.7 -28.7 -2.9 -53.8 -54.6EBIT reported -194.4 -52.5 -19.7 9.8 -12.3 16.6 -337.7 111.6 142.7Income from investments 0.0 0.0 0.0 12.5 12.5 17.7 9.0 12.5 12.5Interest result -446.3 -265.2 -206.4 -422.7 -231.8 -494.7 -231.1 -440.0 -430.0Other financial items 34.1 -186.7 4.2 -121.6 3.0 -0.6 0.5 -15.0 -15.0Discontinuing operations 21.9 24.5 662.7 0.0 0.0 0.0 0.0 0.0 0.0EBT -606.6 -504.4 -221.9 -522.0 -228.6 -461.0 -559.3 -330.9 -289.8Extraordinary result 0.0 0.0 0.0 -24.7 0.0 0.0 0.0 0.0 0.0Taxes on income -0.1 -5.0 -18.8 11.8 -10.7 -2.5 7.9 -35.0 -35.0Net income -606.7 -485.0 -240.7 -534.9 -239.3 -463.5 -551.4 -365.9 -324.8


in GBP mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 9,601 4,912 3,738 10,035 9,733 9,329 8,639 8,937 8,337 thereof goodwill 539 201 193 2,517 2,509 2,488 2,117 2,488 2,488Cash & cash equivalents 796 153 836 425 283 328 433 328 328Total assets 11,173 5,493 4,989 11,244 10,881 10,466 9,966 10,065 9,465Equity incl. minorities 3,698 1,575 1,956 3,230 3,049 2,811 2,270 2,645 2,320Financial liabilities 5,731 3,014 2,280 6,159 6,093 5,959 6,024 5,716 5,421 short term (<1 year) 2 61 1 142 30 29 33 29 29 long term (>1 year) 5,728 2,953 2,279 6,017 6,063 5,929 5,990 5,687 5,391Net working capital 160 -379 -305 -887 -717 -752 -711 -769 -789

CASH FLOW

in GBP mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) 567 381 468 629 365 852 420 800 850Change in working capital -46 -130 -142 173 -141 -119 -41 17 20Operating cash flow 521 250 326 802 224 732 379 817 871CAPEX -328 -275 -288 -555 -286 -536 -233 -545 -525Free cash flow 193 -24 38 247 -62 196 146 272 346Dividends 0 0 0 -9 -8 -21 -13 -30 -50Acquisitions/disposals 0 -18 1,448 -2,421 6 10 2 0 0Share buy back/issues 807 0 -109 39 4 15 1 0 0FCF after extraordinary items 1,000 -42 1,377 -2,144 -60 200 135 242 296

DEBT ADJUSTMENTS

in GBP mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions n.a. 58 31 27 31 27 27 27 27For operating leases 218 218 218 263 263 263 263 263 263Others* 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (VIRGIN MEDIA GROUP)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 30.5% 32.3% 32.4% 29.3% 30.1% 30.8% 32.8% 30.9% 31.4%EBITDA margin adj. 32.7% 34.4% 34.6% 32.6% 32.1% 32.8% 34.3% 32.2% 32.7%EBIT margin rep. -10.3% -2.6% -1.0% 0.3% -0.6% 0.4% -17.0% 2.7% 3.4%EBIT margin adj. -9.1% -1.5% 0.1% 2.9% 0.8% 1.8% -16.1% 3.3% 4.0%Return on capital (before tax) -6.8% -6.9% -5.3% -4.4% -2.7% -5.5% -6.5% -3.9% -3.7%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 575 647 632 1,056 606 1,255 654 1,278 1,318EBITDA adj. 618 689 674 1,176 648 1,337 684 1,331 1,371FFO rep. 567 381 468 629 365 852 420 800 850FFO adj. 588 401 489 656 379 878 434 827 877Net debt rep. 4,935 2,861 1,445 5,735 5,810 5,631 5,591 5,388 5,092Net debt adj. 5,153 3,137 1,693 6,025 6,104 5,922 5,881 5,679 5,383Total debt 5,731 3,014 2,280 6,159 6,093 5,959 6,024 5,716 5,421EBITDA net interest cover rep. 1.3 2.4 3.1 2.5 2.6 2.5 2.8 2.9 3.1EBITDA gross interest cover rep. 1.3 2.4 2.7 2.3 2.5 2.4 2.7 2.9 3.1EBIT net interest cover rep. -0.4 -0.2 -0.1 0.0 -0.1 0.0 -1.5 0.3 0.3EBIT net interest cover adj. -0.4 -0.1 0.0 0.2 0.1 0.1 -1.3 0.3 0.4FFO rep. / total debt rep. 9.9% 12.6% 20.5% 10.2% 16.3% 14.3% 15.1% 14.0% 15.7%FFO rep. / net debt rep. 11.5% 13.3% 32.4% 11.0% 17.1% 15.1% 16.2% 14.9% 16.7%FFO adj. / net debt adj. 11.4% 12.8% 28.9% 10.9% 16.8% 14.8% 15.9% 14.6% 16.3%FOCF rep. / total debt rep. 3.4% -0.8% 1.7% 4.0% 18.2% 3.3% 1.8% 4.8% 6.4%FOCF rep. / net debt rep. 3.9% -0.8% 2.6% 4.3% 19.1% 3.5% 2.0% 5.1% 6.8%RCF rep. / net debt rep. 11.5% 13.3% 32.4% 10.8% 16.8% 14.7% 15.7% 14.3% 15.7%RCF adj. / net debt adj. 11.4% 12.8% 28.9% 10.7% 16.6% 14.5% 15.4% 14.0% 15.4%Total debt rep. / EBITDA rep. 10.0 4.7 3.6 5.8 5.1 4.7 4.6 4.5 4.1Net debt rep. / EBITDA rep. 8.6 4.4 2.3 5.4 4.9 4.5 4.3 4.2 3.9Net debt adj. / EBITDA adj. 8.3 4.6 2.5 5.1 4.6 4.4 4.3 4.3 3.9FFO rep. / net interest rep. 2.3 2.4 3.3 2.5 2.6 2.7 2.8 2.8 3.0FFO rep. / gross interest rep. 2.2 2.4 3.0 2.4 2.5 2.7 2.7 2.8 3.0Capex / sales 17.4% 13.7% 14.8% 15.4% 14.2% 13.2% 11.7% 13.2% 12.5%Capex / depreciation 42.6% 39.3% 44.2% 53.1% 46.3% 43.3% 23.5% 46.7% 44.7%

CAPITAL STRUCTURE

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eTotal debt / capitalization rep. 60.8% 65.7% 53.8% 65.6% 66.6% 67.9% 72.6% 68.4% 70.0%Net debt / net capitalization rep. 57.2% 64.5% 42.5% 64.0% 65.6% 66.7% 71.1% 67.1% 68.7%Net debt / net capitalization adj. 58.2% 67.4% 46.8% 65.3% 66.9% 68.0% 72.4% 68.4% 70.1%Net working capital / sales 8.5% -18.9% -15.7% -24.6% -17.4% -18.5% -17.6% -18.6% -18.8%Fixed assets / sales 508.7% 245.6% 191.9% 278.6% 236.0% 229.0% 213.3% 216.2% 198.7%


Comment 2008e 2009eSales growth Low top-line growth driven by challenging market environment 1.5% 1.5%EBITDA growth Mainly top-line driven; small margin improvements 1.8% 3.1%EBIT growth Mainly top-line driven; small margin improvements 572.5% 27.8%Capex incl. acquisition Modestly declining capex due to low top-line growth 545 525Change in working capital W/C build up in line with growth 17 20Funds from operations (FFO) Mainly top-line driven; small margin improvements 800 850


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Wind Hellas Telecommunications S.A. (SELL) Investment rationale We keep our sell recommendation for HELLAS bonds and remain neutral on its CDS

due to the company's tight liquidity situation and modest deleveraging prospects in2008 and 2009, assuming unchanged conditions in the Greek telecoms market.Moreover, increasing competition in the Greek telecoms market from Vodafone andOTE/Cosmote/Deutsche Telekom is a potential risk for EBITDA margin pressure and risingleverage. Finally, slowing subscriber growth and continuous regulatory pressure on mobile termination rates, i.e. ARPUs, is likely to depress the EBITDA development. We keep ourneutral stance on the company's 5Y CDS, which trades clearly above 1,000 bp, making it expensive to take short positions over a couple of months time, which would be needed to make the potential operating underperformance visible.

Recent developments On August 28, Wind Hellas announced a merger with Tellas S.A., which should enable the new entity to further optimize synergies between the two companies. The merger, which is subject to certain approvals, will be preceded by an increase in the share capital of Tellas ofEUR 20 mn equally contributed by its existing shareholders (EUR 10 mn from WindTelecomunicazioni). The capital contributions in Tellas S.A. were to take place prior to August 31, 2008, while the merger process is expected to be completed by the end of December 2008. The share capital increase will enable it to receive governmental subsidies ofapproximately EUR 25 mn, according to Wind Hellas. Wind Telecomunicazioni will receive equity of Hellas I in exchange for its 49% stake in Tellas.

Latest results recap On August 28, Wind Hellas Telecommunications S.A. (Hellas Telecommunications II)released weak Q2 2008 results with a disappointing EBITDA development. In Q4 2007, Tellas was for the first time consolidated in the results of Hellas II, which impacts the timeseries comparison and makes a separate time series comparison of old Hellas (excludingTellas) and Tellas more meaningful. Revenues and EBITDA of the total Wind Hellas Group declined by 2.9% and 13.4% to EUR 316.4 mn and EUR 101.8 mn, respectively. In total, theHellas II adjusted EBITDA performance fell short of the company's own budget (-9%) with EUR 101.8 mn. The main driver for the underperformance stemmed from lower revenues from interconnection traffic and tariff and lower outgoing revenues both from contract andprepaid customers.

OPERATING PERFORMANCE

WIND Hellas excl. Tellas Tellas

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Operating performance of Hellas II excluding Tellas

At Hellas II excluding Tellas, pro-forma revenues declined by 2.9% y-o-y to EUR 286.0 mn. EBITDA fell by 5.5% y-o-y to EUR 109.3 mn. The sales decline mainly stems from the decline in interconnection rate, which were impacted by regulatory cuts in June 2007 and February2008. The ARPU declined from EUR 21.9 to EUR 19.9. The sales decline was partially offset by subscriber growth y-o-y of 452k to 4,836k. Subscriber net adds increased y-o-y and also strongly q-o-q to 257k.

WIND HELLAS KEY PERFORMANCE INDICATORS (KPI)

Mobile subscribers versus subscriber net adds ARPU development

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Tellas: Operating performance Revenues of Tellas declined y-o-y by 2.2% at EUR 30.4 mn in Q2 2008. Adjusted EBITDA was negative with EUR 7.5 mn (Q1 2008: EUR 2.4 mn) compared to a modestly positiveadjusted EBITDA of EUR 1.9 mn in Q2 2007. At Tellas, the top-line decline was mainly driven by a moderate y-o-y ARPU decrease from EUR 10.8 to EUR 10.6 in Q2 2008, while theaverage customer number declined to 782k from 887k, while remaining almost stable q-o-q. In contrast to Q1 2008, the adjusted EBITDA showed an expected loss, reflecting the build-up costs of this business.

Liquidity As a result of Tellas' anticipated negative EBITDA in 2008 (EUR 27 mn expected byWIND Hellas) and hence the lower group EBITDA guidance (of EUR 460 mn) combinedwith the full capex funding for Tellas, the WIND Hellas Group is likely to be free cash flow negative in 2008. WIND Hellas Group admitted that it might generate a small negativeFCF (EUR 25-30 mn) in 2008, depending on its working capital developments (assumed to be at least neutral). We expect that the company's FCF could be minus EUR 35 mn, taking EUR 190 mn in net cash flow from operations and capex of EUR 225 mn into consideration. Thisindeed assumes a negligible working capital development in 2008. Furthermore, WIND Hellasaims to refinance EUR 70 mn of former Tellas debt (which was repaid through the drawdown under the revolving credit facility of WIND Hellas) at the Tellas level with the possible timing ofthis uncertain, which currently limits available liquidity under the group's existing revolvingcredit facility (RCF).

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The liquidity situation of the company is likely to tighten further in 2008, even though itshould benefit from the above-mentioned measures regarding Tellas and the potential inflow of EUR 35 mn. We draw some comfort from the following: First, the current liquidity buffer (in our view) appears to be sufficient over the next 12 months (ceteris paribus). Second,we expect that Weather Investments (not rated) and/or WIND Telecomunicazioni (Ba3s/BB-s/BB-s) would support WIND Hellas in case of liquidity problems. As of June 30, 2008, Wind Hellas had EUR 40.5 mn of cash and cash equivalents. Its RCF in the amount of EUR 250 mnwas drawn with EUR 200 mn. Consequently, the company had available liquidity of in totalEUR 90.5 mn (EUR 40.5 mn of cash and cash equivalents plus EUR 50 mn of undrawn RCF). The financial flexibility was reduced by EUR 17.5 mn in Q1 2008 and by EUR 32.1 mn in Q22008 due to negative free cash flow.


Wind Hellas provided the following company outlook for 2008: It plans to generate adjusted EBITDA and capex of EUR 460 mn and EUR 225 mn (EUR 67 mn for Tellas). At the end of Q2 2008, reported total debt to EBITDA was 6.5x compared to 6.1x in Q1 2008, which suffered from the EBITDA decline. As already stated, we expect that the company will be FCF negative in 2008 (up to EUR 35 mn). Hence, given the assumed slight y-o-y decline in adjusted EBITDA (EUR 460 mn) and potentially negative FCF, we believe that leverage willbe at around 6.35x at YE 2008, while WIND Hellas expects that its leverage will basically beflat in 2008 and might "slightly" deleverage in 2009.

We believe that Wind Hellas' EBITDA guidance appears relatively optimistic, given thatmarket conditions might worsen in 2008. Mobile termination rate cuts might be higher than in 2007. Despite the fact that MTRs were cut by about 11% (January 2007), 9% (June 2007) and 11% (February 2008) in Greece, the head of the National Greek Telecommunications andPosts Commission, Nikitas Alexandridis, stated in early June 2008 that termination rates for mobile-phone calls are (still) unacceptably high, indicating that (maybe as early as by autumn)a further (significant) MTR reduction can be expected. While MTR cuts have only a moderateimpact on the contract ARPU, they have a significant impact on the ARPU of prepaidsubscribers, which account for the majority of customers in the market (approx. 71% ofregistered subscribers). In addition, Cosmote appears to be quite aggressive with respect toits initiatives to acquire new subscribers. Hence, further declining ARPUs are likely and wouldlead to pressure on EBITDA. In addition, the whole situation might worsen if subscribergrowth would slow down. At the same time, the prospect of the company to build up its broadband business is at least questionable and expensive. Even in case it develops in linewith management's guidance, it appears unrealistic to expect a significant leverage decline inthe next 1-2 years.

Model assumptions/risks We base our forecasts on the following major assumptions: revenue growth potential of 11.9% and 3% in 2008 and 2009, respectively ; b) EBITDA margin of around 37%; c) Capexof EUR 225 mn in 2008 and EUR 190 mn in 2009;

Key risks to our model estimates are: a) Adverse regulatory measures; increasing competition and lower ARPUs; higher capex due to stronger competition or upgraderequirements; b) Changes in the shareholder structure.

Things to watch ● Liquidity development

● November (est.): Q3 2008 results


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CAPITALIZATION

Senior Credit Facilities Borrower Hellas Telecommunications (Luxembourg) V (Hellas V) Senior Credit Facility Initial Amount (in mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Revolving Facility EUR 250 04/12 2.25% (margin ratchet) 0.75% Security Obligations under the Revolving Credit Facility have the benefit of priority ranking security over substantially all of the assets of Hellas II, Hellas III, Hellas IV, Hellas V, Hellas VI and TIM Hellas. Covenants The RCF contains various covenants substantially similar to the covenants in the existing High Yield Indentures. In addition, the RCF contains financial covenants relating to the maintenance of certain ratios of net senior secured debt to consolidated EBITDA of Hellas II and certain of its subsidiaries. The ratio is tested quarterly and must not exceed 6x for the period ending June 30, 2007. The ratio ratchets down to 5.75:1 for the period ending December 31, 2007, to 5.5x for the period ending March 31, 2009 and to 5.25x for the period ending June 30, 2009 and for each subsequent period thereafter. Notes Issuer Hellas Telecommunications (Luxembourg) III and V and Hellas Telecommunications Finance

Senior Floater (Hellas II) EUR 960 01/15 Bullet Euribor plus 600 bp Senior Floater (Hellas II) USD 275 01/15 Bullet Libor plus 575 bp Senior Floater (Hellas V) EUR 1,122 10/12 Bullet Euribor plus 350 bp Senior Notes (Hellas III) EUR 355 10/13 Bullet Coupon 8.5% PiK Notes (Hellas Telecommunications Finance)

EUR 200 07/15 Bullet Euribor plus 800 bp

Available Credit Lines EUR 250 mn under RCF undrawn as of June 30, 2008 by Hellas V of which EUR 200 mn were drawn.


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BOND DOCUMENTATION – HELLAS FLOAT 12

Issuer Hellas Telecommunications (Luxembourg) V (Hellas V) Call/Put Call Schedule On or after October 15, 2007: 102.00%; October 15, 2008: 101.00%; October 15, 2009: 100.00% Equity claw back No Make whole clause No Change of control 101% Guarantees The Senior Secured Notes will be a general obligation of Hellas II and will be guaranteed by the following subsidiaries

of Hellas II: Hellas IV, Hellas VI, Troy GAC, TIM Hellas (to the extent only of amounts borrowed by Hellas V to refinance the existing indebtedness of TIM Hellas of EUR 166 mn).

Security The Senior Secured Notes and the Senior Secured Guarantees will be secured by Liens ranking junior to the priority liens securing the Revolving Credit Facility and certain hedging obligations over: a) substantially all of the assets of Hellas II, Hellas III, Hellas IV, Hellas V, Troy GAC and TIM Hellas; b) the right of Troy GAC to sell to Hellas II the pledged shares of Hellas III, Hellas V and Hellas VI (the ‘‘Put Right’’); c) and a first ranking security interest over the Escrow Account as defined below.

Ranking The Senior Secured Notes will be general obligations of Hellas V and will: – Rank pari passu in right of payment with all existing and future Indebtedness of Hellas V that is not subordinated

to the Senior Secured Notes; – Be senior in right of payment to any existing and future subordinated obligations of Hellas V; – Be effectively subordinated to any existing and future Indebtedness of Hellas V that is secured by Liens senior to

the Liens securing the Senior Secured Notes including borrowings under the Revolving Credit Facility or secured by property and assets that do not secure the Senior Secured Notes, to the extent of the value of the property and assets securing such Indebtedness.


Consolidated senior leverage ratio of less than 4.0x (incurrence covenant) Most important carve-out/exceptions: – Indebtedness under Credit Facilities/Refinancing not exceeding EUR 250 mn, less the amount of any permanent

repayments of such debt with proceeds from asset sales – Incurrence of CLO, mortgage finance, purchase money obligations not exceeding EUR 40 mn and 4% of total

assets – General Basket not exceeding the greater of EUR 40 mn and 4% of total assets


Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of the following if Hellas II can incur additional debt of EUR 1.00: – 50% of consolidated net income (minus 100% of such negative amount), equity proceeds; Conversion of debt to

equity proceeds, – Proceeds in case of disposition or repayment of any investment constituting a restricted payment (the lesser of the

return of capital with respect to such investment and the initial amount of such investment); Fair market value of the issuer's interest in any unrestricted subsidiary subsequently designated as a restricted subsidiary


EUR 7.5 mn annually while in case of unused amounts to be carried forward not to exceed EUR 15.0 mn – In case of an IPO, dividend payments are not allowed to exceed a) 6% of net cash proceeds or b) 7% of IPO

market capitalization if the consolidated leverage ratio will be ≤ 4.5x c) market capitalization if the consolidated leverage ratio will be ≤ 5.0x

– General Basket not exceeding EUR 30 mn Limitations on Transactions with Affiliates Board resolution if transaction greater than EUR 10 mn

Fairness opinion if transaction greater than EUR 20 mn Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering Yes


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BOND DOCUMENTATION – HELLAS 10/15/13

Issuer Hellas Telecommunications (Luxembourg) III (Hellas III) Call/Put Call Schedule On or after 10/15/2009: 104.25%; 10/15/2010: 102.125%; 10/15/2011 and thereafter: 100.00% Equity claw back Prior to October 15, 2008 up to 35% at 108.50% Make whole clause No Change of control 101% Guarantees Senior notes guaranteed on a senior subordinated basis by Hellas II and its subs. as follows: Hellas IV, Hellas VI; and

Troy GAC. TIM Hellas is currently not a guarantor of the senior notes. Upon the consummation of the merger between TIM Hellas and Troy GAC, the surviving entity will guarantee the senior notes and the guarantors of the senior secured notes/the senior notes will be the same.

Security The senior notes and the senior guarantees will be secured by liens ranking junior (the ‘‘Junior Liens’’) to the priority liens and the liens securing the senior secured notes over: all of the shares in Troy GAC and TIM Hellas owned by Troy GAC; all inter-company corporate bond loans owed to Hellas III; the bank accounts of Hellas III (England and Luxembourg) and Troy GAC (Greece); and security interest over an escrow account.

Ranking The Senior Notes will be general obligations of Hellas III and will: rank pari passu with all existing and future indebtedness not subordinated to the Senior Notes; be senior in right of payment to any existing and future subordinated obligations of Hellas III; be effectively subordinated to any existing and future indebtedness of Hellas III that is secured by Liens senior to the Liens securing the Senior Notes or secured by property and assets that do not secure the Senior Notes, to the extent of the value of the property and assets securing such debt be structurally subordinated to all liabilities (including trade payables), disqualified stock and preferred stock of any future subsidiary of Hellas II that is not itself issuer or a Guarantor.


Consolidated senior leverage ratio of less than 4.0x (incurrence covenant) Most important carve-out/exceptions: Indebtedness under Credit Facilities/Refinancing not exceeding EUR 250 mn, less the amount of any permanent repayments of such debt with proceeds from asset sales Incurrence of CLO, mortgage finance, purchase money obligations not exceeding EUR 40 mn and 4% of total assets General Basket not exceeding the greater of EUR 40 mn and 4% of total assets

Limitation on Sale of Certain Assets Consideration is at least equal to FMV and at least 75% consists of cash, replacement assets or assumed debt and is applied to debt reduction or invested in replacement assets (within 365 days). Excess Proceeds exceeding EUR 15 mn used to redeem notes and pari passu debt at par

Limitation on Restricted Payments Aggregate amount of restricted payments not to exceed the sum of the following if Hellas II can incur additional of EUR 1.00: 50% of consolidated net income (minus 100% of such negative amount), Equity proceeds; Conversion of debt to equity proceeds, Proceeds in case of disposition or repayment of any investment (the lesser of the return of capital with respect to such investment and the initial amount of such investment); Fair market value of the issuer’s interest in any unrestricted subsidiary subsequently designated as a restricted subsidiary (amount does not exceed amount of restricted payment deemed made when subsidiary was subsequently designated) Most important carve-out/exceptions: Repurchase of shares of capital stock or subordinated obligations not to exceed EUR 7.5 mn annually while in case of unused amounts to be carried forward not to exceed EUR 15.0 mn In case of an IPO, dividends are not allowed to exceed a) 6% of net cash proceeds or b) 7% of IPO market cap. if the consolidated leverage ratio <4.5x c) market cap. if the leverage ratio ≤ 5.0x General Basket not exceeding EUR 30 mn

Limitation on Transactions with Affiliates Board resolution if transaction greater than EUR 10 mn, Fairness opinion if >EUR 20 mn Fall away/ Suspension Covenants No Negative pledge Yes Anti Layering Yes


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Business Description – WIND Hellas WIND Hellas is one of the three largest mobile services operator in Greece. The company provides mobile telecommunications services, including voice, network access and related value-added services, to pre-paid and contract customers. WIND Hellas also utilizes UMTS technology to provide advanced mobile data services. WIND Hellas has a market share of slightly below 30% in the Greek mobile market. The company has a customer base of around 4.4 mn mobile subscribers. Through the acquisition of Tellas, WIND Hellas became the only fully integrated telecoms services provider in Greece besides the incumbent (OTE).

TOTAL REVENUES BY SEGMENT (FY 2007)

Wind Hellas91.0%

Tellas9.0%


ADJUSTED EBITDA BY SEGMENT (FY 2007)

467.2

-0.6

-100 0 100 200 300 400 500

Wind Hellas

Tellas

in EUR mn


DEBT MATURITY PROFILE AS OF MARCH 31, 2008

<1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years >5 yearsFinancial debt 3 3 3 3 1,407 1,525

ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P B Negative Weaker-than-expected liquidity from Tellas transaction. Exp. Net debt/EBITDA of >7.5x ; Down: deteriorating liquidity, lack of revenue growth

Moody’s B2 Negative High execution risk of Tellas’ business plan; outlook stabilized if performance shows evidence of achieving 2008 targets. Up: success in oper. business, decreasing Debt/EBITDA <6.0x

Fitch B Stable Reflecting the Tellas acquisition, postponing deleveraging

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

HELLAS Float + 350 bp 10/15/2012

Bn/B1n/B+s EUR 1,222.25

7/25/2008 (101)

HELLAS 8.5% 10/15/2013

CCC+n/ B3n/B+s EUR 355 4/15/2009 (104.25)


CCC+n/ Caa1n/ CCC+s

EUR 960 7/25/2008 (102)


CCC+n/n.a./ n.a. EUR 200 7/25/2008 (102)

BOND STRUCTURE

TIM Hellas

Hellas V

GAC II

Hellas IV

Hellas III1%99%

Hellas VI

PIK NotesHellas II Hellas Finance

Hellas I

Hellas

1% 99%

100%

Senior Notes

Hellas VII

Q-Telecom

Senior Sec. Notes

Revolving Credit Fac.


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PROFIT AND LOSS (WIND HELLAS)

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 808.5 829.1 489.0 1,100.0 560.5 1,216.0 619.3 1,360.3 1,401.1Cost of goods and services sold -331.4 -385.6 -226.3 -485.7 0.0 -529.2 -366.7 -598.5 -616.5Administration -303.1 -317.2 -187.2 -467.5 -485.0 -470.5 -186.5 -544.1 -546.4Other operating income/expenses -7.1 -5.3 -5.2 0.0 0.0 0.0 0.0 0.0 0.0EBITDA reported 275.7 243.6 136.5 332.1 183.3 422.9 194.7 424.2 444.7EBIT reported 166.9 121.1 70.3 146.8 75.5 216.4 66.1 217.7 238.2Adj. EBIT (bef. pension interest) 167.0 134.4 84.9 161.5 82.9 235.8 76.3 238.8 259.4Interest result -11.0 -8.5 -58.2 -176.2 -86.0 -259.5 -120.5 -259.5 -259.5Other financial items 0.2 -1.4 -41.0 0.0 0.0 0.0 0.2 0.0 0.0EBT reported 156.1 111.1 -28.9 -29.3 -10.5 -43.1 -54.2 -41.8 -21.3Taxes on income -63.4 -32.3 8.5 -26.2 -10.2 -28.1 -12.7 -10.0 -33.0Net income 91.6 78.8 -20.4 -55.5 -20.8 -71.2 -66.8 -51.8 -54.3


in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 795 813 1,784 2,138 2,093 2,327 2,264 2,368 2,375 thereof goodwill n.a. n.a. 610 772 772 962 n.a. 962 962Cash & cash equivalents 67 14 55 44 71 110 40 -48 -85Total assets 1,026 1,004 2,087 2,519 2,495 2,850 2,769 2,734 2,704Equity incl. minorities 402 480 18 -1,008 -1,029 -1,081 -1,150 -1,133 -1,187Shareholder loans 0 0 369 192 203 216 230 239 262Pension provisions 2 2 3 4 5 6 6 6 7Other provisions 108 68 144 192 200 192 229 192 192Financial liabilities 242 167 1,265 2,686 2,692 3,002 2,995 2,915 2,915 short term (<1 year) 75 1 0 0 7 88 96 0 0 long term (>1 year) 167 166 1,265 2,686 2,685 2,915 2,898 2,915 2,915Net working capital -98 -102 -51 -119 -97 -191 -21 -190 -190

CASH FLOW

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) 219 215 42 199 90 220 61 155 153Change in working capital 11 -69 -44 74 14 -3 -49 -1 0Operating cash flow 230 146 -2 273 103 217 12 155 153CAPEX -138 -141 -82 -148 -46 -164 -56 -225 -190Free cash flow 92 4 -84 125 57 53 -44 -70 -37Dividends -8 -8 0 0 0 0 0 0 0Acquisitions/disposals 0 0 0 -325 -13 -136 0 0 0Share buy back/issues 0 6 422 -1,204 0 0 0 0 0FCF after extraordinary items 84 2 338 -1,404 44 -83 -43 -70 -37

DEBT ADJUSTMENTS

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions 2 2 3 4 5 6 6 6 7For operating leases n.a. 132 144 144 144 191 199 208 208Others* 0 0 0 0 0 0 0 0 0


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PROFITABILITY RATIOS (WIND HELLAS)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 34.1% 29.4% 27.9% 30.2% 32.7% 34.8% 31.4% 31.2% 31.7%EBITDA margin adj. 34.1% 32.4% 33.5% 32.7% 35.1% 37.9% 34.8% 36.7% 37.1%EBIT margin rep. 20.6% 14.6% 14.4% 13.3% 13.5% 17.8% 10.7% 16.0% 17.0%EBIT margin adj. 20.7% 16.2% 17.4% 14.7% 14.8% 19.4% 12.3% 17.6% 18.5%Return on capital (before tax) 24.2% 17.4% 0.9% -1.7% 4.1% -2.2% 4.7% -2.3% -1.2%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 276 244 137 332 183 423 195 424 445EBITDA adj. 276 269 164 359 197 461 216 499 520FFO rep. 219 215 42 199 90 220 61 155 153FFO adj. 219 226 54 211 96 239 72 174 172Net debt rep. 175 153 1,209 2,642 2,621 2,892 2,954 2,962 2,999Net debt adj. 177 287 1,357 2,791 2,771 3,089 3,159 3,177 3,214Total debt 242 167 1,265 2,686 2,692 3,002 2,995 2,915 2,915EBITDA net interest cover rep. 25.0 28.7 2.3 1.9 2.1 1.6 1.6 1.6 1.7EBITDA gross interest cover rep. 22.5 25.9 2.3 1.9 2.1 1.6 1.2 1.6 1.7EBIT net interest cover rep. 15.1 14.3 1.2 0.8 0.9 0.8 0.5 0.8 0.9EBIT net interest cover adj. 15.1 6.2 1.2 0.8 0.9 0.8 0.6 0.9 0.9FFO rep. / total debt rep. 90.7% 128.6% 3.3% 7.4% 6.3% 7.3% 6.4% 5.3% 5.3%FFO rep. / net debt rep. 125.2% 140.5% 3.5% 7.5% 6.5% 7.6% 6.5% 5.2% 5.1%FFO adj. / net debt adj. 124.0% 78.8% 4.0% 7.6% 6.6% 7.7% 6.8% 5.5% 5.4%FOCF rep. / total debt rep. 38.2% 2.6% -6.6% 4.6% 6.8% 1.8% -1.6% -2.4% -1.3%FOCF rep. / net debt rep. 52.7% 2.8% -6.9% 4.7% 7.0% 1.8% -1.6% -2.4% -1.2%RCF rep. / net debt rep. 120.5% 135.0% 3.5% 7.5% 6.5% 7.6% 6.5% 5.2% 5.1%RCF adj. / net debt adj. 119.3% 75.9% 4.0% 7.6% 6.6% 7.7% 6.8% 5.5% 5.4%Total debt rep. / EBITDA rep. 0.9 0.7 9.3 8.1 7.4 7.1 6.9 6.9 6.6Net debt rep. / EBITDA rep. 0.6 0.6 8.9 8.0 7.2 6.8 6.8 7.0 6.7Net debt adj. / EBITDA adj. 0.6 1.1 8.3 7.8 7.1 6.7 6.6 6.4 6.2FFO rep. / net interest rep. 20.9 26.3 1.7 2.1 2.0 1.8 1.5 1.6 1.6FFO rep. / gross interest rep. 18.9 23.8 1.7 2.1 2.0 1.8 1.4 1.6 1.6Capex / sales 17.0% 17.0% 16.7% 13.5% 8.3% 13.5% 9.0% 16.5% 13.6%Capex / depreciation 126.5% 115.3% 123.4% 79.9% 43.0% 79.4% 43.5% 109.0% 92.0%

CAPITAL STRUCTURE



Comment FY 2008 FY 2009Sales growth Revenue growth in 2008 impacted by Tellas acquisition 11.9% 3.0%EBITDA growth Mainly revenue driven plus cost reductions 0.3% 4.8%EBIT growth Mainly revenue driven plus cost reductions 0.6% 9.4%Capex incl. acquisition Slightly declining 225 190Change in working capital Almost flat Working capital development assumed -1 0Funds from operations (FFO) Top line growth driven 155 153


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Wind Telecomunicazioni SpA (BUY) Investment rationale On September 5, we changed our hold recommendation to buy for the WINDIM 9.75%

12/1/2015 bond, which we view as being part of a defensive HY portfolio in the current volatile market environment. However, we remain neutral on the CDS, as we think that theongoing deleveraging could lead to a request to refinance the PiK loans at the WindTelecomunicazioni SpA level. All in all, Wind’s Q2 2008 results confirmed the positive operating trend of the past. Moreover, Wind does not seem to be an active bidder for the Italian business of Tiscali SpA.

Recent developments Wind and 3 Italia SpA, part of Hutchison Whampoa Ltd.’s 3 Group, are seeking (sincequite some time) to sell a stake in their tower venture called Eiffel, which controls about 18,000 towers. The tower venture might be worth EUR 2.0-2.3 bn. According to pressreports, Wind and “3” will keep a stake of between 33-49% in the venture. Hence, only 51-67% might be sold and would be worth between EUR 1.1 bn-1.5 bn, while Wind’s stake in this transaction would probably be around 50% and worth between EUR 550-750 mn. However, in its Q2 2008 conference call, the company stated that it assigns a probability of less than 50% to the sale of its tower assets being executed, as it cannot agree on a purchase price that is considered attractive.

Moreover, given the information from Hellas’ conference call at the end of August, the sale of Tellas is expected to be a non-cash transaction. Therefore, additional deleveraging from asset disposals is no longer likely.

In mid-June, Naguib Sawiris stated that Wind Telecomunicazioni would, if at all, only make an offer for Tiscali’s Italian assets. The market cap of Tiscali SpA, which includes the UK assets, is currently EUR 1.25 bn. However, during its Q2 2008 conference call, thecompany indicated that it is not active in the process to acquire Tiscali Italy.

Strong operating performance Good and relatively stable CF (EBITDA-capex) generation

0

200

400

600

800

1,000

1,200

1,400

1,600

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%Total revenues EBITDA EBITDA margin

-400

-300

-200

-100

0

100

200

300

400

500

600

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008



Latest results recap On September 4, Wind released strong Q2 2008 results. Adjusting Q2 2007 pro forma for the deconsolidation of Tellas, total revenues increased by 6.3% y-o-y to EUR 1,394 mn in Q2 2008. EBITDA strongly rose y-o-y by 12.6% to EUR 518 mn, resulting in an improved EBITDA margin of 37.2% compared to 35.1% in Q1 2008 and 34.5% in Q2 2007. The company'smobile business demonstrated still strong subscriber growth and increased its mobilesubscribers q-o-q by 0.21 mn to 16.1 mn, while the ARPU declined y-o-y (from EUR 19.0) and improved q-o-q (from EUR 18.3) to EUR 18.7. However, the mobile EBITDA margin improved

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quite strongly due to the subscriber increase y-o-y from 42.9% to 44.4% (43.2% in Q1 2008).

WIND'S MOBILE MARKET SHARE STABILIZES WIND: RELATIVELY STABLE MOBILE ARPU DEVELOPMENT

17.0%

17.5%

18.0%

18.5%

19.0%

19.5%

20.0%

20.5%

Mar

-05

Jun-

05

Sep

-05

Dec

-05

Mar

-06

Jun-

06

Sep

-06

Dec

-06

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Mob

ile m

arke

t sha

re

0

5

10

15

20

25

Q1

2005

Q2

2005

Q3

2005

Q4

2005

Q1

2006

Q2

2006

Q3

2006

Q4

2006

Q1

2007

Q2

2007

Q3

2007

Q4

2007

Q1

2008

Q2

2008

in E

UR

Voice ARPU Data ARPU

Source: Informa, Company data, UniCredit Global Research

Liquidity Wind's liquidity situation appears to be sufficient for the next 12-18 months at least. As of June 30, the company had EUR 458 mn of cash and cash equivalents on its balance sheetand an undrawn revolving credit facility in the amount of EUR 400 mn. Given the strong FCF generation of Wind in 2008 so far, it announced that it will request a debt repayment for thetranche A2 maturity schedule for the end of 2009 and for the Tranches A1 and A2 maturitiesfor the end of 2010 for a total amount of EUR 412 mn. That said, the next scheduled debt repayment would be due in July 2011.


Wind upgraded its guidance for 2008: The company now expects its full-year EBITDA to be in the range of EUR 1,940-1,980 mn (previously EUR 1,875 mn), including a positive impact of approximately EUR 60-70 mn from non-recurring items. The net debt to EBITDA ratio is expected to fall to 3.0x by YE 2008. We assume that the previous FCF guidance of EUR 500 mn for FY 2008 will now be more in the area of EUR 570-600 mn, given the company's new EBITDA guidance, as the capex guidance of EUR 850 mn was confirmed.

Consolidated net debt of Wind Acquisition Finance S.p.A., Wind's HoldCo, declined by EUR272 mn q-o-q to EUR 6,098 mn in Q2 2008 (net debt already declined by EUR 617 mn in YE 2007 and by EUR 70 mn in Q1 2008). The reported net debt to EBITDA (LTM) ratio was 3.2xcompared to 3.4x at the end of Q1 2008. Including the PiK at WIND Acquisition HoldingsFinance, the ratio would still be 4.2x.

Model assumptions/risks We base our forecasts on the following conservative assumptions: a) Sales growth of 2.5%-3.5% in 2008 and 2009; b) EBITDA of EUR 1,875 mn in 2008 (plus EUR 65 mn positiveimpact from non-recurring items) and relatively stable margins going forward; c) Annual capex of EUR 850 mn in 2008-2009.

Key risks to our model estimates are: a) Weaker-than-expected free cash-flow generation due to falling margins and higher capex, as a result of stronger-than-expected competition; b) M&A activities, shareholder remuneration, refinancing activities.

Things to watch ● End of November 2008 (Est.): Q3 2008 results and conference call; regulatory

environment; M&A activities (e.g. tower assets sale, Tiscali); potential IPO; refinancing of PiKs


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CAPITALIZATION

Senior Credit Facilities Borrower Wind Telecommunicazioni S.p.A. Senior Credit Facility Initial Amount (in mn) Maturity Amortization schedule Margin (LIBOR/Euribor +) Commitment fee Term A1 EUR 2,925 05/12 Amortizing Euribor +237.5 0.75% Term A2 EUR 450 12/10 Amortizing Euribor +237.5 Term B EUR 1,476 05/13 Bullet Euribor +287.5 Term B USD 62 05/13 Bullet Libor +287.5 Term C EUR 1,476 05/14 Bullet Euribor +337.5 Term C USD 62 05/14 Bullet Libor +337.5 Revolving Facility EUR 400 05/12 Bullet Euribor +225.0 0.75% Second lien notes EUR 552 11/14 Bullet Euribor +625.0 Second lien notes USD 148 11/14 Bullet Libor +625.0 Security The payment obligations under these facilities are guaranteed by two subsidiaries, Enel.net and Delta, and are required to be guaranteed by any subsidiary of the Company or Wind whose gross assets, pre-tax profits or turnover equals or exceeds 5% of the gross assets, consolidated EBITDA (as defined in the senior credit agreement) or turnover of the Group or the Wind Group, as the case may be. The obligations of Enel.net and Delta under their respective guarantees are limited to 130% of the aggregate principal amount made available to them or any of their subsidiaries from the proceeds of the borrowings under the senior credit agreement. Covenants The financial and operating performance will be monitored by a financial covenant package, which requires Wind to maintain certain ratios of consolidated EBITDA to consolidated total net interest payable, consolidated cash flow to consolidated total debt service and consolidated senior net borrowings to consolidated EBITDA, and consolidated total net borrowings to consolidated EBITDA (all terms as defined in our senior credit agreement) and to observe limitations on capital expenditures each year. Notes Issuer Wind Acquisition Finance SA

Senior Notes EUR 950 12/15 Bullet Coupon 9.75% Senior Notes USD 650 12/15 Bullet Coupon 10.75% PiK Loans (Wind Acquisition Holdings Finance SpA)

EUR 1,350 USD 500

11/12 Bullet plus 725 bp

Available Credit Lines EUR 400 mn under RCF undrawn as of June 30, 2008


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BOND DOCUMENTATION – WINDIM 9.75% 12/01/15

Issuer Wind Acquisition Finance SA Call/Put Call Schedule On or after December 1, 2010: 104.875%; December 1, 2011: 103.25%; December 1, 2011: 101.625% and

December 1, 2013 and thereafter: 100% Equity clawback Prior to December 1, 2008 up to 35% at 109.75% Make whole clause No Change of control 101% Guarantees The issuer’s obligations under the notes and the indenture governing the notes are and will be guaranteed by: a) until

completion of the Post-Closing Merger by Wind Acquisition Finance SpA. on a senior basis; b) upon completion of the Post-Closing Merger, by Wind Telecommunicazioni SpA on a senior subordinated basis. The note guarantee will be subject to contractual and legal limitations, and, upon issuance, the note guarantee by Wind will be subject to subordination, payment blockage, standstill provisions and turnover provisions and may be released under certain circumstances.

Security Prior to the Post-Closing Merger, pursuant to the notes security documents and the priority agreement, the Notes and any Note Guarantee will be secured by a first-ranking security interest in the share capital of Wind Acquisitions Finance SpA, Wind Telecommunicazioni SpA, in the proceeds loan and in certain bank accounts and receivables of the Wind Acquisition Finance SpA. Upon completion of the Post-Closing Merger and thereafter, the Notes and each Note Guarantee will be secured by a third-ranking security interest in the share capital of Wind Telecommunicazioni and in the proceeds loans and the loan to Wind of the loan proceeds from the second lien notes. In addition, the notes and each note guarantee will be secured by: – a security interest in the intercompany loan between the company and Wind in connection with the financing

(which will be eliminated upon completion of the Post-Closing Merger to the extent not repaid prior to such time and which will be subject to certain rights of the creditors under our senior debt to control enforcement and to receive any proceeds there from); and

– a security interest in receivables under the acquisition agreement and the put and call option agreement entered into in connection with the acquisition (which will be subject to certain rights of the creditors under our senior debt to control enforcement and to receive any proceeds there from).

Ranking The notes will be senior obligations of the issuer. The Issuer will have no indebtedness outstanding other than the notes, and the indenture governing the notes limits the ability of the Issuer to issue any other indebtedness other than in the form of additional notes.

Certain Covenants Limitation on Debt Consolidated leverage ratio of less than 5.5x (incurrence covenant) on or before December 31, 2006 and less than

5.0x if thereafter; Most important carve-out/exceptions: – The incurrence by Wind or any of its Restricted Subsidiaries that is a Guarantor or is a Permitted RCF Borrower of

Indebtedness and letters of credit under Credit Facilities in an aggregate principal amount not exceeding EUR 6.85 bn, less the aggregate amount of all repayments, optional or mandatory, of the principal of any term indebtedness under a credit facility

– The incurrence by Wind or any of its Restricted Subsidiaries that is a Guarantor of Second Lien Note Indebtedness issued in an aggregate principal amount not to exceed EUR 700 mn less the aggregate amount of all repayments, optional or mandatory, of the principal of any term thereof or under the Second Lien Note Agreement

– Incurrence of CLO, mortgage finance, purchase money obligations not exceeding EUR 250 mn – General Basket not EUR 250 mn provided that no more than EUR 25.0 mn of which at any time outstanding may

be incurred by restricted subsidiaries of Wind that are not guarantors. Limitation on Sale of Certain Assets Consideration is at least equal to fair market value and at least 75% of consideration consists of cash, the assumption

of debt or replacement of assets and is within 365 days applied to debt reduction or invested in replacement assets. Excess Proceeds exceeding EUR 25 mn used to redeem notes and pari passu debt at par

Limitation on Restricted Payments Aggregate amount of restricted payments may not exceed sum of the following but only if Wind can incur additional of EUR 1.00: – 50% of consolidated net income (minus 100% of such negative amount), – Equity proceeds; – Conversion of debt to equity proceeds, – Proceeds in case of disposition or repayment of any investment constituting a restricted payment (the lesser of the




EUR 7.5 mn annually while in case of unused amounts to be carried forward not to exceed EUR 15.0 mn – In case of an IPO, dividend payments are not allowed to exceed 6% of net cash proceeds – General Basket not exceeding EUR 50 mn




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Business Description – Wind Telecomunicazioni S.p.A. Wind Telecomunicazioni SpA is a leading integrated telecom operator in Italy. It is the second largest fixed-line operator and third largest mobile operator in Italy. The company offers mobile, fixed-line voice and Internet products and services to consumer and corporate customers. Its fixed-line business had more than 2.38 mn voice subscribers and over 1.9 mn Internet subscribers (886k Internet narrowband subscribers and ~9% broadband market share with 1,022k subscribers) as of December 31, 2007. In the mobile business, the company had 15.6 mn subscribers as of YE 2007.

REVENUES BY SEGMENT (FY 2007)

Mobile69%

Fixed31%



Mobile86%

Fixed14%


DEBT MATURITY PROFILE AS OF MARCH 31, 2008


ISSUER RATING VIEWS

Agencies

Senior rating

Outlook


S&P BB- Stable Up: Gross debt/EBITDA <5x, deleveraging by IPO

Moody's Ba3 Stable Up: Leverage <4.5x for positive outlook or 4.0x for upgrade to Ba2; Down: Total debt/EBITDA >5.5x

Fitch BB- Stable Abortion of HoldCo PiK refinancing at Wind SpA

MAJOR BOND ISSUES

Issue

Rating

Amount (mn)

First Call

WINDIM 9.75% 12/1/2015

Bs/B2s/BBs EUR 950 12/1/2010 (104.88)

BOND STRUCTURE

SecondLien Notes

WeatherInvestments S.r.l.


Wind AcquisitionFinance SpA

WindFinance SL SA

Wind AcquisitionHoldings

Finance SpA

Wind AcquisitionFinance SA

Wind AcquisitionHoldings

Finance SAPIK notes

Senior NotesProceeds

Proceeds

Proceeds

WindTelecomunicazioni

SpA





PROFIT AND LOSS (WIND TELECOMUNICAZIONI S.P.A.)

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eSales 4,383.0 4,715.0 4,716.0 5,047.7 2,613.0 5,270.6 2,694.4 5,403.8 5,589.9Raw materials used -2,929.0 -2,743.0 -2,691.4 -2,897.4 -1,501.6 -2,988.9 -1,488.3 -3,064.4 -3,170.0Personnel costs -374.0 -377.0 -367.1 -355.6 -172.8 -362.2 -184.4 -371.4 -384.2EBITDA reported 872.0 1,352.0 1,596.4 1,656.4 890.1 1,811.3 974.4 1,875.5 1,940.1Depreciation and amortization -1,256.0 -1,311.0 -1,231.0 -1,028.8 -531.9 -1,049.3 -514.3 -1,075.8 -1,112.9Other operating income/expenses -208.0 -243.0 -61.1 -92.0 -48.4 -90.1 -47.3 -92.4 -95.6EBIT reported -384.0 41.0 365.4 627.6 358.2 762.0 460.1 799.7 827.2Interest result -320.0 -308.0 -334.0 -446.4 -271.2 -523.1 -231.5 -446.4 -446.4Other financial items 0.0 0.0 0.7 0.4 0.2 0.7 0.7 0.0 0.0Discontinuing operations 0.0 0.0 0.0 0.0 0.0 137.0 0.0 0.0 0.0EBT -704.0 -268.0 32.1 181.6 87.1 376.6 229.2 353.3 380.9Extraordinary result -96.0 -52.0 -271.5 -48.1 -8.4 -32.2 -1.7 0.0 0.0Taxes on income 195.0 -53.0 -121.9 -117.4 -206.2 -153.9 -80.7 -125.0 -134.7Net income -605.0 -373.0 -361.2 16.1 -127.4 190.5 146.8 228.3 246.1


in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFixed assets 7,245 7,071 12,771 12,375 12,201 11,935 11,757 11,738 11,435Cash & cash equivalents 36 11 163 138 396 195 458 662 1,221Total assets 9,940 9,367 15,310 14,780 14,610 14,287 14,403 14,558 14,814Equity incl. minorities 61 -7 3,955 3,881 3,816 4,089 4,289 4,346 4,603Pension provisions 0 0 64 75 67 64 64 74 74Financial liabilities 6,823 6,779 7,963 7,433 7,430 6,849 6,842 6,849 6,849 short term (<1 year) 398 313 428 184 188 122 114 122 122 long term (>1 year) 6,425 6,466 7,535 7,249 7,241 6,727 6,728 6,727 6,727Net working capital -160 -422 -420 -523 -519 -456 -269 -459 -459

CASH FLOW

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFFO (Funds from operations) 697 986 1,438 1,137 388 1,150 687 1,314 1,359Change in working capital -685 -56 -2 296 162 141 -154 3 0Operating cash flow 12 930 630 1,433 549 1,292 532 1,317 1,359CAPEX -864 -906 -972 -617 -324 -749 -270 -850 -800Free cash flow -852 24 -342 816 225 543 262 467 559Dividends 0 0 0 0 0 0 0 0 0Acquisitions/disposals 11 33 -30 -52 33 -5 1 0 0Share buy back/issues 616 -125 1,000 0 0 0 0 0 0FCF after extraordinary items -225 -68 628 764 258 538 263 467 559

DEBT ADJUSTMENTS

in EUR mn 2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eFor pensions n.a. n.a. 64 75 67 64 64 74 74For operating leases n.a. 3,504 3,504 3,504 3,504 3,504 3,504 3,504 3,504Others* n.a. 704 1,589 84 84 84 84 84 84





PROFITABILITY RATIOS (WIND TELECOMUNICAZIONI S.P.A.)

2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA margin rep. 19.9% 28.7% 33.9% 32.8% 34.1% 34.4% 36.2% 34.7% 34.7%EBITDA margin adj. 21.2% 30.1% 35.5% 36.7% 43.7% 37.6% 45.5% 36.9% 35.6%EBIT margin rep. -8.8% 0.9% 7.7% 12.4% 13.7% 14.5% 17.1% 14.8% 14.8%EBIT margin adj. -8.8% 4.0% 10.9% 15.4% 14.7% 17.3% 18.0% 15.8% 15.7%Return on capital (before tax) -10.2% -3.9% 0.3% 1.6% 4.3% 2.2% 5.7% 3.2% 3.3%


2003 2004 2005 2006 H1 07 2007 H1 08 2008e 2009eEBITDA rep. 872 1,352 1,596 1,656 890 1,811 974 1,876 1,940EBITDA adj. 930 1,418 1,674 1,853 1,141 1,979 1,225 1,992 1,992FFO rep. 697 986 1,438 1,137 388 1,150 687 1,314 1,359FFO adj. 697 986 1,438 1,137 613 1,150 912 1,314 1,359Net debt rep. 6,787 6,768 7,799 7,295 7,034 6,654 6,383 6,187 5,628Net debt adj. 6,787 10,976 12,956 10,958 10,689 10,306 10,035 9,849 9,290Total debt 6,823 6,779 7,963 7,433 7,430 6,849 6,842 6,849 6,849EBITDA net interest cover rep. 2.7 4.4 4.8 3.7 3.3 3.5 4.2 4.2 4.3EBITDA gross interest cover rep. 2.7 4.4 4.7 3.5 3.2 3.3 3.8 3.9 4.1EBIT net interest cover rep. -1.2 0.1 1.1 1.4 1.3 1.5 2.0 1.8 1.9EBIT net interest cover adj. -1.2 0.4 1.1 1.3 1.3 1.4 1.9 1.7 1.8FFO rep. / total debt rep. 10.2% 14.5% 18.1% 15.3% 13.3% 16.8% 21.2% 19.2% 19.8%FFO rep. / net debt rep. 10.3% 14.6% 18.4% 15.6% 14.0% 17.3% 22.7% 21.2% 24.1%FFO adj. / net debt adj. 10.3% 9.0% 11.1% 10.4% 11.3% 11.2% 14.4% 13.3% 14.6%FOCF rep. / total debt rep. -12.5% 0.4% 5.8% 11.0% 1.7% 7.9% 6.5% 6.8% 8.2%FOCF rep. / net debt rep. -12.6% 0.4% 6.0% 11.2% 1.7% 8.2% 7.0% 7.6% 9.9%RCF rep. / net debt rep. 10.3% 14.6% 18.4% 15.6% 14.0% 17.3% 22.7% 21.2% 24.1%RCF adj. / net debt adj. 10.3% 9.0% 11.1% 10.4% 11.3% 11.2% 14.4% 13.3% 14.6%Total debt rep. / EBITDA rep. 7.8 5.0 5.0 4.5 4.3 3.8 3.6 3.7 3.5Net debt rep. / EBITDA rep. 7.8 5.0 4.9 4.4 4.0 3.7 3.4 3.3 2.9Net debt adj. / EBITDA adj. 7.3 7.7 7.7 5.9 5.2 5.2 4.9 4.9 4.7FFO rep. / net interest rep. 3.2 4.2 5.3 3.5 2.4 3.2 4.0 3.9 4.0FFO rep. / gross interest rep. 3.2 4.2 5.2 3.4 2.4 3.1 3.7 3.8 3.8Capex / sales 19.7% 19.2% 20.6% 12.2% 12.4% 14.2% 10.0% 15.7% 14.3%Capex / depreciation 110.8% 106.7% 118.8% 60.0% 60.9% 71.4% 52.5% 79.0% 71.9%

CAPITAL STRUCTURE



Comment 2008e 2009eSales growth Low single digit telecom services revenue growth 2.5% 3.4%EBITDA growth Mainly top-line driven 3.5% 3.4%EBIT growth Top-line driven and due to lower depreciation/amortization 5.0% 3.4%Capex incl. acquisition Based on company guidance 850 800Change in working capital Assumed to be almost negligible 3 0Funds from operations (FFO) Benefiting from top line growth 1,314 1,359





High Yield Corporate Hybrids Following the collapse of US securities firm Lehman Brothers, corporate CDS spreads

worldwide saw an unprecedented over-the-weekend widening on September 15. This included the European high-yield names and the iTraxx Crossover in particular, which almost approached the maximum spread levels of March of this year. Although thefailure of Lehman Brothers is another disastrous outcome of the current crisis, whichwill indirectly impact non-financial names in the medium term as well, another spread development is at least as alarming. The cash spreads of euro-denominated sub-debt of non-financial issuers, as represented by the iBoxx Non-Financials Sub index, continuously increased since the beginning of June.

iBoxx Non-Fin Sub recently at long-term spread highs

After its peak in mid-March at 275 bp, the iBoxx non-financials hybrid index reached a short-term spread-low at the beginning of June, in line with global credit markets in general. Mostdevastatingly, since then the index has topped the widest levels of March. Presently, there areno signs that the deterioration of euro hybrid bonds will halt. Especially the performance ofcorporate sub-debt has been inferior to senior corporate debt, as a comparison of the overall Non-Financials and the Non-Financials Sub indices shows.

Hybrid issues will be wiped out completely in case of default

Cynically speaking, sub debt has an advantage compared to senior debt: there is littlerecovery risk. Default probabilities increase in a cyclical downturn, and this is exactly what weexpect. Recoveries are negatively correlated with default rates, according to historical datapublished by Moody's. Thus in the current financial markets crisis, which will leave its traces on the real economy even worse than was already evident, recoveries of IG and HY debt willbe low. As recent defaults in the US financial sector show, sub debt is usually eroded evenwhen senior debt recovers at decent levels. The likelihood that corporate hybrid debt will represent a 100% loss in case of default is high.

Avoid risky assets in present times

Sub debt is a bet on the issuer to default or not. The spillover of the financial market crisis tonon-financial issuers takes time, more than we had anticipated, as the financial sector still shows signs of severe problems. But we stick to the view that the global economic slowdown,the tightening of banks' lending standards, the risk aversion of investors, high producer pricesand other factors will negatively affect the non-financial sector. Various models predict rising default rates. We prefer to avoid hybrid debt of non-financial firms. Regarding the pure asset price deterioration, a significant premium for recent new issues, furthermore, leads to re-pricing in secondary markets.

HYBRID SPREADS ARE PRESENTLY TRADING AT LONG-TERM HIGHS – TREND: PRICE DETERIORATION

Snap Shot Spread Development Hybrids versus Crossover

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SUEDZU 5.25% 07/15

PFLEID 7.125% 08/14

TUIGR 8.625% 01/13

MICH 6.375% 12/13 LINDE 7.375% 07/16

LINDE 6% 07/13

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Dr. Tim Brunne (HVB), +49 89 378-13521, [email protected]




Lottomatica (BUY) Investment rationale We confirm our buy recommendation for the LTOIM 03/66, Lottomatica's hybrid bond,

as we are confident that the company will keep its investment grade ratings. Following a significant tightening of the LTOIM 03/66 between our last publication in April and June, thebond underperformed its peer hybrids given the weakening credit market environment overduring June and August. However, we like this issue as Lottomatica's clearly communicated detailed targets, which confirm the group's consistent strategy of continuous, acquisition-driven growth while remaining committed to an investment-grade rating.

H1 2008 results demonstrate that its acquisition stance is paying off. H1 2008 sales increased 11% overall to EUR 922 mn (+16% net of FX), mainly driven by the strong development at Sports Betting, Gaming Solutions and the Italian Scratch & Win market. EBITDA improved4.8% to EUR 393 mn (+10% net of FX) and the margin remained strong at 42.4% (H1 2007: 44.9%). H1 2008 FFO was up to EUR 277 mn vs. EUR 264 mn a year ago, leading to a ratio of adj. FFO to net debt (LTM) of 20.0% (H1 2007: 17.3%). As the company continued itsexternal growth and paid dividends, net debt increased to EUR 2.6 bn (FYE 2007: EUR 2.2 bn). However, H1 2008 adj. net debt to EBITDA (LTM) improved to 3.7x (H1 2007: 3.9x). Lottomatica stated that its results will be in line with the FY 2008 guidance. The latter includessales of EUR 1,950-2,050 mn, EBITDA of EUR 750-765 mn, and net debt of EUR 2.6-2.7 bn.The FY 2008-2010 Strategic Plan includes targets for average growth of sales, EBITDA and EBIT of 13-15%, 9-10% and 15-18% (CAGR) p.a., respectively. Sales growth should be to a large part acquisition-driven while profitability will benefit from the traditionally high margins of the industry. We anticipate rating stability despite the continued acquisitive stance and theplanned higher debt due to ongoing M&A activities and shareholder remuneration.


HYBRID DOCUMENTATION – LTOIM 8.25% 03/31/66

Rating and Issue Size Senior Rating Baa3s/BBB-s Hybrid Rating Ba3/BB Issue Size EUR 750 mn Equity Treatment Moody's 75% S&P 40%-60% IFRS 100% Maturity and Ranking Maturity March 31, 2066 First call date 03/2016 Step up 100 bp from year 10 Subordination Senior only to equity Replacement language Yes, intentional Coupon Deferral Optional Yes Mandatory Yes Cumulative No Mandatory trigger event "If, 10 business days prior to any Interest

Payment Date, the Coverage Ratio is less than 1.35, the Issuer shall defer payment of any scheduled interest amount…"

Alternative Coupon Settlement Mechanism Yes Immediately required settlement to be funded by equity issuance / ability to pre-empt mandatory deferral through an equity issue occurring within the prior six months for this explicit purpose.

Early Redemption in case of special events Change of Control Optional for the Issuer (however, if redemption takes place, it has to occur for all the notes) in case the Change of Control

results in a rating downgrade to at least one notch below Baa3/BBB-

Source: Company, Rating agencies, UniCredit Global Research




Lottomatica Analyst: Carmen Hummel (HVB), +49 89 378-12252 Senior Debt Ratings (Moody's/S&P/Fitch) Credit profile trend Recommendation Index Equity Market Cap.Baa3/BBB-/- Improving Buy -- EUR 3.2 bn

Company Description: Lottomatica (www.gruppolottomatica.it) based in Rome, Italy, is the sole concessionaire of the Lotto game in Italy. In August 2006, Lottomatica purchased US-based GTECH (at the time rated Baa3/BBB-/BBB+), almost twice as big in terms of annual sales, for ca. EUR 4 bn in a mix of equity and debt. GTECH Holdings Corporation is the worldwide leader in online lottery systems (global market share of 52% compared with a 7% market share held by Lottomatica). In the US Lottery market, GTECH holds an unapproachable 80% market share. Regional sales breakdown in FY 2007: North America 31% (primarily GTECH), Europe and Africa 63% (+43% y-o-y), Latin America 5% (+186% mainly on GTECH), Asia Pacific 1% (+27%). The company has operations in 43 countries worldwide on six continents and has around 6,000 employees. Lottomatica is listed on the Mercato Telematico Azionario (the Italian Electronic Stock Market). Main shareholders (July 2008): 57.7% Gruppo de Agostini, remainder free float.

Rating Agencies' View: Ratings reflect the company's worldwide leadership as an operator and supplier of online lottery systems, solid profitability metrics and ability to win and retain profitable new contracts, with a long-term nature (5-7 years). Apart from the Italian Lotto concession that matures in 2016, there is minimal contract concentration, and the tenor of the group's existing lottery contracts secure more than half of current revenues through 2010. Lottomatica's ratings also reflect barriers to entry, including the large installed base of point-of-sale terminals and the high capital investment that would be necessary to replicate the company's systems and software. S&P anticipates Lottomatica maintain credit ratios more appropriate for a BBB- rating, including a ratio of lease-adj. total debt to EBITDA of 3.5-4.0x (FYE 2007:3.9x). Moody's stable outlook reflects Lottomatica's commitment to its current ratings. It expects credit ratios to improve to levels more commensurate to the rating, e.g. debt to EBITDA (Moody's adjusted basis) of around 3.0x (FYE 2007: 3.2x).

SALES BY SEGMENT (H1 2008)

Interactive1.6%

Commercial Services

4.5%Sports Betting7.5%

Gaming Solutions

9.3%

Lottery77.0%

EBIT BY SEGMENT (H1 2008)

-50 0 50 100 150 200 250 300

Lottery

Sports Betting

CommercialServices

Interactive

Gaming Solutions

Unallocated

EUR mn

Strengths/Opportunities

– Worldwide leading market share as an operator and supplier of online lottery systems

– Sole concessionaire for the Italian Lotto game (largest on-line lottery in the world)

– Strong commitment to maintaining a corporate investment grade rating (part of the 2008-2010 Strategic Plan)

– High visibility of earnings given existing long term contracts – Strong free cashflow generation – Lottery is high margin business – Impeccable reputation of its main shareholders, the De Agostini Group

Weaknesses/Threats

– Highly leveraged after the GTECH purchase, which in FY 2005 generated twice the amount of Lottomatica's sales

– Lotto (ca. 24% of FY 2007 sales) concession might end in April 2012 (dispute between the regulator and Lottomatica with the latter anticipating the concession to end in 2016).

– Foreign-exchange risk – Little room for debt-financed acquisitions or shareholder friendly measures

at the currently elevated debt levels – Major shareholder (58%), De Agostini, is a private company (no public

financial information) – High dividend payout ratio

MAJOR BOND ISSUES

ISIN Ticker/Issue Issue Rating Amount (EUR) Comment --XS0254095663 LTOIM Var 16/66 Ba3/BB 750 mn Hybrid

Latest News & Investment Recommendation: Please refer to previous page.

Source: Rating agencies, company data, iBoxx, UniCredit Global Research




LOTTOMATICA

EUR mn 2005 2006 H1 07 2007 H1 08Sales 583 939 835 1,661 928EBIT margin adj. 36.7% 35.0% 29.0% 24.1% 27.2%EBITDA margin rep. 45.2% 37.9% 44.9% 40.7% 42.4%EBITDA margin adj. 46.1% 50.8% 46.0% 41.8% 43.3%Net income 114 1 68 106 103Return on capital adj. 22.4% 5.5% 6.8% 4.9% 7.4%Funds from operations (FFO) 237 287 264 502 277Operating cash flow 197 178 101 337 81Free cash flow rep. (after Capex & Div.) 36 -50 -157 -22 -92Retained cash flow (RCF) 169 167 144 382 121Acquisitions / disposals 35 -3,224 -3 91 -278Share buy back / issues 71 1,529 18 19 -38Total dept rep. 367 2,867 2,841 2,683 2,876Net debt rep. 89 2,467 2,551 2,229 2,670Adj. for pensions 0 0 0 0 0Adj. for operating leases and others 18 71 71 60 51Net debt adj. 107 2,538 2,622 2,289 2,722

DEBT LEVERAGE

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CREDIT METRICS

2005 2006 H1 07 2007 H1 08EBIT net interest cover adj. 14.6 4.7 2.6 2.2 2.4EBIT gross interest cover adj. 10.8 3.2 2.2 2.0 2.2EBITDA net interest cover adj. 18.3 6.8 4.2 3.7 4.2EBITDA gross interest cover adj. 13.6 4.7 3.6 3.5 3.8FFO adj. / net debt adj. 224.4% 11.8% 17.3% 22.4% 19.3%FFO adj. / total debt adj. 62.5% 10.2% 15.5% 18.7% 18.0%RCF adj. / net debt adj. 161.0% 7.1% 12.7% 17.2% 13.6%RCF adj. / total debt adj. 44.8% 6.1% 11.4% 14.4% 12.6%Net debt adj. / EBITDA adj. 0.4 5.3 3.9 3.3 3.8Total debt adj. / EBITDA adj. 1.4 6.2 4.3 4.0 4.1FFO adj. / net interest adj. 16.4 4.3 2.8 2.8 3.1FFO adj. / gross interest adj. 12.2 2.9 2.4 2.6 2.8Total debt adj. / total capital. adj. 42.9% 61.1% 61.6% 61.3% 65.1%Net debt adj. / net capital. adj. 17.3% 57.5% 59.0% 56.9% 63.4%Equity / total assets 34.4% 28.9% 29.4% 29.6% 26.2%


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Michelin (SELL) Investment rationale We have a sell recommendation on Michelin's hybrid bond, which has a remaining maturity of

26 years. Although the current spread level is relatively fair for the average hybrid rating ofmid-to-high BB, it does not compensate for the risk of a rating downgrade. Michelin releasedH1 2008 results below expectations. Revenues declined 1.9% at current exchange rates(+4.2% y-o-y at constant exchange rates) to EUR 8,239 mn, while the sales volume rebounded in Q2 2008 compared to Q1 2008 in a difficult trading environment. Operatingincome declined by 17.8% y-o-y to EUR 708 mn, mainly driven by higher external costs, e.g.raw materials. The operating margin before recurring items was 8.6%, down 1.6% y-o-y. Net income amounted to EUR 430 mn and missed the consensus estimate only slightly. In H12008, FCF was negative with EUR 445 mn, EUR 414 mn worse than in H1 2007, mainly dueto the overall weaker profitability and working capital-related cash outflows, partially due to higher raw material prices. At the end of H1 2008, reported net debt amounted to EUR 4,334mn and the reported net debt to EBITDA ratio increased to 1.85x versus 1.5x at YE 2007,according to our calculations. Credit metrics weakened clearly over the last six months. Wedo not expect any meaningful improvement in credit metrics, while high oil prices, lowerconsumer confidence levels and declining auto production numbers might continue to putpressure on margins and credit metrics.

Dr. Sven Kreitmair, CFA +49 89 378-13246 [email protected]

HYBRID DOCUMENTATION – MICH 6.375% 12/03/33

Rating and Issue Size Senior Rating Baa2s/BBBs/

BBB+s (Issuer: CGEM)

Hybrid Rating Ba1s/BB+s/BBBs Issue Size EUR 500 mn (outstanding: EUR 358 mn)

Equity Treatment Moody's Basket max.25% (est.) S&P 0% (est.) IFRS 0% Maturity and Ranking Maturity 12/3/2033 First call date 12/3/2013 Step up 100 bp from year 10 (12/3/13) Subordination lowest ranking; pari passu to other

subordinated obligations of CGEM Replacement language Yes

Coupon Deferral Optional Yes Mandatory No Cumulative Yes Mandatory trigger event No Alternative Coupon Settlement Mechanism No Early Redemption in case of Special events (other than standard tax and gross up) Buy-back or public offer No replacement language


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Michelin Analyst: Dr. Sven Kreitmair, CFA (HVB), +49 89 378-13246 Senior Debt Ratings (Moody's/S&P/Fitch) Credit Profile Trend Recommendation Index Equity Market Cap.Baa3s/BBBs/BBB+s Weakening Underweight iBoxx / iTraxx EUR 6.9 bn

Company Description: Companie Générale des Etablissements Michelin (www.michelin.com), headquartered in Clermont Ferrand, France, manufactures all-purpose tires, wheels, steel cables, maps and tourist guides. Michelin manufactures and distributes its products worldwide in 69 production sites in 19 countries and is backed by a sales network in 170 countries. Furthermore, Michelin owns 6 plants in Brazil and Nigeria. The company is one of the three largest tire manufacturers in the world. Michelin employs 121,356 people. Major shareholders are individual shareholders 11.8% (17.3% voting rights), 20.6% (21.7%) other French institutions, employee stock ownership plan 1.7% (2.3%).

Rating Agencies' View: S&P's stable outlook reflects the expectation that Michelin will continue to improve its profitability and cash flow as a result of the cost reduction measures and capacity improvements that it started to implement in the past two years. We expect the group to achieve and maintain FFO/net debt > 25%, and to generate meaningfully positive FOCF. The agency said that it could revise the outlook to positive if the group sustains the improvement in its operating performance and cash flow and the rating could come under pressure if the performance does not improve as expected, or if cash flow is below expectations.


Europe50%

North America33%

Other zones17%


Passenger car and light truck

tires50.5%

Other activities23.6%

Truck tires26.0%


– Leading position in the consolidating global tire market with a broad, geographically well-spread product range

– Group realizes premium prices due to superior added value, recognized product quality and high customer loyalty

– Improved stability in earnings of the company's three balanced and profitable core segments

– High proportion business in replacement tire markets with high margins and more stability

– Stability of strategy and structure of the company due to the longer-term management orientation

Weaknesses/Threats

– Large proportion of high-wage production sites, consequently a disadvantage in cost structure compared with competitors

– High R&D spending necessary to defend competitive advantages – Limited ability to maintain profit margin as raw material prices increase and

FX moves – High pricing pressure mainly from OEM customers (especially in

passenger car tires)

MAJOR BOND ISSUES

ISIN Ticker/Issue Issue Rating Amount (EUR) Comment XS0145903661 MICH 6.5 04/12 Baa2 / BBB / BBB+ 500 mn -- FR0010034298 MICH 6.375 12/33 Ba1 / BB+ / BBB 500 mn Hybrid

Latest News & Investment Recommendation: Michelin released H1 2008 results below expectations. Revenues declined 1.9% at current exchange rates and increased by 4.2% y-o-y to EUR 8,239 mn at constant exchange rates (consensus estimate of EUR 8,314 mn), while the sales volume rebounded in Q2 2008 compared to Q1 2008 in a difficult trading environment. Operating income declined by 17.8% y-o-y to EUR 708 mn (consensus estimate of EUR 795 mn), which was mainly driven by higher external costs, e.g. raw materials. The operating margin before recurring items was 8.6%, down 1.6% y-o-y. Net income amounted to EUR 430 mn and missed the consensus estimate only slightly. In H1 2008, FCF was negative with EUR 445 mn, EUR 414 mn worse than in H1 2007, mainly due to the overall weaker

profitability and working capital-related cash outflows, partially due to higher raw material prices. At the end of H1 2008, reported net debt amounted to EUR 4,334 mn and the reported net debt to EBITDA ratio increased to 1.85x versus 1.5x at YE 2007, according to our calculations. Credit metrics weakened clearly over the last six months and ratings also reflect the creditworthiness through the cycle. Hence, the operating margin and working capital developments in H1 2008 were probably disappointing. We continue to have an underweight recommendation for the name in our auto sector model portfolio. We do not expect any meaningful improvement in credit metrics, while the current market environment might put pressure on margins and credit metrics. (H1 results: February 15)


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MICHELIN

EUR mn 2001 2002 2003 2004 2005 2006 H1 07 2007 H1 08Sales 16,287 16,111 15,975 15,048 15,590 16,384 8,402 16,867 8,239EBIT margin adj. 9.0% 10.3% 6.3% 9.6% 9.8% 8.5% 10.6% 11.0% 9.9%EBITDA margin rep. 12.1% 13.1% 12.3% 13.5% 15.2% 12.1% 14.7% 12.7% 14.2%EBITDA margin adj. 15.3% 16.4% 12.4% 15.2% 15.4% 14.3% 16.3% 16.4% 16.0%Net income 314 614 329 654 889 573 436 772 430Return on capital adj. 8.6% 11.7% 6.7% 13.8% 13.0% 10.9% 13.3% 16.1% 15.9%Funds from operations (FFO) 1,323 1,225 1,466 1,318 1,457 1,412 898 1,696 782Operating cash flow 1,263 1,534 1,542 1,322 1,031 1,191 657 1,862 174Free cash flow rep. (after Capex & Div.) -237 400 244 135 -475 -393 -280 163 -640Retained cash flow (RCF) 1,140 1,058 1,285 1,176 1,243 1,207 690 1,481 552Acquisitions / disposals 363 70 -172 -54 122 154 33 55 -35Share buy back / issues 26 26 20 15 14 11 107 14 37Total dept rep. 5,820 5,027 5,214 4,948 4,739 4,893 5,303 4,070 4,636Net debt rep. 4,881 3,818 3,440 3,293 4,128 4,213 4,336 3,740 4,379Adj. for pensions 937 1,162 2,300 2,228 2,361 2,016 2,016 1,616 1,616Adj. for operating leases and others 446 468 492 260 314 327 327 354 354Net debt adj. 6,265 5,447 6,233 5,780 6,803 6,556 6,679 5,710 6,349

DEBT LEVERAGE

0%

5%

10%

15%

20%

25%

30%

35%

2001 2002 2003 2004 2005 2006 2007 H1 07 H1 080.0

0.5

1.0

1.5

2.0

2.5

3.0



0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2001 2002 2003 2004 2005 2006 2007 H1 07 H1 080

2

4

6

8

10

12

14

16

18EBITDA margin adj. EBITDA gross interest cover adj. (RS)

CREDIT METRICS

2001 2002 2003 2004 2005 2006 H1 07 2007 H1 08EBIT net interest cover adj. 4.0 5.4 3.7 5.5 4.9 4.0 3.4 5.6 5.9EBIT gross interest cover adj. 3.7 5.0 3.4 5.5 4.9 4.0 4.7 5.6 5.9EBITDA net interest cover adj. 6.8 8.6 7.2 8.8 7.7 6.8 5.5 8.4 9.0EBITDA gross interest cover adj. 6.3 8.0 6.7 8.8 7.7 6.8 7.5 8.4 9.0FFO adj. / net debt adj. 22.0% 23.5% 24.5% 23.7% 22.5% 22.8% 26.0% 31.1% 26.2%FFO adj. / total debt adj. 19.1% 19.2% 19.0% 18.4% 20.6% 20.6% 22.7% 29.4% 25.2%RCF adj. / net debt adj. 19.0% 20.4% 21.6% 21.2% 19.4% 19.7% 22.7% 27.4% 22.4%RCF adj. / total debt adj. 16.6% 16.7% 16.8% 16.5% 17.8% 17.8% 19.9% 25.9% 21.6%Net debt adj. / EBITDA adj. 2.5 2.1 3.1 2.5 2.8 2.8 2.6 2.1 2.3Total debt adj. / EBITDA adj. 2.9 2.5 4.0 3.3 3.1 3.1 3.0 2.2 2.4FFO adj. / net interest adj. 3.8 4.2 5.6 5.2 4.9 4.3 3.8 5.4 5.5FFO adj. / gross interest adj. 3.5 3.9 5.2 5.2 4.9 4.3 5.2 5.4 5.5Total debt adj. / total capital. adj. 55.7% 56.5% 69.9% 84.9% 77.4% 73.0% 71.8% 62.2% 63.3%Net debt adj. / net capital. adj. 52.2% 51.5% 64.3% 81.4% 75.8% 71.0% 69.0% 60.8% 62.4%Equity / total assets 24.9% 27.6% 27.3% 22.1% 26.8% 27.8% 29.0% 32.2% 32.6%





Südzucker (BUY) Investment rationale We continue to have a buy recommendation for the SUEDZU hybrid (rated

Ba1/BB/BBB-) as we think that the company will master well the challenges of the EU sugar market transition and we expect a significantly improved credit profile from FY2009/10 onward. We rule out any acquisition spending as rumored in the press.Management recently firmly stated that de-leveraging and recovery of credit ratios has the first priority until Südzucker's credit profile has improved to levels which are rathercommensurate to a low-A rating (which is realistic when considering a major cash-in of EUR 450 mn to be booked in spring 2009 and the finalization of the EU sugar market liberalization).From a relative value standpoint, the SUEDZU hybrid is one of the cheapest bonds in the corporate hybrid world. Q1 2008/09 results, published in July 2008, met expectations, with operating profit having markedly benefited from the fall-away of the restructuring levy (to the European restructuring fund) in the sugar segment. Overall sales increased 10% y-o-y to EUR 1.5 bn while the operating result improved 18% to EUR 63 mn backed a strong operating performance of the sugar segment. Operating cash flow as reported was EUR 175 mn, amajor improvement from the EUR 74 mn in Q1 2007/08. Net debt as reported increased toEUR 1.9 bn (from EUR 1.2 bn a year ago), driven by the expansion in bioethanol and by working capital financing requirements, i.e. the payment of the restructuring levy. At the AGMheld in July Südzucker confirmed the FY 2008/09 targets, i.e. EBIT of EUR 230-260 mn (incl. negative one-off effects of EUR 80-100 mm). Previously this year, the company also stated that it anticipates this year's net debt to further rise (although at a slower pace than in FY2007/08) as cash flow will be again burdened by restructuring levies. In FY 2009/10, thetransition of the sugar market should be finalized, and Südzucker expects group EBIT of "atleast" EUR 400 mn and significantly lower debt" primarily thanks to improved margins (a.o.cost savings of EUR 135 mn p.a. targeted), the abolition of the restructuring levy and apositive one-time effect from the cash-in of EUR 446 mn in connection with quota renouncements. We would expect ratings to remain stable until then (unless a surprisingaction was to occur: debt-financed M&A activities for example are a no-go at the moment). Following a tough FY 2008/09 we anticipate a significantly improved credit profile from FY 2009/10 onward.


HYBRID DOCUMENTATION – SUEDZU 5.25% PERPETUAL

Rating and Issue Size Senior Rating Baa2s/BBBs/BBBs Hybrid Rating Ba1s/BBs/BBB-s Issue Size EUR 700 mn Equity Treatment Moody's Basket "D" / 75% S&P ca. 50% IFRS 100% Maturity and Ranking Maturity Perpetual First call date 06/2015 Step up 100 bp from year 10 Subordination Senior only to equity Replacement language Yes Coupon Deferral Optional Yes Mandatory No Cumulative No Mandatory trigger event Cash flow <5% of sales Alternative Coupon Settlement Mechanism Yes Early Redemption in case of Special events (other than standard tax and gross up) n.a.





Südzucker Analyst: Carmen Hummel (HVB), +49 89 378-12252 Senior Debt Ratings (Moody's/S&P/Fitch) Credit profile trend Recommendation Index Equity Market Cap.Baa2n/BBBs/BBBn Weakening Overweight iBoxx EUR 2.1 bn

Company Description: Südzucker AG (www.suedzucker.com), headquartered in Mannheim, Germany, is an international manufacturer of sugar products, food ingredients and agricultural products. While sugar production represents the backbone of Südzucker's business, the specialty products business (functional food, frozen foods, portion packed items, bioethanol) and the fruit additive business have constantly gained ground during the last few years. The group’s core markets are Germany, France, and Eastern Europe. In Germany, Südzucker generated around 31% of sales, in other Europe (mostly Eastern European EU members) 61% and in other countries 8% (as of FY 2007/08). Südzucker employs around 20,000 people. Shareholder structure: German co-operative of beet farmers (SZVG) holds around 55% of shares, Austrian shareholders (10%), 34% free float.

Rating Agencies' View: After quite turbulent times (not only from a ratings' perspective) with several rating downgrades from an A level to now mid-BBB. Last rating action date back to July 2008 as Moody's and Fitch changed their outlook to negative from stable. The rating actions at Moody's and Fitch reflect the expected margin pressure in the Sugar and Special Products segments and a slower recovery of credit metrics of the next two years. However, the recovery should stem from the growing contribution of Südzucker's Special products and Fruit businesses from about 40% currently, the expected end of the company's capex program in the Bioethanol segment, as well as its adaptation to the new regulatory environment. S&P calculated a ratio of adj. FFO to net debt of ca. 21% for the Q1 2008/09 (ending May 2008) in-line with FYE 2007/08 levels but below the ratio (32%) in FY 2006/07. Moody's would expect negative pressure on the ratings if credit metrics did not recover as anticipated, with retained cash flow to net debt improving to above 20% (FYE 2007/08: 14%) and gross debt to EBITDA to around 3.5x (4.8x) by FYE 2008/09.


Fruit14.8%

Sugar59.9%

Special products25.3%


Sugar43.6%

Fruit16.6%

Special products39.9%


– Leader in the European sugar market with a 24% market share – Special Products segment offers some diversification from the Sugar

business – Bioethanol business (part of Special products) with significant earnings

potential – Solid liquidity profile (although slightly exposed to short-term funding) – Resolution of the sugar market regime has slightly eased the pressure on

Südzucker's profitability

Weaknesses/Threats

– Deregulation of the European sugar market with significant price cuts will affect profitability at the Sugar division

– Sugar market provides only limited growth – Profit improvements in the Special products unit slower than anticipated – Earnings volatility has significantly increased in the last few years – Increasing leverage

MAJOR BOND ISSUES

ISIN Ticker/Issue Issue Rating Amount (EUR) Comment DE0008461021 SUEDZU 5.75 02/12 Baa2 / NR / BBB 500 mn -- XS0222425372 SUEDZU Var 49-15 Ba1/BB 700 mn Hybrid

Latest News & Investment Recommendation: Please refer to previous page.





SÜDZUCKER

EUR mn 2003/04 2004/05 2005/06 2006/07 Q1 07/08 2007/08 Q1 08/09Sales 4,575 4,827 5,347 5,765 1,338 5,780 1,470EBIT margin adj. 10.3% 11.3% 9.0% -5.0% 4.5% 3.9% 4.8%EBITDA margin rep. 14.1% 14.4% 11.9% 13.9% 5.6% 8.4% 15.6%EBITDA margin adj. 14.7% 15.6% 13.8% 11.5% 8.3% 9.4% 8.4%Net income 307 358 290 -269 20 74 115Return on capital adj. 9.6% 9.9% 6.8% -7.0% -6.7% 2.4% 3.6%Funds from operations (FFO) 465 510 505 542 74 475 175Operating cash flow 313 400 313 866 -311 -217 -348Free cash flow rep. (after Capex & Div.) -121 -202 -230 166 -403 -875 -417Retained cash flow (RCF) 338 408 387 379 74 314 173Acquisitions / disposals 31 -511 -137 -17 19 180 20Share buy back / issues 14 137 889 209 4 10 0Total dept rep. 1,406 1,944 1,710 1,778 1,800 1,902 2,209Net debt rep. 1,100 1,672 1,177 811 1,191 1,508 1,920Adj. for pensions 388 425 433 435 435 408 409Adj. for operating leases and others 2 6 382 388 389 387 210Net debt adj. 1,490 2,103 1,991 1,634 2,016 2,304 2,539

DEBT LEVERAGE

0%

10%

20%

30%

40%

50%

2003/04 2004/05 2005/06 2006/07 Q1 07/08 2007/08 Q1 08/090

1

2

3

4



0%

4%

8%

12%

16%

2003/04 2004/05 2005/06 2006/07 Q1 07/08 2007/08 Q1 08/090

2

4

6

8EBITDA margin adj. EBITDA gross interest cover adj. (RS)

CREDIT METRICS

2003/04 2004/05 2005/06 2006/07 Q1 07/08 2007/08 Q1 08/09EBIT net interest cover adj. 6.5 12.1 5.8 -2.8 -4.3 2.3 2.3EBIT gross interest cover adj. 4.5 4.0 3.5 -1.9 -2.6 1.5 1.5EBITDA net interest cover adj. 9.3 16.6 8.8 6.4 7.1 5.6 5.4EBITDA gross interest cover adj. 6.4 5.5 5.4 4.4 4.3 3.7 3.5FFO adj. / net debt adj. 31.3% 24.3% 26.2% 34.5% 26.0% 21.5% 23.5%FFO adj. / total debt adj. 25.9% 21.5% 20.7% 21.7% 19.9% 18.4% 21.1%RCF adj. / net debt adj. 22.7% 19.5% 20.3% 24.5% 17.9% 14.5% 17.0%RCF adj. / total debt adj. 18.9% 17.2% 16.0% 15.4% 13.7% 12.4% 15.3%Net debt adj. / EBITDA adj. 2.2 2.8 2.7 2.5 3.4 4.3 4.6Total debt adj. / EBITDA adj. 2.7 3.2 3.4 3.9 4.4 5.0 5.1FFO adj. / net interest adj. 6.4 11.3 6.2 5.5 6.2 5.1 5.8FFO adj. / gross interest adj. 4.4 3.7 3.8 3.7 3.8 3.4 3.8Total debt adj. / total capital. adj. 43.0% 46.8% 43.0% 46.6% 46.5% 47.8% 48.0%Net debt adj. / net capital. adj. 38.5% 43.7% 37.3% 35.4% 40.1% 43.9% 45.3%Equity / total assets 39.5% 38.0% 42.7% 38.0% 41.6% 37.3% 40.6%





Wienerberger (SELL) Investment rationale We have a sell recommendation on the hybrid given the relatively weak operating

outlook for 2008 as well as expected volatility in the name. The company reported slowing growth for H1 2008 and a significant slump in earnings as a result of the slowdown in construction markets and a slump in residential construction in the US (13% of grouprevenues in FY 2007), the UK (7%) and in Germany (11%) in particular. Sales declined in Q2 and rose merely 3% in H1, while H1 EBITDA dropped by 8% and full-year EBITDA is also expected to decline. As a result of the profit warning, Wienerberger's rating outlook waschanged to negative both by S&P and Moody's. Both rating agencies expect credit metrics toweaken in 2008, as a result of the slowdown in mature markets, which is unlikely to be fullyoffset by emerging markets. The outlook revisions did not come as a surprise afterWienerberger admitted that weakening trading conditions in some of its key markets willimpact its performance more severely than initially anticipated. Nevertheless, the companyhas taken measures to adjust its capacity to market demand (25 plants scheduled to beclosed mainly in the US and in Germany). The cash costs for the announced measures amount to EUR 25 mn (plus write-downs of EUR 25 mn) for savings of EUR 30 mn starting in FY 2009. In addition, Wienerberger's net working capital is expected to benefit from the plantclosures. With regard to investment spending, the company plans to spend EUR 500 mn on top of EUR 100 mn in maintenance capex in FY 2008. However, the company is also lookingto curb its investment spending in FY 2008 below its initial target. Based on the earningsestimates of UniCredit Equity Research, Wienerberger's capex guidance for FY 2008 and assuming 50% equity content of its hybrid, we calculate FFO to adj. debt of ca. 33% and aRCF to adj. debt of around ca. 22% and a net adj. debt to EBITDA of 2.3x for the FYE 2008.For 2009, growth expenditure is scheduled to be EUR 200 mn, which should support cash flow generation. The start-up of new plants in Eastern European growth markets should alsocontribute positively to earnings, while in general there, too, growth might slow somewhat.Overall, we expect Wienerberger to be able to safeguard its current ratings. The company is committed to an investment grade rating and the curbing of its expansion capex is anindication of the willingness to preserve its Baa2/BBB rating, in our view. However, spreads are expected to remain volatile going forward, being closely linked to the share price of thecompany.


HYBRID DOCUMENTATION – WIEAV 6.5% 02/28/49

Rating and Issue Size Senior Rating Baa2s/BBBs Hybrid Rating Ba1s/BB+s Issue Size EUR 500 mn Equity Treatment Moody's Basket 50% (C) S&P intermediate IFRS 100% Maturity Perpetual First call date 02/2017 Step up 100 bp from 2017 Subordination Senior only to equity Replacement language Yes, intentional Coupon Deferral Cumulative Payable on the resumption of dividend payments or share repurchases Early Redemption in case of gross up event, change-of-control or capital event Minimal Outstanding Amount 75% of the issue size





Wienerberger AG Analyst: Jochen Schlachter (HVB), +49 89 378-13212 Senior Debt Ratings (Moody's/S&P/Fitch) Credit profile trend Recommendation Index Equity Market Cap.Baa2n/BBBn / --- Stable Underweight -- EUR 1.5 bn

Company Description: Founded in 1819, Vienna-based Wienerberger AG (www.wienerberger.com) is the world's largest manufacturer of bricks and Europe's Number 2 in roofing systems. Despite its focus on clay products, it is also a leading manufacturer of concrete pavers in Europe. The company operates 263 plants in 25 countries, with a geographic focus on Eastern and Central Europe as well as the US. Over the past decades, the company has grown through a spate of acquisitions and some greenfield investments with a strong focus on Eastern Europe, but also in the US and in the UK. In Q3 2007, it raised EUR 424 mn through a rights issue to strengthen its balance sheet. Proceeds will be used for the construction of further hollow brick plants in Eastern European growth markets. In 2007, Wienerberger entered the Bulgarian and Serbian markets and is currently constructing a plant in India. At FYE 2006, the company employed 14,785 people. Wienerberger is floated on the Vienna Stock Exchange. Its shareholder base is widely spread, with an Invesco unit as the biggest shareholder, holding 10%.

Rating Agencies' View: Moody's Baa2 issuer rating reflects Wienerberger's ability to generate sustainable and strong cash flow from established businesses supported by low-maintenance capital expenditure and prudent working capital management. The negative outlook reflects the risk of failing to achieve a sustainable RCF/net debt ratio above the low twenties, and a further weakening in Western European coupled with a slowdown in Eastern European markets. The rating could be upgraded if RCF to net adj. debt would rise to the low to mid-thirties and FCF to debt to the low teens on a sustainable basis. S&P views the leading market position in bricks and clay roof tile, the good geographical diversification within Europe and the strong margins and solid cash flow as positive rating factors. Of concern is the limited diversification by product, exposure to cyclical and competitive residential construction markets and energy-intensive processes. In the current rating category, S&P expects Wienerberger's ratio of adjusted FFO to adjusted net debt to remain between 30%-35%. Failure to achieve an FFO/ adj. debt could result in a rating downgrade in 2009, especially if EBITDA further declines in the high single digits.

EBITDA BY REGION (FY 2007)

Central-WestEurope12.6%

North WestEurope30.3%

Central-EastEurope46.7%

Investment andOther4.5%USA

5.8%

EBITDA BY PRODUCT (FY 2007)

Hollow Bricks47.1%

Facing Bricks20.6%

RoofingSystems22.3%

Pavers5.4%

Other4.5%


– World market leader in bricks and number two in roof tiles in Europe – Solid geographical diversification – Strong EBITDA margin development through rollout of best practices – Good cash flow generation capabilities – Proven capital market access

Weaknesses/Threats

– Aggressive growth strategy driven by M&A and greenfield investments – Exposure to cyclical residential construction in particular in Germany, the

US and the UK – Rising energy costs weigh on margins – Substitution risk for some products – Risk of larger-than-expected acquisitions

MAJOR BOND ISSUES

ISIN Ticker/Issue Issue Rating Amount Comment XS0217731586 WIEAV 3.875 04/12 Baa2/ BBB 400 mn --

Latest News & Investment Recommendation: Wienerberger reported H1 2008 results with operating income in EBITDA terms falling significantly short of sales growth. H1 2008 sales were up 3% to EUR 1,264 mn, mainly as a result of a very weak Q2. EBITDA dropped 8% to EUR 236 mn and margins deteriorated to 18.2% from 20.9% y-o-y. In North America alone, EBITDA dropped 44% to a mere EUR 7 mn as a result of lower capacity utilization owing to a plunge in housing starts. Central Europe East recorded an increase in EBITDA of 7% to EUR 127 mn, while also markedly slowing y-o-y. Cash flow generation remained healthy but could not shake off the negative trend, with free operating cash flow after capex (EUR 162 mn including expansion capex) coming in at a negative EUR 79 mn versus an outflow of EUR 8 mn y-o-y. The company's growth investments in H1 amount to EUR 204 mn spent on growth projects, parts of which were included under the capex line (with the

remainder in the acquisitions line). Credit metrics remained broadly stable y-o-y but deteriorated significantly from FYE 2007 levels. Given the hybrid 50% equity credit we calculate FFO to net adj. debt of 36.9% and a net debt to EBITDA of 2.1x, which compares to 53.2% and 1.5x at FYE 2007. The company expects a decline in its EBITDA by 15% for 2008, as earnings growth in Central Europe East will slow, making it impossible for Wienerberger to offset the weakness in Western Europe and in the US in particular. The company intends to invest EUR 450 mn in 2008 (down from EUR 600 mn initially) and a mere EUR 200 mn in 2009. Maintenance expenditure should be around EUR 100 mn p.a. As expected, Wienerberger has cut its capital expenditures to accommodate the softening in operating performance and cash flow generation in order tor preserve its credit profile.





WIENERBERGER AG

EUR mn 2000 2001 2002 2003 2004 2005 2006 H1 07 2007 H1 08Sales 1,670 1,545 1,654 1,544 1,759 1,955 2,225 1,227 2,477 1,264EBIT margin adj. 9.9% 4.8% 9.7% 12.4% 15.1% 14.3% 14.0% 14.1% 14.6% 11.2%EBITDA margin rep. 18.4% 14.3% 18.3% 21.7% 23.1% 21.9% 21.2% 20.9% 22.2% 18.2%EBITDA margin adj. 19.2% 15.3% 19.3% 22.4% 24.0% 22.8% 22.2% 21.8% 23.0% 19.4%Net income 201 -18 86 113 182 196 218 140 267 99Return on capital adj. 6.3% 1.8% 6.6% 7.9% 9.6% 8.5% 8.4% 9.9% 7.8% 7.9%Funds from operations (FFO) 236 168 203 234 297 321 371 237 479 204Operating cash flow 234 205 258 281 338 239 352 121 362 82Free cash flow rep. (after Capex & Div.) 51 17 100 91 48 -118 -95 -104 -61 -200Retained cash flow (RCF) 200 110 162 189 245 243 284 141 376 84Acquisitions / disposals 14 16 -4 -152 -320 2 -140 -22 -301 -77Share buy back / issues -2 -67 0 0 222 -13 -3 -7 -6 -8Total dept rep. 908 919 823 960 933 1,189 1,405 1,685 1,442 1,646Net debt rep. 671 714 654 783 776 947 1,171 1,393 1,060 1,364Adj. for pensions 37 41 49 40 65 60 55 72 56 72Adj. for operating leases and others 48 53 57 38 57 62 80 80 55 55Net debt adj. 756 809 760 860 898 1,070 1,307 1,546 1,171 1,491

DEBT LEVERAGE

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2007

LTM

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1.0

1.5

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4.0

4.5FFO adj. / net debt adj.Net debt adj. / EBITDA adj. (RS)


0%

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30%

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2001

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2007

LTM

H1

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6.0

7.5


CREDIT METRICS

2000 2001 2002 2003 2004 2005

2006

H1 07 2007

LTM H1 08

EBIT net interest cover adj. 4.7 1.8 4.0 5.4 6.9 5.7 5.5 6.1 4.7 4.5EBIT gross interest cover adj. 3.0 1.3 2.9 3.6 4.0 3.7 3.4 3.9 3.0 2.3EBITDA net interest cover adj. 9.0 5.6 7.9 9.8 11.0 9.0 8.8 9.4 7.3 7.4EBITDA gross interest cover adj. 5.8 4.1 5.7 6.5 6.4 6.0 5.4 6.0 4.7 3.8FFO adj. / net debt adj. 32.0% 21.7% 27.8% 27.8% 33.9% 30.8% 29.2% 30.8% 41.8% 30.7%FFO adj. / total debt adj. 24.4% 17.3% 22.7% 23.1% 28.8% 25.1% 24.7% 25.9% 31.5% 25.8%RCF adj. / net debt adj. 27.2% 14.5% 22.4% 22.6% 28.0% 23.5% 22.6% 24.6% 33.0% 22.2%RCF adj. / total debt adj. 20.7% 11.6% 18.3% 18.8% 23.8% 19.2% 19.1% 20.7% 24.9% 18.6%Net debt adj. / EBITDA adj. 2.4 3.4 2.4 2.5 2.1 2.4 2.6 2.7 2.1 2.7Total debt adj. / EBITDA adj. 3.1 4.3 2.9 3.0 2.5 2.9 3.1 3.3 2.7 3.2FFO adj. / net interest adj. 6.8 4.2 5.2 6.8 7.9 6.7 6.8 7.9 6.3 6.2FFO adj. / gross interest adj. 4.4 3.0 3.8 4.5 4.6 4.4 4.2 5.0 4.0 3.2Total debt adj. / total capital. adj. 46.7% 49.5% 49.0% 51.6% 43.7% 47.0% 49.1% 52.7% 41.6% 45.3%Net debt adj. / net capital. adj. 40.0% 43.9% 44.0% 46.9% 39.8% 41.9% 45.0% 48.4% 34.9% 41.1%Equity / total assets 43.7% 41.5% 41.9% 40.7% 47.7% 45.4% 43.3% 40.4% 50.3% 46.7%





Disclaimer Our recommendations are based on information obtained from, or are based upon public information sources that we consider to be reliable but for the completeness and accuracy of which we assume no liability. All estimates and opinions included in the report represent the independent judgment of the analysts as of the date of the issue. We reserve the right to modify the views expressed herein at any time without notice. Moreover, we reserve the right not to update this information or to discontinue it altogether without notice. This analysis is for information purposes only and (i) does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any financial, money market or investment instrument or any security, (ii) is neither intended as such an offer for sale or subscription of or solicitation of an offer to buy or subscribe for any financial, money market or investment instrument or any security nor (iii) as an advertisement thereof. 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. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange may have an adverse effect on the value of investments. Furthermore, past performance is not necessarily indicative of future results. In particular, the risks associated with an investment in the financial, money market or investment instrument or security under discussion are not explained in their 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. Investors must make their own determination of the appropriateness of an investment in any instruments referred to herein based on the merits and risks involved, their own investment strategy and their legal, fiscal and financial position. As this document does not qualify as an investment recommendation or as a direct investment recommendation, neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Investors are urged to contact their bank's investment advisor for individual explanations and advice. Neither Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch, UniCredit CAIB Securities UK Ltd.and UniCredit Aton, nor any of their respective directors, officers or employees nor any other person accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This analysis is being distributed by electronic and ordinary mail to professional investors, who are expected to make their own investment decisions without undue reliance on this publication, and may not be redistributed, reproduced or published in whole or in part for any purpose. Responsibility for the content of this publication lies with: a) Bayerische Hypo- und Vereinsbank AG, Am Tucherpark 16, 80538 Munich, Germany, (also responsible for the distribution pursuant to §34b WpHG). The company belongs to

UCI Group. Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany. b) Bayerische Hypo- und Vereinsbank AG Milan Branch, Via Tommaso Grossi, 10, 20121 Milan, Italy, duly authorized by the Bank of Italy to provide investment services. Regulatory authority: “Bank of Italy”, Via Nazionale 91, 00184 Roma, Italy and Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany. The UniCredit CAIB Group, consisting of c) UniCredit CAIB AG, Julius-Tandler-Platz 3, 1090 Vienna, Austria Regulatory authority: Finanzmarktaufsichtsbehörde (FMA), Praterstrasse 23, 1020 Vienna, Austria d) UniCredit CAIB Securities UK Ltd., Moor House, 120 London Wall, London EC2Y 5ET, United Kingdom Regulatory authority: Financial Services Authority (FSA), 25 The North Colonnade, Canary Wharf, London E14 5HS, United Kingdom e) UniCredit Aton, Boulevard Ring Office Building, 17/1 Chistoprudni Boulevard, Moscow 101000, Russia Regulatory authority: Federal Service on Financial Markets, 9 Leninsky prospekt, Moscow 119991, Russia POTENTIAL CONFLICTS OF INTERESTS Alcatel-Lucent 3; Fresenius 2; Lottomatica 3; Michelin 3; Seat Pagine Gialle 3; SGL Carbon 6a; Wienerberger 2, 3; Key 1a: Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch, UniCredit CAIB Securities UK Ltd., UniCredit Aton and/or a company affiliated with it (pursuant to relevant domestic law) owns at least 2 % of the capital stock of the company. Key 1b: The analyzed company owns at least 2% of the capital stock of Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch, UniCredit CAIB Securities UK Ltd., UniCredit Aton and/or a company affiliated with it (pursuant to relevant domestic law). Key 2: Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch and UniCredit CAIB Securities UK Ltd., UniCredit Aton and/or a company affiliated with it (pursuant to relevant domestic law) belonged to a syndicate that has acquired securities or any related derivatives of the analyzed company within the twelve months preceding publication, in connection with any publicly disclosed offer of securities of the analyzed company, or in any related derivatives. Key 3: Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch and UniCredit CAIB Securities UK Ltd., UniCredit Aton and/or a company affiliated (pursuant to relevant domestic law) administers the securities issued by the analyzed company on the stock exchange or on the market by quoting bid and ask prices (i.e. acts as a market maker or liquidity provider in the securities of the analyzed company or in any related derivatives) Key 4: The analyzed company and Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch and UniCredit CAIB Securities UK Ltd., UniCredit Aton and/or a company affiliated (pursuant to relevant domestic law) concluded an agreement on services in connection with investment banking transactions in the last 12 months, in return for which the Bank received a consideration or promise of consideration. Key 5: The analyzed company and Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch and UniCredit CAIB Securities UK Ltd., UniCredit Aton and/or a company affiliated (pursuant to relevant domestic law) have concluded an agreement on the preparation of analyses. Key 6a: Employees of Bayerische Hypo- und Vereinsbank AG Milan Branch and/or members of the Board of Directors of UniCredit (pursuant to relevant domestic law) are members of the Board of Directors of the Issuer. Members of the Board of Directors of the Issuer hold office in the Board of Directors of UniCredit (pursuant to relevant domestic law). Key 6b: The analyst is on the supervisory/management board of the company they cover. Key 7: Bayerische Hypo- und Vereinsbank AG Milan Branch and/or other Italian banks belonging to the UniCredit Group (pursuant to relevant domestic law) extended significant amounts of credit facilities to the Issuer. RECOMMENDATIONS, RATINGS AND EVALUATION METHODOLOGY Company Date Rec. Company Date Rec. Company Date Rec. ALUFP 10/31/2007 Sell IESYRP 7/18/2008 Hold STORA 3/31/2008 Underweight ATUGRP 11/30/2007 Hold INEGRP 7/18/2008 Sell STORA 2/13/2008 Marketweight BASLNV 7/18/2008 Sell INEGRP 4/30/2008 Hold STORA 1/11/2008 Overweight BASLNV 4/1/2008 Hold INEGRP 11/30/2007 Sell SUEDZU 10/11/2007 Overweight BOMB 11/29/2007 Buy ISSDC 7/18/2008 Hold SUEDZU 10/1/2007 Marketweight COGNIS 4/30/2008 Buy ISSDC 5/30/2008 Buy VMED 12/5/2007 Hold DEGUSS 11/29/2007 Sell ISSDC 4/30/2008 Hold VNU 4/30/2008 Buy EUROCA 11/23/2007 Hold ISSDC 11/30/2007 Buy VNU 4/1/2008 Hold F 12/5/2007 Sell MESSA 4/24/2008 Sell VNU 10/22/2007 Sell FREGR 7/8/2008 Hold MESSA 1/11/2008 Hold WDAC 9/5/2008 Sell GM 4/30/2008 Sell MESSA 12/5/2007 Buy WDAC 7/18/2008 Hold GMAC 2/6/2008 Sell NSINO 5/21/2008 Sell WDAC 12/6/2007 Buy GMAC 9/18/2007 Hold NSINO 2/25/2008 Hold WDAC 12/5/2007 Hold GROHE 8/28/2008 Hold NSINO 12/5/2007 Buy WIEAV 7/28/2008 Underweight




Company Date Rec. Company Date Rec. Company Date Rec. GROHE 7/18/2008 Sell NXPBV 9/12/2008 Marketweight WIEAV 7/11/2008 Marketweight GROHE 12/5/2007 Hold ONOFIN 1/31/2008 Hold WIEAV 4/30/2008 Buy HBMGR 12/5/2007 Buy RHA 4/9/2008 Hold WIEAV 2/15/2008 Marketweight HEADHO 4/16/2008 Sell RHA 11/6/2007 Buy WINDIM 9/5/2008 Buy HEADHO 12/5/2007 Hold SEAT 4/30/2008 Sell WINDIM 7/18/2008 Hold HELLAS 4/30/2008 Sell SEAT 3/19/2008 Hold Overview of our ratings You will find the history of rating regarding recommendation changes as well as an overview of the breakdown in absolute and relative terms of our investment ratings on our websites hvbmarkets.de and http://www.mib-unicredit.com/research-disclaimer under the heading “Disclaimer.” The history of recommendations is not provided for HVB Milan and UniCredit CAIB AG. Note on the bases of evaluation for interest-bearing securities: Our investment ratings are in principle judgments relative to an index as a benchmark. Issuer level: Marketweight: We recommend having 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 having 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 having 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 holding the respective instrument for investors who already have exposure. Sell: We recommend selling the respective instrument for investors who already have exposure. Buy: We recommend buying the respective instrument for investors who already have exposure. Trading recommendations for fixed-interest securities mostly focus on the credit spread (yield difference between the fixed-interest security and the relevant 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. The prices used in the analysis are the closing prices of the appropriate local trading system 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. Coverage Policy A list of the companies covered by Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, UniCredit CAIB Securities UK Ltd., Bayerische Hypo- und Vereinsbank AG Milan Branch and UniCredit Aton is available upon request. Frequency of reports and updates It is intended that each of these companies be covered at least once a year, in the event of key operations and/or changes in the recommendation. Companies for which Bayerische Hypo- und Vereinsbank AG Milan Branch acts as Sponsor or Specialist must be covered in accordance with the regulations of the competent market authority.

SIGNIFICANT FINANCIAL INTEREST: Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch, UniCredit CAIB Securities UK Ltd., UniCredit Aton and/or a company affiliated (pursuant to relevant national German, Italian, Austrian, UK and Russian law) with them regularly trade shares of the analyzed company. Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch, UniCredit CAIB Securities UK Ltd. and UniCredit Aton may hold significant open derivative positions on the stocks of the company which are not delta-neutral. Analyses may refer to one or several companies and to the securities issued by them. In some cases, the analyzed issuers have actively supplied information for this analysis. ANALYST DECLARATION 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. ORGANIZATIONAL AND ADMINISTRATIVE ARRANGEMENTS TO AVOID AND PREVENT CONFLICTS OF INTEREST To prevent or remedy conflicts of interest, Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, UniCredit CAIB Securities UK Ltd., Bayerische Hypo- und Vereinsbank AG Milan Branch and UniCredit Aton have established the organizational arrangements required from a legal and supervisory aspect, adherence to which is monitored by its compliance department. Conflicts of interest arising 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 Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, UniCredit CAIB Securities UK Ltd., Bayerische Hypo- und Vereinsbank AG Milan Branch and UniCredit Aton 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 Markets Units, as well as the research department. In the case of equities execution by Bayerische Hypo- und Vereinsbank AG Milan Branch, other than as a matter of client facilitation or delta hedging of OTC and listed derivative positions, there is no proprietary trading. Disclosure of publicly available conflicts of interest and other material interests is made in the research. Analysts are supervised and managed 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 sale of securities to clients. ADDITIONAL REQUIRED DISCLOSURES UNDER THE LAWS AND REGULATIONS OF JURISDICTIONS INDICATED Notice to Austrian investors This document does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any securities and neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. This document is confidential and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on to any other person or published, in whole or part, for any purpose. Notice to Czech investors This report is intended for clients of Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, UniCredit CAIB Securities UK Ltd. or Bayerische Hypo- und Vereinsbank AG Milan Branch in the Czech Republic and may not be used or relied upon by any other person for any purpose. Notice to Italian investors This document is not for distribution to retail clients as defined in article 26, paragraph 1(e) of Regulation n. 16190 approved by CONSOB on October 29, 2007. In the case of a short note, we invite the investors to read the related company report that can be found on UniCredit Global Research website www.globalresearch.unicreditmib.eu. Notice to Russian investors As far as we are aware, not all of the financial instruments referred to in this analysis have been registered under the federal law of the Russian Federation “On the Securities Market” dated April 22, 1996, as amended, and are not being offered, sold, delivered or advertised in the Russian Federation. Notice to Turkish investors Investment information, comments and recommendations stated herein are not within the scope of investment advisory activities. Investment advisory services are provided in accordance with a contract of engagement on investment advisory services concluded with brokerage houses, portfolio management companies, non-deposit banks and the clients. Comments and recommendations stated herein rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not suit your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely on the information stated here may not result in consequences that meet your expectations.




Notice to Investors in Japan This document does not constitute or form part of any offer for sale or subscription for or solicitation of any offer to buy or subscribe for any securities and neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Notice to UK investors This communication is directed only at clients of Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, UniCredit CAIB Securities UK Ltd. or Bayerische Hypo- und Vereinsbank AG Milan Branch who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or (iii) to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons. Notice to U.S. investors This report is being furnished to U.S. recipients in reliance on Rule 15a-6 ("Rule 15a-6") under the U.S. Securities Exchange Act of 1934, as amended. 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" (as such term is defined in Rule 15a-6) 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 regarding any security or issuer mentioned herein, or engage in any transaction to purchase or sell or solicit or offer the purchase or sale of such securities, should contact a registered representative of UniCredit Capital Markets, Inc. (“UCI Capital Markets”). 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 UCI Capital Markets. The securities referred to in this report may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S. reporting and/or other requirements. Available information regarding the issuers of such securities may be limited, and such issuers may not be subject to the same auditing 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 tolerance and financial position. In jurisdictions where UCI Capital Markets 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 transaction 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 UCI Capital Markets does not make any representation with respect to its completeness or accuracy. All opinions expressed herein reflect the author’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. UCI Capital Markets 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. UCI Capital Markets 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 in 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 This document may not be distributed in Canada or Australia.




UniCredit Global Research* Thorsten Weinelt, CFA Global Head of Research & Chief Strategist +49 89 378-15110 [email protected]

Dr. Ingo Heimig Head of Research Operations +49 89 378-13952 [email protected]

Global Credit Research

Luis Maglanoc, CFA, Head +49 89 378-12708 [email protected]

Credit Strategy & Structured Credit Research Dr. Jochen Felsenheimer, Head +49 89 378-18188 [email protected]

Dr. Philip Gisdakis, Deputy Head Credit Strategy +49 89 378-13228 [email protected]

Dr. Tim Brunne, Quantitative Credit Strategy +49 89 378-13521 [email protected]

Markus Ernst, Structured Credit +49 89 378-14213 [email protected]

Agnes Kitzmüller, Credit Strategy & Structured Credit +49 89 378-11294 [email protected]

Gianna Julia Wisser, Credit Strategy +49 89 378-13229 [email protected]

James Zanesi, Structured Credit +49 89 378-12250 [email protected]

Financials Credit Research Franz Rudolf, CEFA, Head Covered Bonds +49 89 378-12449 [email protected]

Alexander Plenk, CFA, Deputy Head Banks +49 89 378-12429 [email protected]

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

Florian Hillenbrand, Covered Bonds +49 89 378-12961 [email protected]

Martin Knocinski, Regulatory & Accounting Service +49 89 378-14245 [email protected]

Luis Maglanoc, CFA, Regulatory & Accounting Service, Banks +49 89 378-12708 [email protected]

Christian Meidinger, Covered Bonds, Sub-Sovereigns & Agencies +49 89 378-12004 [email protected]

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

Ivanka Stefanova, Banks +49 89 378-14247 [email protected]

Corporate Credit Research Stephan Haber, Co-Head Telecoms, Cable, Technology +49 89 378-15192 [email protected]

Dr. Sven Kreitmair, CFA, Co-Head Automotive, Media +49 89 378-13246 [email protected]

Jana Arndt, CFA Basic Resources, Industrial G&S, Packaging +49 89 378-13211 [email protected]

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

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

Dr. Stefan Kolek EEMEA Corporate Credits & Strategy +49 89 378-12495 [email protected]

Rocco Schilling Healthcare, Tobacco, Travel & Leisure +49 89 378-15449 [email protected]

Jochen Schlachter Chemicals, Construction & Materials +49 89 378-13212 [email protected]

Dietmar Tzschentke EEMEA Financials +49 89 378-12960 [email protected]

Publication Address

UniCredit Markets & Investment Banking Bayerische Hypo- und Vereinsbank AG Global Research Arabellastrasse 12, D-81925 Munich Tel. +49 89 378-12759 Fax +49 89 378-16237

Bloomberg UCCR Internet www.globalresearch.unicreditmib.eu

* UniCredit Global Research is the joint research department of Bayerische Hypo- und Vereinsbank AG (HVB) and UniCredit CAIB Group (CAIB).

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