61813056 US Sovereign Rating Downgrade Implications

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overe gn a ng owngra e

Capital Markets Implications

Strictly Private and Confidential

August 7, 2011


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Treasury Market Outlook (Contd.)

Historical Downgrades Muted Impact on Yields of Prior Sovereign Downgrades Previous 1-notch downgrades from AAA have caused little market

reaction historically

On April 18, S&P placed the US on negative outlook. Subsequently,rates sold off, but in the week following the announcement, the 10-year yield change was minimal

Country Ratings Change Date10s 2s/10s

1D 1W 1D 1W

Japan Aaa to Aa1 11/17/1998 2 bp 15 bp 3 bp 11 bp

+ -

Expected Investor Reactions

Recent feedback from investors is that a downgrade would notnecessarily prompt selling of Treasuries, although in a downsidescenario significant selling by one or more major market participantswould likely prompt others to follow quickly

Belgium AAA to AA+ 05/06/1998 -1 bp 2 bp 0 bp 7 bp

Italy AAA to AA 05/06/1998 -1 bp 2 bp 0 bp 5 bp

Spain AAA to AA+ 05/06/1998 -1 bp 3 bp 0 bp 6 bp

Spain AAA to AA+ 01/19/2009 1 bp 33 bp -4 bp -43 bp

The largest holders of US government debt, the foreign centralbanks, are unlikely to adjust their US Treasury holdings due tothe liquidity and depth of the US Treasury market

Insurance companies are unlikely to be forced to sell as the NAIChas recently deemphasized ratings for regulatory capitalrequirements

Spain Aaa to Aa1 09/30/2010 -7 bp -9 bp -3 bp 9 bp

Ireland AAA to AA+ 03/30/2009 7 bp -18 bp 11 bp 15 bp

Ireland Aaa to Aa1 06/02/2009 -7 bp -11 bp 3 bp -11 bp

Average 0 bp 2 bp 2 bp 0 bp

Asset managers retain significant flexibility

The Federal Reserve has issued a guideline noting no change inrisk weights for US banks

USD Considerations

Major Holders of US Treasuries

US Treasury Owner $BN

Households 959

Corporations, Businesses, GSEs, ABS Issuers & Dealers 271

Potential for knee-jerk USD weakening on the Asia open, but Citi doesnot expect this to be maintained

General move towards risk reduction could be USD positive

Foreign buyers could potentially shift their holdings away from USD

State & Local Governments 506

US Federal Reserve 1,340

Banks, S&Ls, Credit Unions, Insurance Cos. 578

Pension & Retirement Funds 826

Mutual Funds, Closed end Funds, ETFs 359through the US Treasury market, however the current risk appetiteand the status of the of the USD as the worlds reserve currency willlikely mitigate selling pressure

Less favorable capital flows could weigh on USD in the medium-term

Money-Market Funds 338

Non-US Private Investors 1,287

Non-US Central Banks & Sovereign Wealth Funds 3,158Total 9,621

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Equity Capital Markets Outlook

Elevated Volatilit New Issue Pull BackIPOs Follow-Ons Convertibles

1,200

1,250

1,300

1,350

1,400

S&P500Index

15%

20%

25%

30%

35%

Volatility(%)

$25

$15

$11

$28

Proceeds($BN)

$56

$45 $45

Proceeds($BN) $13 $12

$5

$3Proceeds($BN)

Source: Factset as of 08/05/11.

Defensive Rotation Investor SelectivityMedian Follow-On File/Offer Performance

,

6/30 7/7 7/14 7/21 7/28 8/4

S&P 500 Index VIX Index

Peak(1)

Source: Dealogic. Includes U.S. domiciled offerings $25 mm.

$3

Q4

'10

Q1

'11

Q2

'11

Q3

'11

IPO Filed

Backlog

Q4

'10

Q1

'11

Q2

'11

Q3

'11

Q4

'10

Q1

'11

Q2

'11

Q3

'11

(6.0%) (6.0%) (6.1%)

7.9%

Q4 '10 Q1 '11 Q2 '11 Q3 '11

llow-On

FiletoOffer

Consumer Staples (2.5%) 1.9% (4.7%)

Telecom (2.9) (5.4) (9.2)

Utilities (3.8) 1.5 (3.8)

Information Technology (6.2) (3.2) (8.9)

Healthcare (6.8) 0.8 (9.8)

Consumer Discretionary (8.1) (2.6) (10.2)Industrials (8.3) (8.9) (18.0)

Financials(2) (9.2) (15.8) (18.0)

Investors Re-Calibrating GrowthReal GDP (QoQ at Annual Rate)

Advice To Issuers

FMaterials (9.5) (10.3) (15.5)

Energy (10.0) 0.0 (15.3)

Markets

Last weeks pressure in expectation of rating downgrade

European overhang; anticipate continued defensive rotation

Source: Factset as of 08/05/11.(1) S&P 500 peak (04/29/11). (2) I ncludes Real Estate.

Source: Dealogic. Includes U.S. domiciled offerings $25 mm.

3.7%

1.7%

2.6%

3.1%

2.3%

1.5%

Issuance Observe markets and launch on stable footing; windows open and close rapidly

Choose underwriters with global differentiated distribution capabilities

IPOs

Flexibility on size and price range - fine tune prior to launch

Assess opportunity for pre-sounding including cornerstone/anchor investments

Follow-Ons

6

Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11

Minimize market exposure and launch smaller - increase through oversubscription

Equity Linked

Convertible market underpenetrated

Sell equity at premium; replacement to widening fixed income rates

Share re-purchase strategies (open market / ASR / levered)Source: Citi Research.


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S&Ps U.S. Public Debt Projections

S&P generated US public debt projections for the coming decade across three scenarios, with resulting debt-to-GDP ratios for each scenario as

Base Case Scenario Upside Scenario Downside Scenario

Macro assumptions were based on the US congressional baseline economic assumptions

S&Ps Assumptions 2.1 trillion of the spendingreductions are implemented

2001 and 2003 tax cuts, due toexpire in 2012, remain in place

GDP growth of 3%, CPI at 2%

2.1 trillion of the spendingreductions are implemented

2001 and 2003 tax cuts for highearners lapse from 2013 onwards

GDP growth of 3%, CPI at 2%

1.2 trillion in second round ofspending cuts does not occur as

planned 2001 and 2003 tax cuts, due to

expire in 2012, remain in place

50-75 bps rise in funding costs (i.e.10-year bond yields) 2013 onwards

GDP growth of 2.5%, CPI at 1.5%

Debt / GDP

2011 74% 74% 74%

2021 85%(1) 78% 101%

Rating Outcome AA+ with negative long-term outlook AA+ with stable long-term outlook AA long-term rating

(1) On Friday the US Treasury posted on its blog (http://www.treasury.gov/connect/blog/Pages/Just-the-Facts-SPs-2-Trillion-Mistake.aspx) that the debt-to-GDP ratio in this scenario should be 79% rather than85%, as S&P misread congressional baseline economic assumptions. This discrepancy apparently generated a $2 trillion difference in the calculated debt-to-GDP ratio9


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Different Concerns: Public vs Private Financial InstitutionsFinancial Institutions & Insurance

U.S. banks held $1.77 trillion of securities issued or guaranteed

Fannie & Freddie, GSEsand LiquidityGuarantee Programs

Supported entities would benegatively impacted

No im act ex ected where

by the U.S. treasury as of 3/31/11

Creates risk of meaningful unrealized losses if prices decline would impact recovery in the banking sector

Potential disruption of Repo market (U.S. Treasuries are arimar source of collateral

Banks, TIAA, USAA,and IndependentFinancial Institutions

ratings are based on stand-alone basis

Sovereign ratingdowngrade could buildnegative pressure on higher

AAA rated insurance companies have strong levels of capital &

liquidity and are not linked to government support

Money Market Funds under $1.3 trillion exposure to governmentsecurities risk breaking the buck only under significantredem tion activit tail-end risk

U.S. Public Finance

rated banks

U.S. Non Financial Corporates

AAA corporations resilient to a 1-2 notch sovereign downgrade(ADP, ExxonMobil, Johnson & Johnson, and Microsoft)

Rating resiliency based on:

Revenues derived from non-government sources withsignificant international component

Munis & LocalGovernments

No automatic rating impact, butissuers would be capped at 1-2notches above sovereign

Robust internal cash flow generation

Funding not highly reliant on government or domestic banks Credit EnhancedMortgage BackedSecurities/Bonds

Impacted by the rating level ofthe credit enhancementprovider (which could bedowngraded)

10

Federal RevenueAnticipation Funds

Debt not explicitly supported bya State could be impacted


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61813056 US Sovereign Rating Downgrade Implications

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