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Corporate

Bonds

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Analysen & Trends Analysen & Trends

Decisive Insights

for forward-

looking investment

strategies

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Content

4

Corporate Bonds

5

Corporate Credit

6

Corporate Credit Value Drivers

12

Change in the Corporate Market since 2006

14

Some Features of Corporate Credit

Management

15

Corporate Credit Contributes to

Diversified Investment

Imprint

Allianz Global Investors GmbH Bockenheimer Landstr. 42 – 44 60323 Frankfurt am Main

Global Capital Markets & Thematic Research Hans-Jörg Naumer (hjn)

Ann-Katrin Petersen (akp) Stefan Scheurer (st) Gregor Krings

Data origin – if not otherwise noted: Thomson Reuters Datastream

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Corporate Bonds

In 2009, some UCITS* specialising in corporate credit turned in remarkable performances. The best of them in the eurozone were up nearly 70 %; they outperformed the major Western indices (Nasdaq + 44 %), and were close to the levels of the Shanghai (Hang Seng Index: + 80 %) and Sao Paulo (Bovespa Index: +83 %) stock markets (Source: Datastream). While their performance in 2010 (+ 16 %) and 2011 (– 2 %) were less outstanding, they much exceed that of european stocks (e. g.: DJ Eurostoxx 50: – 4 and –18 % respectively). Many investors therefore continue to hold corporate credit UCITS as part of their asset allocation.

But what is corporate credit? Why has it been one of the top performers among the different asset segments since 2009? After turning in such a solid performance, why does this seg-ment continue to offer potential?

After we define corporate credit, we will examine what drives its value, then look at the market changes over recent years, before identifying a few of the characteristics of its management, then identifying what it brings to a diversified portfolio.

* ”Undertakings for Collective Investments in Transferable Securities“

Corporate bonds might enhance the risk / return profile

due to their unique features as an asset class.

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Corporate Credit

Corporate credit means bond debt issued by private companies. Here we will discuss only listed issues.

The total value of bonds in issue in the eurozone is EUR 16 trillion in August 2011. Government debt comprises about 38 % of this market, 5 % is debt issued by private companies, and 53 % by private financial institutions. (source: INSEE (Institut National de la Statistique et des Etudes Economiques)). In the US, the proportion of corporate bonds is higher.

There are two types of corporate bonds:

Investment grade bonds have the highest

rating (at least BBB- rating). The issuers are solid companies with high solvency (credit-worthiness). It is unlikely that such companies will not fulfil the interest payment and matu-rity (below BBB-) terms of their bonds.

High-yield bonds are issued by companies

with lower creditworthiness, in particular with regard to longer maturities (below BBB –). Bonds issued by companies with an uncertain future are described as junk bonds (rating of BB or below).

By definition, yields of investment grade bonds, which are more secure, are lower than yields of high-yield bonds, which are riskier.

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Corporate Credit Value Drivers

1. Corporate bonds and changes in interest rates

Most importantly, corporate bonds, as with all bonds, are very sensitive to interest rate changes.

If the yields of government bonds increases, the yield of corporate bonds with the same maturity will most likely increase as well. However, as is the case with all bonds, their market value may then go down. The drop in value is greater the more sensitive the bond is, that is, for long maturities and / or for lower yield of. Conversely, if the yields on govern-ment bonds falls, then the rate on corporate bonds will likely decrease and their market value would increase. The greater the sensi-tivity of the bond, the greater the increase in value. The price of a corporate bond is sensi-tive to the same factors, that change yields of government bonds.

Investment-grade bonds are more sensitive than high-yield bonds, since their yield is lower by definition.

But the change in yields of on government bonds is not the only factor.

2. Corporate bonds and creditworthiness

In fact, the yield of a corporate bond is primar-ily dependent on the solvency, i. e. the credit-worthiness of the issuer.

In the major developed countries, it is gener-ally accepted that there is no debt with lower risk than a government bond or government debt (Although there are some exceptions). Corporate debt is riskier than government debt, and this justifies a higher yield. The difference is called the spread.

The higher the creditworthiness of the issuer (e. g. investment-grade bonds), the lower the spread. The lower the creditworthiness of the issuer (e. g. high-yield bonds), the higher the spread.

It is therefore essential to hold securities the creditworthiness of which would improve. An improvement in issuer risk warrants a lower spread, which tends to result in a lower overall yield and an increase in the value of the securities. Conversely, it is just as impor-tant to avoid securities with deteriorating creditworthiness. An increase in risk warrants a higher spread, which tends to result in a higher overall yield and a decrease in the value of the securities.

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Figure 1: Bond ratings by rating agencies

Source: Allianz Global Investors Capital Market Analysis

* Ratings from Aa to Ca by Moody’s can be modified by adding a 1, 2 or 3 to show the relative place within the category. ** Ratings from AA to CC by Standard & Poor’s and Fitch Ratings can be modified by adding a plus or minus sign to

show the relative place within the category.

Creditworthiness Moody‘s* Standard & Poor‘s**

Fitch Ratings**

Best quality (excellent ability to repay debt) Aaa AAA AAA

High quality (very strong ability to repay debt) Aa AA AA

Above-average quality (good ability to repay debt) A A A

Average repayment ability Baa BBB BBB

Below-average quality (somewhat speculative, exposure to risk) Ba BB BB

Low quality (speculative, exposure to risk) B B B

Poor quality (risk of non-payment) Caa CCC CCC

Highly-speculative Ca CC CC

No interest paid or bankruptcy declaration filed C D D

In default C D D

The existence of multiple rating agencies means, in theory, that there will be diverse points of view, but the 2008 financial crisis and the more recent sovereign debt crisis in the eurozone showed their credit ratings are not immune to some criticism.

For this reason, active portfolio managers in corporate debt have long assembled teams of analysts to independently monitor the major issuers.

3. Creditworthiness and credit ratings

The creditworthiness of an issuer is rated by specialised rating agencies, such as Standard & Poor’s, Moody’s and Fitch Ratings. The rat-ing is deemed to be directly related to credit risk, in terms of the issuer’s relative credit quality. (see Figure 1)

Investment grade debt has a rating of BBB- or higher. High-yield debt has a rating of below BBB–.

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4. Credit rating and study of risk

A thorough analysis of a company is needed to understand its credit quality.

Its equity (shares) and medium and longterm debt (bonds) are what comprise a company’s long-term resources, in other words an essential part of the company’s liabilities. An analysis of the issuer’s sector, its market posi-tioning, strategy, balance sheets and financial statements must verify that day-to-day opera-tions will allow the company to service its liabilities appropriately over the long term. The equity analysis and credit analysis of a company go through these same steps. Equity analysis examines the value per share, which represents ownership of a portion of the com-pany in terms of its current and future profit-ability. Credit analysis examines the value of a bond, which is ownership of a portion of the company’s debt and the company’s ability to service its debt and repay the principal at maturity.

There are three important financial analysis ratios:

Figure 2: Table of ratings and financial ratios in terms of business and financial risk

Financial Risk Profile

Business risk profile Minimal Modest Intermediate Aggressive Highly leveraged

Excellent AAA AA A BBB BB

Strong AA A A – BBB – BB –

Satisfactory A BBB+ BBB BB+ B+

Weak BBB BBB – BB+ BB- B

Vulnerable BB B+ B+ B B –

Financial risk indicative ratios* Minimal Modest Intermediate Aggressive Highly leveraged

Cash Flow (Funds from operations / Debt) (%) > 60 45 – 60 30 – 45 15 – 30 < 15 Debt leverage (Total Debt / Capital) (%) < 25 25 – 35 35 – 45 45 – 55 > 55

Debt / EBITDA** < 1,4 1,4 – 2,0 2,0 – 3,0 3,0 – 4,5 > 4,5

Source: Standars & Poor‘s, 2010; Allianz Global Investors Capital Market Analysis * Fully adjusted, historicallydemonstrated, and expected to continue consistently; ** Earnings before interest, taxes, depreciation and amortization

• the Cash Flow to Debt Ratio (in %); • the Debt to Equity Ratio (in %) – also called

gearing;

• debt as a multiple of EBITDA*, i. e. the gross operating margin.

The table below shows the distribution of these three ratios and the different ratings in terms of operational risk (y-axis) and financial risk (x-axis).

A company with an excellent business model can only present a minimal financial risk if it has an annual cash flow of at least 60 % of its debt, a debt-to-equity ratio of less than 25 % and debt of less than 1.4 times EBITDA. This warrants a rating of AAA.

Lower ratios correspond to a modest financial risk and warrant a rating of AA. If the financial ratios are even lower, this warrants a rating of BBB. (see Figure 2)

* Earnings before interest, taxes, depreciation and amortization

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Source: Standard & Poor‘s, 2011 Annual Global Corporate Default Study and Rating Transitions; March 2012 Figure 3: Historical rating changes of corporate debt by Standard & Poor’s 100 % 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Upgrade Downgrade Default Withdrawn rating Unchanged rating

A rating is reviewed regularly, at least annually. It can be maintained, improved or downgraded, or placed under review with positive or nega-tive implications, pending the conclusion of a study (see Figure 3).

Since 1998, one can observe that down-gradings occur at the peak of the cycle and when growth is falling (1998 – 2003, 2008 – 2009), and upgradings when growth resumes (2004 – 2007, 2010 – 2011).

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Figure 5: Influence of recovery rate on yield differential (spread)

Par value Recovery rate Effective loss rate

Default probability

Probable loss Current spread Probable net spread 100 % 55 % 45 % 2 % 0.90 % 4 % 3.10 % 100 % 50 % 50 % 2 % 1.00 % 4 % 3.00 % 100 % 45 % 55 % 2 % 1.10 % 4 % 2.90 % 100 % 40 % 60 % 2 % 1.20 % 4 % 2.80 % 100 % 35 % 65 % 2 % 1.30 % 4 % 2.70 %

Source: Allianz Global Investors Capital Market Analysis, 2011

5. Default risk

All issuers have a default risk, i. e. being unable to fulfil the terms of issue of their bonds. The default may result from the delayed payment or non-payment of interest due, or non-pay-ment of part or all of the capital.

The default rate measures the percentage of companies that have defaulted within a given sample. This sample is defined, for example, by rating, debt seniority or economic sector.

The table below shows, for each of the 3-year periods between 1996 and 2011, for an initial rating (y-axis), the risk of – or the opportunity for – migration towards a lower or higher rat-ing, or even default (x-axis). Thus, a rating of AAA has a 0 % default risk within three years, while a rating of BBB has a 0.65 % risk, etc. (see Figure 4).

Figure 4: 3-year ratings migration rate 1996 – 2011 (%)

From / to AAA AA A BBB BB B CCC / C Default Other Europe (1996 – 2011) AAA 57,28 22,07 4,46 0,23 0,23 0,00 0,23 0,00 15,49 (7,85) (8,02) (4,32) (1,34) (1,57) (0,00) (1,57) (0,00) (6,81) AA 0,56 61,15 24,26 2,27 0,34 0,00 0,04 0,09 11,30 (0,51) (8,81) (8,45) (1,47) (0,40) (0,00) (0,16) (0,19) (3,14) A 0,04 5,33 66,39 12,62 0,66 0,24 0,13 0,20 14,38 (0,18) (2,53) (6,10) (3,19) (0,62) (0,33) (0,22) (0,25) (4,18) BBB 0,00 0,36 10,56 58,16 6,95 1,66 0,29 0,65 21,37 (0,00) (0,40) (2,57) (3,71) (3,77) (1,33) (0,55) (1,06) (6,45) BB 0,00 0,00 0,96 9,96 37,16 12,36 0,67 3,45 35,44 (0,00) (0,00) (2,45) (3,72) (6,78) (5,09) (0,93) (3,68) (7,58) B 0,00 0,00 0,00 0,51 11,00 28,70 4,17 13,27 42,35 (0,00) (0,00) (0,00) (0,73) (5,18) (7,12) (2,70) (11,72) (12,57) CCC / C 0,00 0,00 0,00 0,00 0,00 9,09 3,03 54,55 33,33 (0,00) (0,00) (0,00) (0,00) (0,00) (7,52) (5,58) (25,60) (26,08)

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6. CDS and the hedging of default risk

A holder of debt or bonds can use the credit default swap (CDS) market to hedge against issuer default risk. The market fixes the price of a CDS as a percentage of the hedged capital, which is the cost of the insurance premium to be paid in exchange for guar-anteeing the default risk. The price increases when the creditworthiness of the issuer decreases and its rating falls. And the price goes down as the rating increases. For exam-ple, the Figure below shows the close cor-relation between the spread on 5-year bonds issued by a global wines and spirits company and the market price of its CDS.

(see Figure 6). In case of a default, the investor normally does

not lose the entire value of his invested capital. Let us take a diversified corporate bond port-folio, offering an average current spread of 4 % (see figure 5). If the default probability is 2 %, the investor will not loose these 2 % altogether. The default probability must be supplemented by the recovery rate, i. e. the proportion of capital affected by the default, but ultimately recovered by the creditor.

The default probability (e. g. 2 %) and the effec-tive loss rate (e. g. 45 %) together determine the probable net spread (i. e. (current spread ÷ 4 %) – ((default probability ÷ 2 %) x (effective loss rate ÷ 45 %)) = 3.10 %). At a given time during the economic cycle and for a specific rating, an investor can use these two rates to estimate his probable loss and deduct it from the spread to obtain the effective remuneration supplement (probable net current spread).

Figure 6: Price of CDS and spread on a Global Wines and Spirit Company’s debt 800 700 600 500 400 300 200 100 0 2007 2008 2009 2010 2011 2012

Global Wines and Spirits Company Sen 5YR CDS*t Global Wines and Spirits Company 5Y Bond Spread

in basis points

Source: Datastream, Allianz Global Investors Capital Market Analysis *Credit Default Swap

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Change in the Corporate Market

since 2006

Figure 7 shows US market rate changes of 10-year government bonds, and investment-grade and high-yield corporate bonds with the same duration. During the previous eco-nomic cycle, five periods were identified. • Until July 2007, the economy was marked by

growth. Long-term rates trended upwards, but the spread between government bonds and investment grade bonds stayed rela-tively stable, at around 0.8 %. The spread on high-yield bonds was at 2.5 % at the end of the period.

• Between July and 1rst quarter of 2008, during the subprime crisis, the decrease in the Federal Reserve’s (FED) key interest rate facilitated the fall in long-term interest rates. The spread on investment grade debt increased from 0.8 % to 2 %, while on high-yield debt it approached 7 %.

• From early in 2008 to March 2009, the cri-sis worsened. The yield of on government bonds stayed stable at around 3.5 % to 4 %, then fell to nearly 2 % on the bankruptcy of Lehman Brothers. However, the spread on investment-grade bonds more than dou-bled to 4.60 %, and the spread on high-yield debt exceeded 20 %! In March 2009, the spreads fell to 3.40 % and 15 %, respectively. • Beginning in March 2009, the situation nor-malised. Long-term rates on government bonds began to recover from the historic slump. At the same time, rates on corpo-rate bonds fell significantly. The spread on investment-grade bonds fell to 0.3 – 0.4 %, on average. The spread on high-yield bonds had an even more severe decline, to 4.20 %. • In April 2010, the crisis in the eurozone

resulted in massive purchases of bonds of the most solvent countries. There was at that time a more acute perception of risk, which has revived concerns about corporate debt and caused spreads to rise again.

Source: Datastream, Allianz Global Investors Capital Market Analysis, April 2012 25 % 20 % 15 % 10 % 5 % 0 % 2007 2008 2009 2010 2011 25 % 20 % 15 % 10 % 5 % 0 % Barclays Custom IG Corp Index – RY

Barclays US HY Composite – RY

US Benchmark 10 Years DS Govt Index – RY

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• The same occured in late spring 2011 with the eurozone crisis revival. While invest-ment-grade bonds bond rates stabilized, their spread increased with the falling rates on government bonds. However, high yield bond rates rose, swelling spreads up to higher levels again.

This last cycle of corporate credit was atypi-cal, as it was magnified by the financial crisis. However, a few things were learned about the investment-grade and high-yield segments:

1. During economic growth, the rise in longterm interest rates diverts the investor away from government bonds, and often from investment-grade bonds. However, high-yield credit is attractive if the lower-ing of spreads, justified by improved cred-itworthiness, is equal to or greater than the recovery of long-term rates.

2. When long-term rates on government bonds rise, economic growth slows, cor-porate debt increases, financial results are disappointing and there is increased risk. The rate on corporate debt and the spread increases in relation to government debt. Corporate debt is then a bad investment. 3. During a recession, long-term rates fall

to their lowest point, but the corporate default risk rises, justifying the increase in corporate debt rates. This means that the spread on corporate debt peaks. Corporate debt is then a very poor investment. 4. When economic activity stabilises or

begins to recover, long-term interest rates gradually rise and business risk falls steadily. Yields of corporate debt fall. The narrowing of the spread makes corporate bonds, and high-yield bonds in particular, among the best investments.

5. By definition, the risks related to the high-yield segment are higher than risks in the investment-grade segment. For this reason:

• high-yield bonds have a wider spread against government bonds than invest-ment-grade bonds against government bonds;

• a worsening economic and financial environment has a greater impact on high-yield bonds than on investment-grade bonds;

• when the economy is recovering, the potential gain in the high-yield segment is greater than in the investment-grade segment. In 2009, these gains were exceptional.

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Some Features of Corporate

Credit Management

An investor’s portfolio benefits from the unique features of corporate bonds as an asset class.

1. The dual nature of a corporate bond

A corporate bond can be described as having a dual nature: equity and bond.

As debt, its value is closely linked to the quality of the issuer, that is, its capacity to honour its commitments and to perform. The market also assesses this risk through the price of the issuer’s shares. A corporate bond, which is an interest-rate instrument dependent on the bond market, is therefore theoretically related to the equities market by the business risk. When a company wants to raise capital, it can issue listed equities, which makes the buyer a co-owner of the company. Alterna-tively, the company may issue listed corporate bonds, which make the buyer a creditor of the company. Thus, investors holding equities or bonds from the same issuer have two different levels of confidence with regard to that issuer.

This means that:

• The corporate bond manager must closely monitor information provided by the issuer (borrower). In fact, any change affecting the operating account could impact its solvency, credit risk and the value of its bonds. • The manager must analyse the accuracy

of the spread on a corporate bond to the default risk of the issuer. If the spread is excessive with regard to current or future risks, he purchases the bond. If the spread is too narrow with regard to identified risks, he will reduce holdings in the bond.

• A corporate bond manager must, as with equities, diversify his portfolio by sector, and within the same sector between vari-ous companies. He may choose a macro-economic or top-down approach to switch between cyclical and defensive sectors. He may also use a bottomup approach, focus-ing on individual securities.

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2. Corporate bonds and volatility

Another characteristic of corporate bonds is their volatility:

• Due to its high yield, a high-yield bond with an unchanged spread is less sensitive to a rise in long-term interest rates than an investment-grade bond, and even less so than a government bond of the same duration.

• The price of a corporate bond also depends on the creditworthiness of the issuing com-pany, which is more uncertain than that of a country. This has a determining impact on its yield, and therefore on its value. Cor-porate bonds are also more volatile than government bonds.

• However, corporate bonds are less risky than equities. In the event of liquidation, the creditor is theoretically paid before the owner. Corporate bonds are therefore likely to be less volatile than equities.

3. Corporate bonds and liquidity

One last, but significant, characteristic of corporate bonds is lower liquidity. They only represent 5 % of the euro denominated bond universe, and the nominal value of each issue is generally far much lower than that of a public bond.

The lack of liquidity gives rise to market imperfections, i. e. distortions between the price and therefore the spread, and the intrin-sic risk of the bond. These market distortions offer excellent opportunities for investors,

but they can also make it difficult for inves-tors to divest their holdings when the market declines rapidly.

The bond-equity duality of corporate credit was apparent in mid-2009. The equities mar-kets, after a solid rebound, were less attractive to investors. High-yield bonds offered a wide spread, with no real relation to the actual risk. Knowledgeable investors preferred to assume business risk as a creditor through corporate bonds, because they considered the risk to be lower than that as co-owner through equities.

Corporate Credit Contributes to

Diversified Investment

Corporate debt makes a significant contribu-tion to diversified investment. Its distinctive market behaviour makes it a unique asset segment.

First, a correlation between high-yield debt and investment-grade debt does not exist, which means that the two segments have specific differences in their behaviour. This is also true of their correlation with sovereign debt: investment-grade debt has a high correlation with sovereign debt, while highyield debt has a negative correlation. (see Figure 8)

Then, because it is representative of busi-ness risk, high-yield debt has a significant correlation with equities. Over the long term (1986 – 2011), high-yield debt has outper-formed equities at the start of economic upturns, before underperforming during subsequent years. (see Figure 9)

Figure 8: Corporate Bonds as an instrument for portfolio optimization

High Yield (HY)  Investment Grade (IG)  Bonds 7 – 10Y  Bonds 1 – 10Y 

High Yield (HY)  100.00 % 10.57 % – 0.71 % – 4.92 %

Investment Grade (IG)  10.57 % 100.00 % 81.68 % 79.74 %

Bonds 7 – 10Y  – 0.71 % 81.68 % 100.00 % 94.76 %

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Figure 9: Annual performance of high-yield (HY) debt and equities

Source: Bloomberg, Allianz Global Investors Capital Market Analysis

80 % 60 % 40 % 20 % 0 % –20 % –40 % –60 %

Return High Yield corporate bonds (Merrill Lynch US High Yield Master II Index) Equity returns (S&P 500 Index) 1996

1987 1988 1989 1990 1991 1992 1993 1994 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1987 – 2011 Avg. High Yield outperforms the S&P 500

by more than 10 % per year

During default periods and the first year of recovery, High Yield outperforms the S&P

Subprime crisis

Over a shorter period (2005 – 2011), corpo-rate debt in the eurozone has provided major opportunities for diversification based on its weak correlation with other asset segments and the attractiveness of its performance compared to its risks. The data on investment-grade and high-yield debt relative to govern-ment bonds and blue chip stocks demon-strate (see Figure 10):

• the attractive risk / return ratio, as illustrated by the Sharpe ratio:

− of investment-grade debt in 2005, and especially of high-yield debt in 2005 – 2006, during the upwards phase of the cycle;

− of high-yield and investment-grade debt during the recovery of 2009 – 2010;

• their lack of attractiveness during phases of maturity or the economic downturn in 2007 – 2008;

• the attractive performance of high-yield debt during the period.

Over a 7 year period of disappointing stock indexes performances, corporate bonds have proved to offer similar „sharpe ratios“ to government bonds, with similar (Investment Grade) or much higher (High Yield) returns. Olivier Gasquet

Annotation Figure 10

Sharpe ratio:

The sharpe ratio (or reward-to-variability ratio) is a measure of the excess return (asset return less risk free interest rate) per unit of risk (volatility in %) in an investment asset. The higher the sharpe ratio, the more attractive the investment asset.

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Figure 10: Investment-grade (IG) and high-yield debt in Euro Performance and volatility compared (2005–2010)

Annualised performance

Period IG Euro* HY Euro* Government bonds 3 – 5 years* Government bonds 7 – 10 years* Dow Jones Euro Stoxx 50* Interbank rate* 2005 4.87 % 6.37 % 3.47 % 6.41 % 23.76 % 2.14 % 2006 – 0.03 % 11.65 % 0.92 % – 0.65 % 17.39 % 2.91 % 2007 1.45 % – 3.29 % 2.97 % 1.20 % 9.62 % 3.99 % 2008 6.22 % – 35.51 % 6.01 % 8.08 % – 42.40 % 3.99 % 2009 6.97 % 82.65 % 6.22 % 5.08 % 25.73 % 0.73 % 2010 2.19 % 15.93 % 2.66 % 2.23 % – 2.82 % 0.44 % 2011 2.95 % – 2.24 % 4.45 % 6.60 % – 15.67 % 0.89 % 2005 – 2011 3.52 % 6.25 % 3.78 % 4.07 % – 0.51 % 2.15 % Annualised volatility

Period IG Euro* HY Euro* Government bonds 3 – 5 years* Government bonds 7 – 10 years* Dow Jones Euro Stoxx 50* Interbank rate* 2005 2.72 % 3.38 % 1.88 % 3.60 % 11.03 % 0.07 % 2006 2.65 % 1.74 % 1.85 % 3.53 % 14.59 % 0.10 % 2007 2.70 % 3.36 % 2.00 % 3.66 % 15.80 % 0.14 % 2008 4.60 % 10.61 % 3.87 % 6.04 % 39.34 % 0.14 % 2009 3.42 % 8.74 % 2.76 % 5.13 % 28.03 % 0.04 % 2010 2.82 % 5.61 % 2.82 % 4.49 % 23.78 % 0.02 % 2011 3.66 % 6.26 % 3.42 % 5.57 % 28.81 % 0.04 % 2005 – 2011 3.30 % 6.63 % 2.76 % 4.68 % 24.89 % 0.13 % Sharpe Ratio

Period IG Euro* HY Euro* Government bonds 3 – 5 years* Government bonds 7 – 10 years* Dow Jones Euro Stoxx 50* Interbank rate* 2005 1.006 1.254 0.707 1.187 1.961 0.000 2006 – 1.108 5.020 – 1.082 – 1.011 0.992 0.000 2007 – 0.944 – 2.172 – 0.512 – 0.765 0.356 0.000 2008 0.484 – 3.722 0.521 0.677 – 1.179 0.000 2009 1.827 9.369 1.990 0.849 0.892 0.000 2010 0.621 2.760 0.790 0.400 – 0.137 0.000 2011 0.564 – 0.500 1.040 1.025 – 0.575 0.000 2005 – 2011 0.417 0.618 0.590 0.410 – 0.107 0.000

Source: Allianz Global Investors Quantitative Research & Capital Market Analysis; April 2012

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Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. Past performance is not indicative of future performance. Bond prices will normally decline as interest rates rise. Bonds are subject to the credit risk of the issuer. High-yield or “junk” bonds have lower credit ratings and involve a greater risk to principal. Emerging markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates. No offer or solicitation to buy or sell securities, nor invest-ment advice / strategy or recommendation is made herein. In making investinvest-ment decisions, investors should not rely solely on this material but should seek independent professional advice.The views and opinions expressed herein, which are subject to change without notice, are those of the issuer and / or its affiliated companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or willful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This is a marketing communication. This material has not been reviewed by any regulatory authorities, and is published for information only, and where used in mainland China, only as supporting materials to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors US LLC, an investment adviser registered with the US Securities and Exchange Commission; Allianz Global Investors Europe GmbH, an investment company in Germany, subject to the supervision of the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) RCM (UK) Ltd., which is authorized and regulated by the Financial Services Authority in the UK; Allianz Global Inves-tors Hong Kong Ltd. and RCM Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator.

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www.allianzglobalinvestors.com Allianz Global Investors GmbH Bockenheimer Landstr. 42 – 44

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High-Yield Munis: The Barclays High Yield Municipal Bond Index is considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at

Stem diameter of sunflower plants (♦− −) without fertilizers, (■▪▪▪▪) bovine biofertilizer and (▲──) mineral fertilizer, under different irrigation