1

Challenges and opportunities for Hybrid Capital

2

Overview of the hybrid market FINANCIAL INSTITUTIONS 2006

50

2007

Banks & Ins T1 € 2007 YTD: 6.05bn 2006: 23.4bn 2005: 28bn 2004: 21.5bn 2003: 10bn

EUR bn

40 30 20 10 0 LT2

UT2

Banks & Insurance T1 Austria 1% USA 15% Spain 5% Italy 15%

France 10%

Japan 6% Denmark 8%

Germany 24%

T1

T3

Insurance

Banks & Insurance T2 A ustria Others 3%B elgium 2% Germany 5% 10% USA Ireland 16% 8% Sweden 2% France 3% Spain Italy 19% 5% UK 27%

Banks & Ins Tier 2 € 2007 YTD: 17.4bn 2006: 55bn 2005: 43.8bn 2004: 40.7bn 2003: 20bn

3

Overview of the hybrid market CORPORATES : 16 bn € issued to date Eurogate (GER) € 150m Pfleiderer (GER) € 275m Wienenberger (AUT) Eurofins (GER) € 900m € 100m Cemex (MEX) Mossi (ITA) € 730m € 200m

18 000 June 2005: S&P streamlines hierarchy for hybrid securities

16 000

Primary Issuance Volume € m

14 000

Siemens (GER) € 900m / GBP750m

March 2005: S&P outlines corporate criteria for equity credit

12 000

Linde (Ger) € 700m / GBP250m

February 2005: Moody’s increases equity credit for hybrid capital by assigning up to 75% equity credit (Basket D) for certain securities

10 000

Lottomatica (ITA) € 750m

Thomson (FRA) € 500m

May 2004: Moody’s publishes criteria for Basket C (50% equity credit) hybrid capital securities

Dong (DEN) € 1,100m

Linde (GER) € 400m

0 Jun03

Sep03

Claas (GER) € 80m

Michelin (FRA) € 500m

Casino (FRA) € 600m

Dec03

Mar04

Jun04

Sep04

Dec04

Mar05

IVG (GER) Vinci (FRA) € 200m € 500m Henkel (GER) € 1,300m

Otto (GER) € 150m

Bayer (GER) € 1,300m

4 000 2 000

Solvay (BEL) € 500m

TUI (GER) € 300m

8 000 6 000

GE Capital (USA) € 950m / GBP400m

Union Fenosa (ESP) € 750m Vattenfall (SWE) € 1,000m

Suedzucker (GER) € 700m

Jun05

Sep05

Dec05

Mar06

Jun06

Sep06

Dec06

Mar07

4

Hybrid: What is it? A Liability capital markets instrument Structured to be a proxy to Equity With generally 4 main features Ranking

: Junior to all debt obligations

Maturity

: Undated or very long dated (60 years)

Right of payment

: Tailored to be a proxy to a dividend, i.e. discretionary in most cases

Callable

: Synthetic maturity (typically at year 10)

And 3 key objectives pursued by issuers Strengthen their financial structure At a reasonable price And in a non-dilutive way

5

Debt to Equity continuum Accounting treatment (IFRS) Ordinary shares

Legal treatment

Equity

Ordinary shares

Equity

Hybrid instrument

Subordinated: senior to ordinary shares only

Senior debt

Senior debt: no subordination

Equity

Equity Hybrid instrument

Equity

Debt Senior debt

Debt

Debt

Rating treatment Ordinary shares

Fiscal treatment

100% Equity

Ordinary shares

Dividend payment - not tax deductible

Hybrid instrument

Interest payment - tax deductible

Senior debt

Interest payment - tax deductible

Equity 50% Equity Hybrid instrument 50% Debt Senior debt

100% Debt

Debt

Equity

Debt

6

Hybrid Capital vs other capital instruments Senior

Convertible

Hybrid

Post Tax cost

☺

☺

☺

Dilution

☺

Capital

☺

Regulatory Treatment

☺

☺

Equity Credit

☺ ☺

☺ ☺

Accounting treatment

7

FIs: A key compenent of regulatory capital On a aggregate basis “Hybrids Tier 1” represents 15% of banks own funds Hybrids Tier 1 are mainly composed by innovative instruments (2/3) Structure of Tier 1 by country

Structure of additional own funds by country

Going forward the main issues are: Development of non innovative structures Harmonisation of Tier 1 eligibility criteria across Europe

8

Corporates: main rationale for issuance To retain financial flexibility Claas, Südzücker, Vattenfall, DONG, Wienerberger

To refinance existing debt Bayer, Thomson

To consolidate company’s financial structure Union Fenosa, Mossi & Ghisolfi, Eurofins

To finance pension deficits Henkel

To (re)finance an acquisition Vinci, Porsche, TUI, Lottomatica, Solvay, Linde, Siemens, Cemex, Rexam

To lower cost of capital GECC

9

A continuously evolving market Progressive standardization on one hand… Guidelines from regulators, rating agencies and, to an extent, from accountants Beginning of standardization of certain terms Investor’s education Quantitative pricing models developed (convergence in the making)

… But the quest of the holy grail continue Regulatory environment CEBS / CEIOPS / Solvency II Non Innovative Tier 1 Tier 1 for insurance companies in anticipation of future regulation Complexification of instruments’ features Optional/Mandatory Interest Deferrals ACSM : Share settlement, APSM, PIK Replacement language binding and non-binding Early redemption call

10

A continuously evolving market … therefore new frontiers are continuously tested First hybrid transaction by a non investment grade issuer for TUI First perpetual Exchangeable hybrid Bond for MOL First non investment grade issue by an investment grade issuer for Lottomatica First non-rating compliant hybrid for Cemex A growing market for unrated/unlisted issuers (Mossi & Ghisolfi, Eurogate, Eurofins, etc.)

11

Structuring: what are the drivers ?

12

Structuring challenges

Regulator Tax & Legal

Regulatory constraints (features, thresholds) Issuer / Issue corporate law

Accountants

Tax considerations Accounting treatment (equity/debt) Rating Agencies Investors

Rating of the issue and equity content Investors perception & impact on credit premium

13

Structuring : the French case LEGAL ASPECTS

TAX ASPECTS

Perpetual obligations can be structured under French law

French tax rules stick to the legal analysis of the securities issued

Deeply Subordinated Bond (Titres Super Subordonnés) ranked hybrid instrument just senior to equity

TSS are defined as debt securities and therefore interest payment are fully tax deductible

Interest deferral is achievable but the mechanism should take into account legal / regulatory constraints (dividend pusher, ACSM)

ACCOUNTING ASPECTS Equity treatment depending on the lack of obligation to deliver cash or financial assets No maturity Option to settle in cash does not create a liability Interest payment optional only (dividend pusher possible)

Hybrid instruments can be efficiently structured from a tax, legal & accounting perspective… in most European jurisdiction !

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AXA EUR 1 bn 5.777% undated / 2016 Issuer :

AXA SA Direct issue

Issuer rating :

A2, A, A+

Issue rating :

Baa1,BBB, A

Size :

EUR 1 bn

Maturity :

Undated non call 10 ans

Coupon :

5.777% Regulator / Rating agencies

15

AXA EUR 1 bn 5.777% undated / 2016 To finance Winterthur, AXA has chosen to: Anticipate future Tier 1 regulation for insurance companies Optimize the benefits of the issue from a rating agencies angle

Corporate law issue / issuer:

French / English

Regulatory aspects:

Banking Tier 1 format in anticipation of future insurance rules

Tax:

Tax deductible

Accounting:

Equity under IFRS

Equity content:

100% S&P / 75% Moody’s

Investors perception:

Oversubscription 4.4 x

16

Linde EUR 700 mn 7.375% 2066 / 2016 Issuer :

Linde Finance BV Undirect issue

Guarantor :

Linde AG

Issuer rating :

A3, BBB+ (Moody’s, S&P)

Issue rating :

Baa2, BBB-

Size :

EUR 700 mn

Maturity :

2066 non call 10 ans

Coupon :

7.375%

Negative watch at the time of the issue

IFRS debt treatment

17

Linde EUR 700 mn 7.375% 2066 / 2016 In the context of BOC acquisition Linde launched its second hybrid: To increase financial flexibility thanks to the equity content To limit dilution by reducing the equity increase

Corporate law issue / issuer:

German / English

Regulatory aspects:

None

Tax:

Tax deductible

Accounting:

Debt under IFRS

Equity content:

50% S&P and Moody’s

Investors perception:

Oversubscription 9 x

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Differing features for the same substance

Regulator

AXA Tier 1

Linde Hybride

Insurance company regulated by « ACAM »

Corporate, non regulated

Direct issue

Indirect issue

Undated

Dated

Equity IFRS

Dette IFRS

75 % equity content Moody’s 100% equity credit S&P

50 % equity content Moody’s 50% equity credit S&P

-2 notches Moody’s -3 notches S&P

-2 notches Moody’s -2 notches S&P

Tax & Legal

Accountants

Rating Agencies Investors

0% Vinci Hybrid

Scandinavia

Thomson Hybrid

CNP Tier I

Switzerland

AXA Tier I

Credit Logement Upper Tier II

Credit Logement Tier I

UK

OeVolksbanken Lower Tier II

Other EU

BBVA Lower Tier II

CAM Lower Tier II

Netherlands

Sanpaolo IMI Lower Tier II

BPVN Lower Tier II

Banco Sabadell Lower Tier II

Spain

Jyske Bank Tier II

Italy

BPER Lower Tier II

France

CFCM Lower Tier II

Tryg Forsikring Tier II

Germany

Capitalia Tier III

Credit Logement Lower Tier II

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Who are the investors ? Others

65% 58% 62% 59% 39% 90% 91% 65% 100% 55% 99% 77% 85% 61% 84% 61% 84% 67%

100%

80%

60%

40%

20% % distributed out of home market

20

What’s in for investors Historical Spreads of Corp Hybrids

Features of hybrids make them attractive to investors

270

240

Characteristics of debt with fixed coupon and scheduled maturity

Z Spread (bp)

210

Highest yielding bonds that fund managers can buy

180

150

120

90

Mainly issued by IG companies with a low probability of default

60 juin05

Strong performance in the recent years

juil05

août05

sept05

Vattenfall

oct05

nov05

déc05

Suedzucker

janv06

Dong A/S

févr- mars06 06

avr06

mai06

Bayer AG

juin06

Linde 13/Perp

juil06

août06

Henkel

sept06

oct06

nov06

Vinci

déc06

janv07

Solvay

févr- mars07 07

Linde 16/66

avr07

mai07

juin07

Siemens

Historical Spreads of Insurance Subordinated Bonds 170

Nevertheless, hybrids carry a number of risk for investors

Therefore the relevant question is : « are they fairly paid for these risks » ?

130

Z Spread (bp)

Subordination, coupon deferral, extension, volatility

150

110

90

70

50

30 mai-05 Legal & General

août-05

nov-05 Allianz - UT2

févr-06

mai-06

Zurich Finance

août-06 Eureko

nov-06 Hannover Re - T1

févr-07

mai-07 Old Mutual - UT2

21

Pavillon d’Armenonville Thursday July 5 & Friday 6, 2007