1. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved. 7 th Annual Credit Markets Symposium – Finding the Right Balance Changes in Wholesale Lending: 2007 versus 2013 Jay Dhru Sr. Managing Director Global Corporate Ratings April 19, 2013

2. 2. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Market Conditions for U.S. Corporate Ratings Positive Factors: Investor “thirst for yield” & low interest rates are spurring corporate borrowing, Low yields on treasuries and stock market uncertainty make corporate bonds & loans relatively attractive, High yield market continues to be receptive to new issuance in 2012), Barring major economic setbacks, we expect a continuation of strong high yield issuance in 2013, Corporate balance sheets and liquidity have improved markedly since the crisis, Corporate profit margins and productivity have recovered but further gains will be challenging in a low growth environment, Default rates remain at low levels although trending up marginally, and Fed implements third phase of Quantitative Easing Risks and Challenges: Low U.S. consumer confidence is undermining hiring and slowing economic growth - we place the likelihood of a recession at 15% to 20%, High structural unemployment and underemployment are also weakening demand, European recession combined with a sovereign debt crisis and decelerating growth from China, all contribute to stronger head winds on U.S. & global GDP growth prospects, Corporate earnings: Is there a potential for a material margin squeeze given decreasing economic and revenue growth prospects? Risks from automatic budget cuts (Fiscal Cliff) and 2013 fiscal austerity, Effect of rising dollar on export competiveness, Negative effect from volatile commodity prices, Dodd-Frank Wall Street Reform & Consumer Protection Act, and Resurgence of more liberal credit standards (i.e. ‘covenant light’) which could have adverse implications in the future

3. 3. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. IG and SG Upgrades and Downgrades: US Corporates, excluding Financial and Insurance Includes downgrades to default and includes upgrades from default Source: Global Ratings Reporting Group using QDA. Report Creation Date : 11/16/2012. United States – Annual Upgrades and Downgrades Since 2009 Upgrades Downgrades 2009 2010 2011 YTD 2012 *Note: 2.06x during last 6 months

4. 4. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Record Amount of Cash Hoarded on Balance Sheets Fed Reserve Report: $1.82T of non-financial corporate cash at YE‘12 ~5.5% increase from 2011; 12%+ increase from 2006 ~28% increase from Great Recession in 2008 S&P Rated: ~$1.27T of cash held by non-financial corporate issuers at YE’12 Ratio of Cash to Total Assets is higher than historical levels Near 7% range from 2006 – 2008 Peaked at over 9% in 2010 but remains elevated S&P RatedFederal Reserve

5. 5. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Cash Not Evenly Distributed Among Ratings Greater Growth Among Investment Grade ~9% CAGR from 2006 – 2012 Consistent Cash Flow through recession and higher offshore cash ‘A’ rated category and above (10% of issues)  60% of $1.27 Trillion Spec Grade Growth Is Lagging ~2.5% CAGR from 2006 – 2012 Greater revenue declines and lower CFO generation through recession Higher domestic cash balance which can be distributed to sponsors & shareholders Held for liquidity concerns; Maturities concentrated at “B” and lower ratings. “B” rated category and below (46% of issues)  only 10.5% of $1.27 Trillion ~9% CAGR ~2.5% CAGR 2012 (E)

6. 6. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Cash Not Evenly Distributed Among All Rated Issuers Top 25 Largest Cash Holders account for 40% of Cash 1.5% of Total Rated Corporate Issuers Top 50 Account for about 52% of Total Pie, out of 1700 issuers. Top 10 Rated Issuers Microsoft$68.1B Google$48.1B Cisco$46.4B Oracle$33.7B Pfizer$32.7B GM$26.1B Ford$24.4B Amgen$24.1B Chevron$21.9B J&J$21.1B 2012

7. 7. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Cash Not Evenly Distributed Among All Industries Two Industries Hold Nearly 45% Of The Cash 1. Technology accounts for about 28% (over $350B)  Greater exposure to non-US earnings  Treasurers’ reticence to repatriate overseas cash 2.Health Care at 15% (nearly $200B) Improvement in Auto Sector Fundamentals Supports 7% Share of Cash 2012

8. 8. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. How Did The Cash Balance Grow? Under Investment by $175B Since The Recession Capex fell 21% through the Recession; Revenue declined 13% Capex declines in 2009 and 2010 outpaced those of revenue declines Capex spend as a % of revenues fell from 7.5% to 6.6% from 2008 to 2010 Capex growth did not exceed revenue growth until 2011 Capex % spend finally returned to 2008 level in 2012 12% Decline 7.6 YE’12 (E)

9. 9. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Capex Decline More Pronounced in Spec Grade Spec Grade Issuers underinvested about 20% of normal Capex Some rebound of late, but still not fully recovered Investment Grade Issuers underinvested by only 4% 2012 (E) 7.6

10. 10. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Europe – More Caution, More Cash Pressure, Investing Elsewhere Europe Debt 1000 - Cash & ST investments (Real terms) Europe Debt 1000 –Operating Cash Growth (Nominal) Cash Balances By European Industry Proportion of Capex Spent Outside Europe Source: S&P Capital IQ, S&P Ratings calculations. All data refer to a bespoke index, Europe Debt 1000. The index represents the largest 1000 companies in Europe (both publically-listed and private companies with public debt) in terms of total debt and is rebalance annually. European non- financial companies have a Trillion Euro cash pile......but downward pressure on operating cash flow Industries with cash may not spend it given long lead times for investment and overcapacity......and a large and rising share of capex is spent outside of Europe

11. 11. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Asia-Pacific: Cash Balances Ease As Concerns Fall Cash balances as percentage of assets for rated corporates in Asia-Pacific: –Increased to conservative levels after the global financial crisis broke. –But eased over the past two years as liquidity concerns dissipate. © Standard & Poor’s. 2012e is a sample estimate, actual figures may differ.

12. 12. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Underinvestment Led To Higher Cash Balances…BUT It preserved liquidity only in the short term It artificially inflated overall corporate liquidity Will shrink profitability Diminish ability to borrow Impact credit quality Exposes competitive disadvantage Product innovation Manufacturing Operating equipment maintenance Technology

13. 13. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Is The Cash Burning a Hole in Corporate Pockets? M&A is on the rise Share buy backs on the rise Little cost cutting left You cannot grow by shrinking

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