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Madrid, 8 November 2010 Banco Popular, S.A. C/ Velazquez, 34 esq. Goya 35 28001 Madrid Attn D. Javier Moreno. Dear Sir: According to the request made by your organization, please find attached the independent report of the issuance of Bonds necessarily convertible to subordinated debentures necessarily convertible to shares that your company is planning to launch. I remain at your disposal for any clarification or additional information required. Sincerely,

Ana Castañeda Ortega Managing Director

InterMoney Valora Consulting, S.A.

Report on the Issue of Subordinated Bonds Necessarily Exchangeable for Ordinary Shares of Banco Popular Español, S.A.

Report on the issue of bonds necessarily convertible to subordinated debentures necessarily convertible to shares of 2Banco Popular Español S.A. - 8 November 2010

Report on the Issue of Subordinated Bonds Necessarily

Exchangeable for Ordinary Shares of Banco Popular Español, S.A.

I/2010

Banco Popular Español, S.A.

November 8, 2010


Contents Introduction.................................................................................................................... 4 1. Issue characteristics .............................................................................................. 5 2. Analysis of the issuer’s credit risk....................................................................... 5 3. Definition of the analysis framework ................................................................. 8

3.1. Analysis method ............................................................................................ 8 3.2. Framework.................................................................................................... 11

4. Analysis of the Banco Popular´s issue.............................................................. 21 4.1. Valuation of the issue.................................................................................. 21 4.2. Suitability of the issue yield ....................................................................... 22

5. Conclusions .......................................................................................................... 24 Appendix 1. Relationship between credit rating and beta value ......................... 26 Appendix 2. Valuation methodologies..................................................................... 29 Appendix 3. Valuation inputs.................................................................................... 35

Report on the issue of bonds necessarily convertible to subordinated debentures necessarily convertible to shares of Banco Popular Español S.A. - 8 November 2010 3


Introduction

At the request of Banco Popular Español, S.A. (hereinafter Banco Popular) InterMoney Valora Consulting, S.A. (hereinafter IM Valora Consulting) provides herein an analysis of valuation on the issue of subordinated bonds necessarily exchangeable for ordinary shares of Banco Popular. The ultimate target of analysis is to examine, from complete independence, if the margins associated with the issue are within the proper limits of current institutional and market circumstances. To this end, the study's methodology lies in the analysis of the risk-return of the issue and its comparison with the determined framework. All this has been done taking into account both the evolution of market conditions and the incorporation, to the financial characterization of the issue of the recent developments of the regulatory framework embodied in the following documents: - “Implementation Guidelines for Hybrid Capital Instruments" CEBS Committee

of European Banking Supervisors. - Draft Law modifying “Ley 13/1985 de 25 de mayo, de coeficientes de

inversión, recursos propios y obligaciones de información de los intermediarios financieros”, the “Ley 24/1988, de 28 de julio, del Mercado de Valores” and the “Real Decreto legislativo 1298/1986, de 28 de junio, sobre Adaptación del Derecho vigente en materia de Entidades de Crédito al de las Comunidades Europeas”.

The paper is organized as follows. The first section contains a brief description of the conditions of the financial instrument, the flow structure and the optionality elements. In the second, we analyze the issuer credit risk. The third section establishes the analysis method and comparison framework by examining the market of reference and comparable issues. In the fourth, we analyze the conditions of return and risk of the Banco Popular´s issue and its suitability to the framework and market conditions. The fifth section of the document contains the conclusions on whether the issue yield conditions are in line with current market conditions and those of comparable products.



1. Issue characteristics

The principal characteristics of this issue of subordinated bonds necessarily exchangeable for ordinary shares of Banco Popular are as follows:

• Issuer: Popular Capital, S.A. • Guarantor: Banco Popular Español, S.A. • Total Issue Amount: 400,000,000 euros extendable to 500,000,000 euros. • Nominal amount per sercuritie: Each bond will have a nominal value of

1.000 euros. • Maturity/Mandatory Conversion Date: December 17, 2013. • Payment Structure: From the first year and until the date of exercise of

conversion option: 8% per annum. • Payment Frequency: Quarterly. • Optionality:

Cap/Floor: Not Applicable. Exchange: Bonds will be necessarily convertible to Subordinated

Debentures necessarily convertible to shares of Banco Popular: - Voluntary Exchange by investors: On December 17, 2011 and 2012, and 30 days prior to March 17, June, September and December, in cases where the issuer or the Bank of Spain decided to cancel the payment remuneration. - Mandatory Exchange: At maturity, and dates of payment of remuneration in the event that the issuer decides to open a period for totally or partially conversion of the issue.

• Conversion price: The maximum between the average closing price of the shares of Banco Popular for the five trading days preceding the end of the (required or voluntary) exchange period or the maturity date and 2 €.

• Investors: Retail Investor, individuals or corporates.

2. Analysis of the issuer credit risk

Subordinated bonds necessarily exchangeable for ordinary shares of Banco Popular will be located within the subordination order of payments and in relation to the other obligations of the issuer:

- ahead of the issuer common shares, - at the same level as other bonds issues, convertible bonds or other issuer

securities equivalent, - behind the Preference Shares or comparable securities that the issuer has

issued, or may issue,



- behind the issuer’s common and subordinated creditors.

The Guarantor commitments provided by the guarantee bond will be placed in the subordination order and in relation to the other obligations of the Guarantor:

- ahead of the common shares of the Guarantor, - at the same level as other bonds issues, convertible bonds or other issuer

securities equivalent, - behind the Preference Shares or equivalent securities that the Guarantor

or its subsidiaries have issued or may issue as well as the obligations derived from the guarantees that the Guarantor has been provided or can provide with respect to the Preferred or comparable securities issued by subsidiaries

- behind all common and subordinated creditors of the Guarantor. With regard to the credit profile, Banco Popular is a reference entity in the Spanish financial sector supported by high credit ratings of Aa3/A/A, given, respectively, by the rating agencies Moody's, S&P and Fitch, meaning that the company can be considered within the investment grade. These ratings outlook is negative, except for Fitch, that is stable. For comparison, Table 1 shows the credit ratings assigned by the various specialized agencies to some of the major banks and Spanish savings banks. It also includes information on their respective credit watch, if any, and outlook.



Table 1. Credit Ratings assigned to Spanish banks and saving banks.

Credit Rating Agency

Entity RatingCreditWatch

Outlook RatingCreditWatch

Outlook RatingCreditWatch

Outlook

Banco Santander Aa2 _ NEGATIVE AA _ NEGATIVE AA _ STABLE

BBVA Aa2 _ NEGATIVE AA _ NEGATIVE AA- _ POSITIVE

Banesto Aa3 _ NEGATIVE AA _ NEGATIVE AA _ STABLE

La Caixa Aa2 _ NEGATIVE AA- _ NEGATIVE A+ _ STABLE

Unicaja Aa3 _ NEGATIVE _ _ _ A+ _ STABLE

BBK A1 _ _ _ _ _ A+ *- _

Caja Murcia _ _ _ _ _ _ A+ *- _

Banco Popular Aa3 _ NEGATIVE A _ NEGATIVE A _ STABLE

Bankinter A1 _ NEGATIVE A _ STABLE A+ _ STABLE

Caja Madrid A1 _ NEGATIVE A _ _ A *- _

Banco Sabadell A2 _ NEGATIVE A _ NEGATIVE A _ STABLE

Ibercaja A2 _ NEGATIVE A _ NEGATIVE _ _ _

Caja Laboral Popular A3 _ NEGATIVE _ _ _ A+ _ STABLE

Banca March A2 _ NEGATIVE _ _ _ _ _ _

Caja de la Inmaculada _ _ _ _ _ _ A _ NEGATIVE

Caja Rioja A2 _ NEGATIVE A _ NEGATIVE _ _ _

Caja Vital A2 _ NEGATIVE _ _ _ A- _ NEGATIVE

Cajamar A3 _ NEGATIVE _ _ _ A _ NEGATIVE

CR de Navarra A2 _ NEGATIVE _ _ _ A- _ STABLE

Cajastur A3 _ STABLE _ _ _ A- *- _

Banca Cívica _ _ _ _ _ _ A- _ STABLE

Caja Cantabria A3 _ NEGATIVE _ _ _ _ _ _

Caixa Catalunya A3 _ NEGATIVE _ _ _ _ _ _

Banco Pastor A3 _ NEGATIVE _ _ _ _ _ _

Banco Guipuzcoano _ _ _ _ _ _ A- *+ _

CajaSol _ _ _ _ _ _ A- _ STABLE

Caja de Extremadura _ _ _ _ _ _ A- *- _

Caja de Santander y Cantabria A3 _ NEGATIVE _ _ _ _ _ _

CAM A3 _ NEGATIVE _ _ _ BBB+ * _

Caixanova A3 _ NEGATIVE _ _ _ BBB+ *- _

Caja Duero Baa1 _ STABLE _ _ _ _ _ _

Bancaja A3 _ NEGATIVE _ _ _ BBB *+ _

Caixa Galicia A3 _ NEGATIVE _ _ _ BBB * _

Caja Insular Ahorros Baa1 _ NEGATIVE _ _ _ _ _ _

CajaGranada _ _ _ _ _ _ BBB+ *+ _

Caixa Penedés _ _ _ _ _ _ BBB+ *+ _

Caja Badajoz _ _ _ _ _ _ BBB+ _ STABLE

Banco de Valencia Baa1 _ NEGATIVE _ _ _ BBB * _

Caixa Girona _ _ _ _ _ _ BBB *+ _

Sa Nostra _ _ _ _ _ _ BBB *+ _

CR del Mediterraneo _ _ _ _ _ _ BBB _ NEGATIVE

Caixa Laietana _ _ _ _ _ _ BBB- *+ _

Caja Ávila Baa3 _ STABLE _ _ _ _ _ _

Caja Segovia Baa3 _ STABLE _ _ _ _ _ _

CajaSur _ _ _ _ _ _ BB+ *+ _

MOODY'S S&P FITCH



As can be appreciated from the table, in terms of credit rating, Banco Popular is below institutions such as Santander, BBVA or La Caixa, at the same level as Bankinter, and above Caja Madrid or Banco Sabadell.

3. Definition of the Framework of the Analysis

3.1. Analysis Method

As anticipated in the document introductory chapter, the method developed to analyze the adequacy of the issue to the current market circumstances departs from the consideration of recent regulatory developments that affect it. As in previous issues of Bonds necessarily convertible that exist in the market, the terms of the Banco Popular´s issue collect, as relevant aspects to be considered by investors, a list of the different risk factors. On one hand, all the risks associated with the issue:

- Non-payment risk of the remuneration. - Subordination of the issue. - Conversion of the of Subordinated Bonds Necessarily Exchangeable for

Ordinary Shares. - Possibility of decrease in share price. - Market risk. - Liquidity risk. - Irrevocability of the subscription. - Absense of preferred subscription rights.

And on the other hand, risks associated to the Guarantor:

- Credit Risk. - External Risk. - Market Risk. - Liquidity Risk. - Operational Risk. - Balance Structural Risk. - Reputational Risk.

From the comparative analysis of risk factors of the issue of Banco Popular with respect to the existing issues, it turns out that there is a differentiating risk factor in this issue. This new risk factor relates to the securities new assumptions of non-payment of remuneration. These new assumptions are collected in two ways as they give



right to decide on such remuneration to the issuer or guarantor and to the supervisor:

“The grounds on which the Issuer, the Guarantor or Bank of Spain will cancel the payment of remuneration is based on the status of solvency and financial situation of the parent credit institution, or its group or sub-group….”(Vid. Nota de Valores Provisional, II punto 1.1)

It is important to note that, on the one hand, the conditions that allow the right to exercise are not arbitrary but must be defined on the basis of objective criteria and financial solvency. On the other hand, this differential element in its dual way, issuer or guarantor and supervisor, despite the fact that it introduces additional risk factor that differentiates the issue with respect to previous issues, it also incorporates an additional supervising element exogenous to the entity that should strengthen prudential management, efficient operation of business and therefore mitigate the risk of not perceiving the remuneration. In short, in the case of Bonds Necessarily Convertible to Shares analyzed, even though the introduction of that right to suspend the interest payment involves an element of additional risk with respect to other issues of Bonds Necessarily Convertible and comparable tools in the market, the maintenance of other risk factors in the same terms and the mitigating factor previously mentioned, necessarily put the total risk conditions of the issue at higher levels than previous issues but relatively close to them. In the same line, the aforementioned regulatory evolution entails an approach to the risk conditions of the capital shares, i.e. equity.1 Based on the unquestioned premise that in an environment of economic rationality and agents risk aversion "higher levels of risk correspond to higher expected returns and vice versa”, the increased risk associated with Banco Popular´s issue must be offset by higher expected returns than other Exchangeable and Subordinated Bonds and comparable existing instruments, but remaining at a lower level than that the return on capital. This location, along with the absence of market benchmarks for similar issues, identifies itself an analytical framework that we consider appropriate to test whether the margins of the issue are within the limits suitable to their risk circumstances and market conditions:

1 The document will be used interchangeably shares or equity capital to designate the shares comprising the capital without any degree of preference or subordination



- The return of the issue analyzed has to be higher than necessarily

convertible bonds and comparable instruments existing in the market. - The return of the issue analyzed must be less than the expected return of

capital of the entity.

Graph 1. Yield-risk relationship.

hile regulatory developments cited above, despite having a common

at a level of turn that should be:

m level determined by the return of existing issues

cted return of the Banco

return that, always compensating for their

- Y

ield

+

- Risk +

Senior Debt

Equity

Subordinated Debt

Existing Comparable

New Regulatory Framework Convertible

Wsupranational inspiration, are subject to further policy development and exercise of supervision, both at the national level, the framework used to infer issue return range is outlined at the same national level. Therefore, the analysis presented in the following section is limited to the Spanish market. According to the above, the Banco Popular´s issue must be placedre

- Over a minimuequivalent emissions in the Spanish market.

Under a maximum level given by the expe- Popular´s Cost of Equity.

Consistent with a level of- increased risk over comparable existing issues, also recognizes being closer to them than to equity because of the substantially higher risks it assumes.



Graph 2. Yield range.

view of this, the analysis has been conducted based on two simple steps om a methodological point of view:

Bond necessarily convertible in the previous regulatory framework for credit risk similar to the Banco Popular.

3.2.

Maximum Yield: Cost of Equity

um expected return level for the Banco Popular´s issue, reholder or the cost of equity, we have

proceeded, in a first step, to make an estimation of the cost of equity of the

the context of CAPM, the cost of equity is given by the following expression:

%

Banco Popular Ke

Existing Comparable Issues

Required Level to New Subordinated Bonds Necessarily Convertible

Infr First, we estimate (i) the Banco Popular´s cost of equity, and (ii) the return

of an issue comparable to the

Having estimated the range of reasonable return, we evaluate the return of the Banco Popular´s issue and consider its position within that range.

Framework

3.2.1

To estimate the maximthat is, the return demanded by the sha

Spanish financial sector. Subsequently, the result has been adjusted to suit the Banco Popular´s risk profile. To this end, we used an approximation method based on the Capital Asset Pricing Model, CAPM. In

)( fmf rrrKe −∗+= β



Where:

− Ke is the cost of equity of an asset, he risk free return,

is the risk Premium on the reference market, and respect to the variability of the reference

capital, risk-free return rate used corresponds to the average IRR for the last 10 ea ear Spanish Treasury issues. Thus, rf, is estimated at 4.4%.

reads or sk premiums applicable to individual countries. In the Spanish case it stands

by capitalization has been built. Then, a regression of weekly returns f the index over the returns of the index of the Madrid Stock Exchange is

− rf, is t− )( fm rr −− β is the volatility of the asset with

market. In line with common practice in the field of valuation to estimate the cost of

rs of 10-yy The risk premium of the Spanish market used is based on the one estimated and published by Aswath Damodaran2 in its periodic review of the spriat 4.5%. In order to estimate the Beta of the sector, a Spanish banking sector index3 weightedoperformed, for the last three years. As shown in Graph 3, the Beta obtained as average of the Spanish banking industry is 1.37.

2 Periodic updated of market premiums, “Country Default Spreads and Risk Premiums”. Last updated: January 2010. 3 The index is composed by the banks listed on the Madrid Stock Exchange.



Graph 3. Relationship Spanish banking sector with respect to Madrid Stock Exchange returns.

y = 1.3734x - 0.0004

R2 = 0.895

-40%

-30%

-20%

-10%

0%

10%

20%

-30% -25% -20% -15% -10% -5% 0% 5% 10% 15%

From the above values, the estimated Ke of the Spanish banking sector is 10.58%:

%58.10%5.43734.1%4.4 =∗+=torBankingSecKe Once Ke has been inferred for the Spanish banking sector, we estimate the Banco Popular´s one by adjusting the value obtained to incorporate the differential effect on the credit risk between Banco Popular and the average credit quality of the sample considered. This adjustment has been made through the Beta. Therefore, as a preliminary step, we have built an indicator of risk based on the coding of the average ratings given by specialized agencies (Moody's, S&P and Fitch). The range of the indicator values is between 1 and 20, with 1 being the value associated with the highest credit quality (Aaa/AAA) and 20 corresponding to the worst score (D).



Table 2. Coding of the credit rating.

Credit Rating

IM ValoraIndicator

Credit Rating

IM ValoraIndicator

Aaa/AAA 1 Ba1/BB+ 11Aa1/AA+ 2 Ba2/BB 12Aa2/AA 3 Ba3/BB- 13Aa3/AA- 4 B1/B+ 14A1/A+ 5 B2/B 15A2/A 6 B3/B- 16A3/A- 7 Caa/CCC+ 17

Baa1/BBB+ 8 Ca/CCC 18Baa2/BBB 9 C/CCC- 19Baa3/BBB- 10 D 20

As shown in the table below, a risk indicator value is assigned to each company considered in the sample, given its rating level. In the case of Banco Popular the indicator stands at the level of 5.33, which implies a spread of 1.87 points with regard to the weighted average of the banking sector that stood at 3.46. Table 3. Rating of the entities considered in the sample.

o estimate the relationship between the risk of insolvency of an entity and its

he detail of the sample of entities used in the analysis is presented in Annex 1

IM ValoraIndicator

% Index

BANCO GUIPUZCOANO 7.00 0.44%BANCO PASTOR 7.00 0.69%BANCO POPULAR ESPANOL 5.33 4.42%BANCO SABADELL 6.00 3.10%BANCO SANTANDER 3.00 57.63%BANCO DE VALENCIA 8.50 1.46%BANESTO 3.33 3.57%BANKINTER SA 5.33 1.70%BBVA 3.33 26.99%

Capitalization-Weighted Average 3.46 100.00%

TBeta, we analyze a sample of 103 listed banks in Europe and the U.S.. Then, we proceed to reorganize the sample into subgroups according to their rating. Graph 4 shows the relationship between the average beta of each subgroup and its associated credit rating. T



Graph 4. Relationship between credit rating and beta.

y = 0,0452x + 1,0464

R2 = 0,5661

1.00

1.25

1.50

1.75

2 3 4 5 6 7 8 9 10 11

IM Valora Indicator

Be

ta

Observing the chart above we can conclude that there is a positive relationship between credit risk and the beta of an entity. Likewise, the slope of the trend line provides a measure of the sensitivity of the Beta to changes in credit risk. Using the sector Beta (1.37) and the risk spread between Banco Popular and the mean of the sample (1.87), the Beta of Banco Popular can be estimated as:

45.187.1*045.0 =+= torBankingSecarBancoPopul ββ Using the previous Beta in the calculation of the Banco Popular´s Cost of Equity, we obtain:

%92.10%5.445.1%4.4 =∗+=arBancoPopulKe The estimated value of 10.92% marks a maximum level of return to the issue. Furthermore, in order to contrast the credit risk adjustment, a second approach has followed. In this case, the approach is based on the estimation, not a Beta for Banco Popular, but directly an additional credit risk return spread with respect to the mean of the sample (δ). Thus the equity return of Banco Popular is given by:

δ+= SectorarBancoPopul KeKe



To estimate the differential δ, we have analyzed the risk-return pairs of the issues in the preferred Spanish liquid secondary market. The purpose is to infer the sensitivity in terms of return on comparable issues4 to changes in risk levels. These comparable issues are listed in the following table. Table 4. Sample of Spanish liquid preferred stock issues.

ISIN IssuerIssue

Rating*IM Valora Indicator

Issue Date

Description

XS0229864060 BBVA Baa2/A-/A- 7.67 22-09-05 3.798% fixed annual coupon for 10 years;from then on EUR3M+165bp paid quarterlyXS0266971745 BBVA Baa2/A-/A- 7.67 20-09-06 4.952% fixed annual coupon for 10 years;from then on EUR3M+195bp paid quarterlyXS0288613119 Banco Popular Ba2/BB+/BBB 10.67 06-03-07 4.907% fixed annual coupon for 10 years;from then on EUR3M+165bp paid quarterlyXS0206920141 Santander A2/A-/A+ 6.00 10-12-04 4.375% fixed annual coupon for 10 years; resto EUR 3M+160pb pagadero trimestralXS0205497778 Bancaja Ba3/_/BB+ 12.00 16-11-04 4.625% fixed annual coupon for 10 years; resto EUR 3M+217pb pagadero trimestralXS0214965450 Bancaja B3/_/BB- 14.50 23-03-05 4.5% fixed annual coupon for 10 years; resto EUR 3M+80pb pagadero trimestralXS0225590362 Banco Pastor B3/_/_ 16.00 27-07-05 4.564% fixed annual coupon for 10 years; resto EUR 3M+217pb pagadero trimestralXS0267456084 Banco Sabadell Ba3/BB+/BBB 11.00 20-09-06 5.234% fixed annual coupon for 10 years; resto EUR 3M+217pb pagadero trimestralDE0009190702 Banco Popular Ba2/BB+/BBB 10.67 20-10-03 6% fixed annual coupon paid quarterly in perpetuityDE000A0DE4Q4 Banesto Ba1/A-/_ 9.00 05-11-04 5.5% fixed annual coupon paid semiannually in perpetuity

(*) Moody's/S&P/Fitch

To estimate the average marginal contribution of default risk on the return of similar issues, we have calculated the parameters of the regression line that is shown in the chart below: Graph 5. Yield-risk.

Santander

BBVA

BBVA

Banesto SabadellPopular

PopularBancaja

Banco Pastor

Bancaja

Yield = 100.83 + 29.275*C redit R at ingR 2 = 0.6525

0

100

200

300

400

500

600

700

4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00

IM Valora Indicator (Risk)

Yie

ld (

bp

)

4 Given the type of risk of the issue under review, and due to the reduced number of convertible issues existing in the market, the heterogeneity in terms of the characteristics of the securities and the lack of liquidity, liquid issues of preferred stock have been taken as a framework of comparable issues.



The line slope (29.27 pb) measures the sensitivity of the return of preferred

inally, applying this differential on the Ke of the sector (10.58%) we obtain

his result of this second approach is in line and supported the earlier estimate

3.2.2 Maximum Yield: Market situation and reference issues

The next set of information is the basis for estimating the minimum return

Situation and evolution in the return of liquid preferred stocks in the

lution of Tier I A and BBB SUSI Index. ular and Spanish

ituation and evolution in the return of liquid preferred stocks in the Spanish market.

stock to the risk rating. Applying this measure to the credit quality gap between Banco Popular and the average of the sample used in the sector (1.87), we obtain a spread of 55 bp over Euribor 3M that, in terms of IRR, is equivalent to δ = 58 bp. Fthe cost of equity for Banco Popular at 11.16%. Tby adjusting the Beta, which was at 10.92%.

threshold:

Spanish market. Situation and evo

Situation and evolution of the CDS of Banco PopGovernment.

S

he issues of preferred stock in the secondary market selected are those with a

able 5. Secondary market of preferred stock issues.

Thigher liquidity. The sample is identical to that used in the regression analysis described in the previous section. T

ISIN IssuerIssuer Issue IM Valora Issue

DescriptionRating* Rating* Indicator Date

XS0229864060 BBVA Aa2/AA/AA- Baa2/A-/A- 7.67 22-09-05 3.798% fixed annual coupon for 10 years;from then on EUR3M+165bp paid quarterlyXS0266971745 BBVA Aa2/AA/AA- Baa2/A-/A- 7.67 20-09-06 4.952% fixed annual coupon for 10 years;from then on EUR3M+195bp paid quarterlyXS0288613119 Banco Popular Aa3/A/A Ba2/BB+/BBB 10.67 06-03-07 4.907% fixed annual coupon for 10 years;from then on EUR3M+165bp paid quarterlyXS0206920141 Santander Aa2/AA/AA A2/A-/A+ 6.00 10-12-04 4.375% fixed annual coupon for 10 years; resto EUR 3M+160pb pagadero trimestralXS0205497778 Bancaja A3/_/BBB Ba3/_/BB+ 12.00 16-11-04 4.625% fixed annual coupon for 10 years; resto EUR 3M+217pb pagadero trimestralXS0214965450 Bancaja A3/_/BBB B3/_/BB- 14.50 23-03-05 4.5% fixed annual coupon for 10 years; resto EUR 3M+80pb pagadero trimestralXS0225590362 Banco Pastor A3/_/_ B3/_/_ 16.00 27-07-05 4.564% fixed annual coupon for 10 years; resto EUR 3M+217pb pagadero trimestralXS0267456084 Banco Sabadell A2/A/A Ba3/BB+/BBB 11.00 20-09-06 5.234% fixed annual coupon for 10 years; resto EUR 3M+217pb pagadero trimestralDE0009190702 Banco Popular Aa3/A/A Ba2/BB+/BBB 10.67 20-10-03 6% fixed annual coupon paid quarterly in perpetuityDE000A0DE4Q4 Banesto Aa3/AA/AA Ba1/A-/_ 9.00 05-11-04 5.5% fixed annual coupon paid semiannually in perpetuity

(*) Moody's/S&P/Fitch



The issues have, in general, a uniform remuneration structure with a fixed payment period during the first 10 years. Thereafter, the cancellation option of the issuer begins and payments become variable, indexed to Euribor 3M, with coupons paid quarterly. The exception to this remuneration structure comes from the ones issued first, the issues of Banesto and Banco Popular, which pay a fixed coupon in perpetuity. Also, it is important to mention that, on average, the issuer rating of the set of reference issues is equivalent to that of Banco Popular. The chart below shows the current average cost of issues in the sample and its evolution since September 2009. Graph 6. Evolution of the average return on the preferred stock issues.

ber 29, 2010 the average return on the Issuance of preferred stock in

eferences in the secondary market to the issue under

300

350

400

450

500

550

600

650

03-09-09 10-11-09 17-01-10 26-03-10 02-06-10 09-08-10 16-10-10

Spre

ad (

bp)

As of Octothe secondary market is 432 bp. Since the average credit rating of issuers in the sample is equivalent to the Banco Popular, this return level is necessarily a minimum threshold. Taking the closest rconsideration, in terms of issue estimated rating, like the issues of Popular and Sabadell issues, we deduce a minimum return, in terms of preferred stock, of 450 bp that, in IRR, is equivalent to 7.60%.



Situation and evolution of Tier I A and BBB SUSI Indexes.

debt, subordinated and referred (Lower Tier 2, Upper Tier 2 and Tier 1) issued by banks and insurance

t to the secondary market study, SUSI Tier I indexes with credit vels of A and BBB have been chosen, its evolution from January 2008 is shown

BB SUSI indexes.

ier I A and BBB SUSI, respectively. These levels are in line with those

JP Morgan´s SUSI indixes are composed of senior pcompanies residents and non-EU residents, denominated in euros. Market rates are from JP Morgan, one of the most globally important financial intermediaries. As a complemenlebelow in Graph 7. Graph 7. Tier I A and B

0

200

400

600

800

1000

1200

1400

1600

1800

01-01-08 01-09-08 01-05-09 01-01-10 01-09-10

SUSI A Tier 1 SUSI BBB Tier 1

As of October 29, 2010, the indexes are at levels of 298 bp and 461 bp for the Tobtained directly from liquid issues of preferred stocks in the Spanish secondary market, remember its price is 450 bp.



Situation and evolution of the Banco Popular´s CDS and Spanish Government.

on, the bservation of the quoted price of credit default swaps: Senior and

m January 2008 of the Senior CDS 5 and 10 ears of Banco Popular.

nco Popular´s CDS.

p for the Senior CDS 5 and 10 years, respectively.

S of the Kingdom of Spain, s the floor of return to any issue in the Spanish market.

The credit risk analysis inherent to an entity issue may require, in additioSubordinated CDS. These constitute a valid complementary reference, although the conclusions derived from the analysis must be seen from the consideration of current market circumstances. Graph 8 shows the evolution froy Graph 8. Evolution of the Ba

0

50

100

150

200

250

300

350

400

450

01-01-08 01-09-08 01-05-09 01-01-10 01-09-10

Sen 5yr Sen 10yr

As of October 29, 2010, the Banco Popular´s CDS are at levels of 267 bp and 265 b In addition, Graph 9 shows the evolution of the CDa



Graph 9. CDS Evolution of the Kingdom of Spain.

0

50

100

150

200

250

300

01-01-08 01-09-08 01-05-09 01-01-10 01-09-10

CDS SR 5Y CDS SR 10Y

As of October 29, 2010, the Spanish Government’s CDS are at levels of 173 bp and 194 bp for the Senior CDS 5 years and 10 years, respectively. Once the secondary market indicators have been analyzed we can conclude that the starting point or minimum threshold of return for the issue under consideration is defined by the preferred stock secondary market, which is estimated, in terms of IRR, at 7.60%.

4. Analysis of the Banco Popular´s issue

This section presents, in a first epigraph, the valuation of the Bond necessarily convertible to Banco Popular´s shares taking into account the characteristics listed in paragraph 1 of this document. Below we analyze its suitability in terms of return respect to the established framework.

4.1. Issue valuation

According to the characteristics of the Banco Popular´s issue, its valuation methodology consists in using simulation methods with binomial trees. To do so, IM Valora Consulting uses the Cox-Ross-Rubinstein model based on the log-normal evolutions used by the Block-Scholes model for equity securities.



The issue valuation as of October 29, 2010, shown in Table 6, displays an outcome of 618 bp (all-in spread over Euribor 3 months). This level of return, in terms of IRR, is equivalent to 9.40%. Table 6. Issue of Necessarily Convertible Bonds to Banco Popular´s Shares.

le issues valuation with options, we

r the issue valuation and its

.2. Suitability of the issue yield

the previous sections allows to obtain the

isting comparable issues in the Spanish market is estimated

o Popular stands at 10.92%

, measured

IssuerIssuer

Rating *Issue Type Value Date

Compulsory Conversion

Date

Implicit Spread

Banco Popular Aa3/A/A Convertible 29/10/2010 29/10/2013 618 bp

(*) Moody's/S&P/Fitch Ratings

On the other hand, to obtain the comparabused a valuation methodology that consists in using simulation methods in trinomial trees. The stochastic processes that are simulated show the behavior of the entire term structure of interest rates in non-arbitration models. For its implementation, IM Valora Consulting uses the Hull and White model. For the comparables valuation without options, we use a valuation methodology consisting in discounting the cash flows generated over the life of the instrument, using the estimated forward rates based on the zero coupon curve to calculate future floating coupons. The zero coupon curve is estimated based on the deposits and swaps quoted in the market. These methodologies and the inputs needed focomparable issues are described with more detail in Appendices 2 and 3.

4

The analysis synthesis presented in following results: The return of ex

at 7.60%, measured in terms of IRR.

The estimated cost of capital for Banc

The return of the Banco Popular´s issue, subject of this document

in terms of IRR, increases to 9.40%.



Graph 10. Location of the Banco Popular´s issue in the reference framework

Yield Range

6

7

8

9

10

11

12%

Banco Popular Ke: 10,92%

Market PreferredStock Issues: 7,60%

Convertible Bond to Shares Banco Popular: 9.40%

Therefore, the return offered by the Subordinated Bonds Necessarily Exchangeable for Ordinary Shares of Banco Popular is located among the maximum and minimum thresholds established by our method of analysis. We also consider that the margin of return compared to comparable issues in the market under the previous regulatory framework, which is estimated at 1.81%, is enough to offset the risk differential that new regulatory requirements brings in.



5. Conclusions

In this study, IM Valora Consulting acts as an independent expert to determine whether the conditions of the issue of necessarily convertible bonds by Banco Popular, which is intended primarily for the retail market, are in line with current market circumstances. Based on this analysis, IM Valora Consulting considers that the proposed yield on the issue is within a reasonable market range and adjusted to the current situation of financial market as well as the risk profile of the issuer and the issue. Our work was performed between October 29 and November 8, 2010. The validity of the results and conclusions are strictly limited to the information on the markets and the issues existing on October 29, 2010. Madrid, 8 November 2010.

Ana Castañeda Ortega Managing Director

This report was prepared by IM Valora Consulting for informational purposes only. The information and opinions contained herein should not, under any circumstances, be construed as a recommendation, invitation, offer, request or obligation to invest or as legal, fiscal or any other type of advice on the issue or other financial transactions. Investors interested in the issue should seek expert advice as necessary to obtain information on financial, accounting, tax, legal or other aspects in order to ascertain whether the financial products described in the report satisfy their investment aims and limitations, along with an independent and personalised evaluation of the product, its risks and remuneration. Neither IM Valora Consulting nor its parent company, group companies, partners or employees shall



be liable for any financial loss or decision of any kind taken by third parties based on the information contained in this report.

The different information sources used to prepare this report have been identified. Neither IM Valora Consulting nor its parent company, group companies, partners or employees assumes any liability in relation to the information provided by those sources.

All evaluations involve objective and subjective factors and the latter involve judgements. Therefore, since the results obtained are only a reference it is impossible to guarantee that third parties will necessarily agree with the report’s conclusions. The results and the data presented do not guarantee and are not necessarily indicative of future yields or market conditions.



Appendix 1. Relationship between credit rating and beta value

Sample of institutions used in the linear regression to estimate the relationship between credit rating and Beta

Financial Entity Beta

Rating S&P

Rating Moody´s

Rating Fitch

Currency

VSEOBECNA UVEROVA BANKA AS 0.95 A1 A+ EUROESTERREICH VOLKSBANKEN-PART 0.31 Baa1 A EURUNICREDIT SPA 1.53 A Aa3 A EURUBI BANCA SCPA 0.97 A A1 A+ EURPIRAEUS BANK S.A. 1.23 BB Ba1 BBB- EURBANCO SANTANDER SA 1.44 AA Aa2 AA EURBANCO DE SABADELL SA 0.98 A A2 A EURRAIFFEISEN BANK INTERNATIONA 1.35 A EURBANCO POPULAR ESPANOL 1.28 A Aa3 A EURPOHJOLA BANK PLC 1.26 AA- Aa2 AA- EURBANCA POPOLARE DI MILANO 1.03 A- A1 A- EURBANCO PASTOR 0.68 A3 EURMEDIOBANCA SPA 0.93 A+ EURNATIXIS 1.41 A+ Aa3 A+ EURKBC GROEP NV 2.50 A- A1 A EURINTESA SANPAOLO 1.28 A+ Aa2 AA- EURSOCIETE GENERALE 1.45 A+ Aa2 A+ EUREFG EUROBANK ERGASIAS 1.27 BB Ba1 BBB- EURNATIONAL BANK OF GREECE 1.33 BB+ Ba1 BBB- EURESPIRITO SANTO FINL GROUP SA 0.52 Baa1 BBB+ EURERSTE GROUP BANK AG 1.47 A Aa3 A EURDEUTSCHE POSTBANK AG 1.00 A- A1 A+ EURDEXIA SA 1.94 A+ EURDEUTSCHE BANK AG-REGISTERED 1.49 A+ Aa3 AA- EURPICCOLO CREDITO VALTELLINESE 0.81 A3 A- EURCRCAM DU LANGUEDOC 0.51 AA- Aa1 EURBANCA CARIGE SPA 0.83 A- A2 A EURMARFIN POPULAR BANK PUBLIC C 1.03 Baa2 BBB+ EURCA NORD DE FRANCE-CCI 0.60 AA- EURCREDITO EMILIANO SPA 1.13 A- A EURCREDIT INDUSTRIEL ET COMM 0.70 A+ Aa3 AA- EURCOMMERZBANK AG 1.34 A Aa3 A+ EURCREDITO BERGAMASCO 0.59 A- A- EURCA ILE DE FRANCE-CCI 0.42 AA- EURBANCO DE VALENCIA SA 0.90 Baa1 BBB EURBANCO ESP CREDITO (BANESTO) 0.99 AA Aa3 AA EURBANCA POPOLARE DI SONDRIO 0.74 A EURBANCO BPI SA.- REG SHS 1.04 A- A2 A EURBANCA POPOL EMILIA ROMAGNA 0.86 A- A- EURBANCO POPOLARE SCARL 1.52 A- A2 A- EURBANK OF CYPRUS PUBLIC CO LTD 1.08 A3 BBB+ EURBNP PARIBAS 1.47 AA Aa2 AA- EURBANCA MONTE DEI PASCHI SIENA 1.00 A- A1 A- EURBANKINTER SA 0.96 A A1 A+ EURBANK OF IRELAND 2.22 A- A1 A- EURBANCO ESPIRITO SANTO-REG 1.22 A- A2 A EURBANCO COMERCIAL PORTUGUES-R 1.20 BBB+ A3 A EURBANCO BILBAO VIZCAYA ARGENTA 1.42 AA Aa2 AA- EURAGRICULTURAL BANK OF GREECE 1.03 Ba2 BBB- EURALPHA BANK A.E. 1.25 BB Ba1 BBB- EURCREDIT AGRICOLE SA 1.42 AA- Aa1 AA- EUR




Financial Entity BetaRating S&P

Rating Moody´s

Rating Fitch

Currency

TATRA BANKA 0.34 A2 EURJPMORGAN CHASE & CO 1.80 A+ Aa3 AA- USDWELLS FARGO & CO 1.91 AA- A1 AA- USDBANK OF AMERICA CORP 2.32 A A2 A+ USDCITIGROUP INC 2.86 A A3 A+ USDUS BANCORP 1.52 A+ Aa3 AA- USDPNC FINANCIAL SERVICES GROUP 1.74 A A3 A+ USDBB&T CORP 1.29 A A1 A+ USDSUNTRUST BANKS INC 1.85 BBB Baa1 BBB+ USDNORTHERN TRUST CORP 1.10 AA- A1 AA- USDFIFTH THIRD BANCORP 2.25 BBB Baa1 A- USDREGIONS FINANCIAL CORP 1.77 BBB- BBB+ USDM & T BANK CORP 1.23 A- A3 A- USDKEYCORP 1.95 BBB+ Baa1 A- USDNEW YORK COMMUNITY BANCORP 1.09 BBB- A3 BBB USDCOMERICA INC 1.59 A- A2 A USDPEOPLE'S UNITED FINANCIAL 0.68 BBB+ A3 A- USDAHLI UNITED BANK B.S.C 1.94 A- A- USDHUNTINGTON BANCSHARES INC 2.04 BB+ Baa2 BBB USDZIONS BANCORPORATION 2.09 BBB- B2 BBB USDMARSHALL & ILSLEY CORP 1.89 BBB- Baa1 BBB+ USDCULLEN/FROST BANKERS INC 0.99 A- A1 A- USDBOK FINANCIAL CORPORATION 1.20 BBB+ A2 A- USDCOMMERCE BANCSHARES INC 1.01 A USDPOPULAR INC 1.31 B Ba1 B USDBANK AUDI SAL - AUDI SARADAR 0.85 B B USDCITY NATIONAL CORP 1.42 BBB+ A1 A- USDFIRST NIAGARA FINANCIAL GRP 0.89 BBB- Baa1 BBB USDFIRST HORIZON NATIONAL CORP 1.57 BBB- Baa1 BBB+ USDASSOCIATED BANC-CORP 1.33 BB- Baa1 BB+ USDBANK OF HAWAII CORP 1.14 A1 A- USDTCF FINANCIAL CORP 1.53 BBB A- USDVALLEY NATIONAL BANCORP 1.31 A- USDFIRSTMERIT CORP 1.23 BBB+ A- USDSYNOVUS FINANCIAL CORP 1.69 BB- B3 BB- USDFULTON FINANCIAL CORP 1.23 Baa1 A- USDSVB FINANCIAL GROUP 1.76 BBB A3 USDCAPITALSOURCE INC 2.05 B+ Ba3 BB USDWASHINGTON FEDERAL INC 1.26 BBB+ USDWESTAMERICA BANCORPORATION 1.11 A USDUMB FINANCIAL CORP 1.02 A- A+ USDTRUSTMARK CORP 1.16 BBB+ Baa1 A- USDWEBSTER FINANCIAL CORP 2.04 BBB- Baa1 BBB- USDASTORIA FINANCIAL CORP 1.27 BBB- Baa1 BBB- USDBANCORPSOUTH INC 1.17 BBB+ Baa1 USDHANCOCK HOLDING CO 1.14 A2 USDSUSQUEHANNA BANCSHARES INC 1.50 BBB- Baa3 USDCATHAY GENERAL BANCORP 1.74 BB USDBYBLOS BANK 0.67 B1 B USDFIRST MIDWEST BANCORP INC/IL 1.73 BBB- Baa1 BBB USD


Table of average Beta distribution based on credit rating.

NumericRating

Average Beta

Nº of Samples

3 1.31 64 1.16 115 1.22 106 1.27 357 1.29 118 1.41 129 1.63 610 1.43 411 1.26 412 1.83 2



Appendix 2. Valuation Methodologies.

The purpose of this document is to describe the methodology used by IM Valora Consulting to evaluate financial instruments. The models used to evaluate financial instruments are based on calculating the present value of expected future flows. The discounts are calculated using what is known as the Zero Coupon Curve (hereinafter ZCC), which is nothing more than an estimate of the Term Structure of Interest Rates. (hereinafter, TSIR). In addition, when there is optionality associated with the instruments, the behaviour of the underlying assets is modelled in a context of uncertainty. When there is no optionality associated with the instrument, the value is obtained by calculating the expected value discounted from the payment function. In some instruments there are closed analytical formulae for obtaining the price of the option. This is the case of the BlackScholes model and its derivatives. However, sometimes there are no closed solutions, in which case it is necessary to use numeric approximations to calculate the market value of the option. In these cases, both the Montecarlo simulation method and methods supported by binomial and trinomial trees are used to reflect the evolution of the underlying asset and its probability structure. The remainder of this document is arranged as follows. We will first describe the valuation models and procedures used. We will then detail the methodology used by IM Valora Consulting to estimate the zero coupon curve. The document concludes with a description of the valuation inputs used. Valuation of convertible bonds In order to obtain the value of a convertible bond it is necessary to model the underlying bond and the option of converting those bonds into ordinary shares of the issuer. To do so, the primary source of risk, the equity security, is modelled using a binomial tree, discretizing its evolution and all of the characteristics of the convertible contract.

We used the Cox-Ross-Rubenstein evolution model where the evolution of an equity asset is modelled using binomial trees with constant transition probabilities. The Cox-Ross-Rubenstein model is based on the log-normal evolution used by the Black-Scholes model for equity securities. According to this model, the



future value in time t of an equity security S is obtained using the following formula:

Zttr

t eSSσσ +⎟

⎠⎞

⎜⎝⎛ −

=2

21

0 , where is the term value of the variable, is the current value of the variable,

tS 0Sσ is the annualised volatility of the variable, r is the free risk rate and

Z is the standard normal random variable. The time must be discretized considering time gaps the size of and, based on the binomial evolution, knowing the value of the underlying for time ( )only two possible values are considered for the following time defined based on the two constants and the initial price: ( up scenario) and ( down scenario). In addition, these values are associated with certain known transition probabilities:

dtt tS

1+tuSt × dSt ×

p and , respectively. p−1 The payment of dividends on security equities must also be considered. A planned dividend payment causes the future price of the equity security to decrease, which means that the potential yield on the conversion option is lower and hence the price of the convertible bond. The inclusion of a continuous dividend rate in the binomial evolution tree of the underlying asset does not alter the value of the asset in the different nodes but rather only affects the transition probabilities. Accordingly, the model’s system of equations is as follows:

( ) ,)(exp,/1

),exp(

dudDtqrp

udDtu

−−×−=

=×= σ

where is the continuous dividend rate. q Finally, in a binomial tree, the value of the convertible bond is obtained recursively, starting with the last conversion date and moving back to the initial date. In this case, the last conversion date is the mandatory conversion date of the convertible bond obtained as follows:

( ) CouponRCtiSBCt += *, , where is the value of the underlying asset in node i, is the conversion ratio stipulated in the issue contract.

( )tiS , RC



To calculate the convertible value for dates prior to the mandatory conversion date, it is necessary to evaluate the value if the conversion option (if any) is not exercise and the immediate conversion values if there is a swap option. Coupon payments, if any, must also be considered so the value of the instrument in these nodes is obtained as follows:

CouponConversiónónContinuaciMaxBCt += ),( . The continuation value is obtained as follows

[ ] ( ) CoupondtDFBCEonContinuati ttitt +×= + ,1 , where is the expected value of the convertible bond which is obtained using transition probabilities as follows:

[ ] titBCE ,1+

[ ] ( ) ( ) ( 1,111,,1 ++×−++×=+ tiBCptiBCpBCE tit ) .

The conversion value is calculated as follows:

( ) RCtiSConversiont *,= . Valuation of fixed income instruments with no optionality This group includes fixed coupon bonds and bonds with floating payments or FRNs, none of which has optionality. The most appropriate method for evaluating these securities consists of discounting the payment of the instrument with the discount function. Once the zero coupon curve applicable to the instrument is known, the valuation of fixed coupon bonds is very simple. Since the value of the future flows is known, the valuation simply consists of obtaining the discount factors applicable on each coupon payment date and calculating the present value of future flows. When the flows of an instrument are variable and linked to an interest rate of reference (e.g., Euribor) they are estimated based on the forward rates implicit in the zero coupon curve of the rates to which the payments are linked. Hence, the valuation of the instrument consists of i) estimating the future payments using the forward rates of the curve of reference, adding the applicable margin (which is determined based on the characteristics of the security) and ii)



obtaining the discount factors on the payment dates using the zero discount curve to calculate the current value of the estimated future flows. Valuation of securities with simple optionality This group includes the securities whose optionality can be determined using closed analytical formulae. The following instruments are examples of these types of assets:

Bonds with one-time cancellation options.

Caps, floors, collars, etc.

The value of the option is calculated using an adequate analytical formula. In most cases, these expressions are based on Black-Scholes models, Black ’76 or a variation of one of these. Valuation of fixed income securities with complex optionality or non-linear coupons in the rate structure For the valuation of these types of instruments involving complex optionality or where the non-linearity of the coupons cannot be resolved using the analytical formula, it is necessary to use an interest rate model that provides information on the expected evolution of the term structure of the rates. At IM Valora Consulting we used an interest rate simulation tree calibrated to market volatility and the interest rate term structure (IRTS) according to the Hull and White methodology. This is an extension of the model proposed by Vasicek which assumes that the process for the short-term interest rate, r, behaves as follows:

[ ] dzartrd σθ +−= )()(

Where a is the parameter that indicates the mean reversion, σ is the instantaneous volatility of the short term rate, )(tθ is a function of time that ensures the consistency of the model with the interest rate term structure observed in the market at a given time and dz is a Wiener process.

To determine the value of these securities, the model’s arguments are first estimated based on the volatilities of caps and swaptions: short term rate volatility (the model’s underlying) and the parameter that indicates the mean reversion of the process. A trinomial tree is then built which is nothing more



than a discreet representation in time of the stochastic process for the short term interest rate. The tree makes it possible to calculate the contingent payments on each node and to determine the expected value of the option.

In short, the procedure for determining the value of this type of instrument is broken down into three phases: in the first phase we estimate the characterising parameters of the stochastic process followed by interest rates, based on the volatilities of the caps quoted in the market. Secondly, we build a simulation tree for the interest rates that is consistent with the term structure of the interest rates at any given time. Thirdly, we calculate the payments on each node of the tree and we discount them recursively according to the probability of reaching each one of the nodes. As we discount the payments on the tree we obtain the value of the cancellation optionality. Estimation of the zero coupon curve The term structure of interest rates is the relation that exists, at any given time, between interest rates and their terms. The graphic representation of that relationship is known as the zero coupon curve (ZCC). Knowing the term structure of interest rate (TSIR) has multiple applications, one of which includes its use in financial economics to evaluate multiple financial assets and to design investment and hedging strategies.

Unfortunately, TSIR cannot be observed directly since the interest rates that make it up must reflect only the relationship between the interest rate and the term. The rates observed in the assets quoted in the market reflect effects other than term, such as quantity and the payment structure of coupons, among others. Moreover, obtaining the TSIR generally requires an estimate to eliminate the specific characteristics of the assets considered. TSIR must be estimated with financial instruments that are homogeneous from a tax, liquidity and credit risk perspective. The estimate of the term structure of interest rates has been receiving increased attention in the economic literature in recent decades and is currently obtained using two different methodologies: non-econometric or recursive methods and econometric methods that estimate the discount function. The method used by IM Valora Consulting is one that estimates the discount function and can be described as follows. For a given currency, market prices are obtained for a set of monetary rates published by the British Bankers’ Association and swap rates published by Bloomberg at 5:00 pm. Based on these rates, the recursive method is then used to obtain the discount function for the



different horizons, interpolating as necessary. Once this “discreet” curve is obtained, the parameters of the curve are estimated using Svensson’s parameterisation:

( ) ( ) ⎟⎟⎠

⎞⎜⎜⎝

⎛−−⎟⎟

⎠

⎞⎜⎜⎝

⎛⎟⎟⎠

⎞⎜⎜⎝

⎛−−+⎟⎟

⎠

⎞⎜⎜⎝

⎛−−⎟⎟

⎠

⎞⎜⎜⎝

⎛⎟⎟⎠

⎞⎜⎜⎝

⎛−−++=

23

2

23

12

1

1210 expexp1expexp1

τβ

ττβ

τβ

ττβββ tt

ttt

ttr



Appendix 3. Valuation Inputs

Value date: 29 October 2010. For the valuation of the convertible bond using the Cox-Ross-Rubinstein method we used the following inputs: Spot: € 4.647. Underlying volatility: 36.77%. Annualised dividend rate: 0.3 €/share (continuous rate on implied

dividends of 6.26%). To estimate the zero coupon curve we used the Svensson model based on the following yield rates observed in the market:

O/N 0.693%1W 0.739%1M 0.807%2M 0.861%3M 0.987%4M 1.042%5M 1.129%6M 1.224%9M 1.374%12M 1.507%

Money Market

2Y 1.597%3Y 1.795%4Y 1.984%5Y 2.170%6Y 2.340%7Y 2.486%8Y 2.612%9Y 2.718%10Y 2.810%12Y 2.959%15Y 3.097%20Y 3.150%25Y 3.096%30Y 2.958%40Y 2.812%50Y 2.758%

Swap Rates



The estimate of the zero coupon curve is obtained by making an adjustment by squared minimums of the theoretical yield rates observed in the market. The resulting curve is shown graphically below:

Zero Coupon Curve

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0.3 4.0 7.8 11.5 15.3 19.0 22.8 26.5

Year

Furthermore, the table below shows the cap volatilities used for calibration and valuation of the instruments analysed in this document.

Year ATM Rate Volatility

1 1.27% 36.90%2 1.60% 45.50%3 1.80% 43.20%4 1.98% 41.90%5 2.17% 39.50%6 2.34% 36.90%7 2.49% 34.50%8 2.61% 32.50%9 2.72% 30.80%10 2.81% 29.40%

Volatilities

20%

30%

40%

50%

10%1 3 5 7 9

Finally, the Hull-White parameters needed for the valuation are:

a Sigma

0.09295 0.01174


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