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Covered Bonds

A Mini-Primer

SummaryThe covered bond market has demonstrated significant growth in recent years as paperoutstanding has grown to €1.8 trillion (YE 2005) from €850 billion in 1995 – annualgrowth of 8% per annum. The product has been in existence in Europe for several hundredyears, but real growth began a decade ago with the introduction of a “jumbo” productattracting international attention and providing significant market liquidity. Originallyestablished by German and Danish issuers, these two markets still remain the largest butan important trend is the expansion of the market beyond European borders. WashingtonMutual broke new ground in 2006, launching the first covered bond issue from a U.S.issuer and Bank of America followed with the first U.S. dollar-denominated issue.

In Canada, covered bonds are a known commodity as Maple issuers such as Compagniede Financement Foncier, Depfa ACS Bank and Dexia Municipal Agency have placedapproximately C$2.3 billion of the securities in our market. Most recently, OSFI weighed-in to the world of covered bonds by indicating it was prepared to permit domestic deposit-taking-institutions to issue the securities. What’s driving the dramatic growth? From aninvestor’s perspective the bonds offer quality, yield (relative to triple-A alternatives) anddiversification opportunities. Alternatively, issuers are attracted by the cost of fundingefficiencies and the opportunity to grow their funding toolkit in an era of feeble depositgrowth. While Canadian investors will undoubtedly see covered bond offerings fromdomestic banks, the value proposition depends on one’s perspective. Although one mayargue a triple-A rated offering from a Schedule-1 bank could be marketed as a higheryielding Government bond alternative, clients are equally likely to adopt a view that, as

financial paper, there are more rewarding alternatives to the same credit at a marginalincremental assumption of risk.

HighlightsWe expect Canadian banks to begin issuing covered bonds

OSFI recently indicated that it was prepared to permit deposit-taking-institutions to issuecovered bonds, with certain restrictions (mainly: covered bonds cannot make up more than4% of the institution’s total assets).

Covered bonds are unique to regulated financial institutions

Covered bonds are debt instruments issued by regulated financial institutions. They aresecured by a priority claim on collateral of high quality, on-balance sheet assets.

The argument for investors and issuers

For investors, covered bonds provide safety, liquidity and yield over more conventionaltriple-A securities. For issuers, they provide benefits such as cost effective funding andfunding diversification.

The financial impact should ultimately be minimal

The issuance of covered bonds should lead to a small positive impact on margins as itcould lower borrowing costs by 5-10 basis versus banks’ most expensive sources ofunsecured wholesale funding, but the 4% of assets cap put in place by OSFI will limit the

potential savings to less than 0.5% of net income. Capital levels should not be impacted bythe issuance of covered bonds.

July 20, 2007

Global Credit Research, CanadaRBC Dominion Securiti es, Inc.

Al taf Nan ji, CFA

Credit Research Analyst

(416) 842-6462

[email protected]

Priced as of prior trading day’smarket close, ET (unless otherwisestated). For Required Disclosures,please see page 11.

All values in Canadian dollarsexcept where indicated.

For pertinent discl osure, please

see page.11 .



July 19, 2007 Covered Bonds – A Mini-Primer

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What are Covered Bonds?

Issued by regulated financial institutions, covered bonds are debt instrumentssecured by a priority claim on collateral of high quality, on-balance sheetassets.

The assets are typically a pool of prime residential mortgages or public sector debtthat remains on the issuer’s balance sheet but acts as collateral to “cover” the bonds.For investors, covered bonds provide safety, liquidity and yield over moreconventional AAA-rated securities. For issuers, they provide benefits such as costeffective funding and investor diversification.

Characteristics of a covered bond include:

• Currency: traditionally and predominantly issued in Euros, some non-Eurocurrency issues have been coming to market including a few Canadian dollardeals by European issuers. US dollar issues have been limited so potentialexists for significant growth in USD issuances.

• Structures: fixed rate and bullet maturities are predominant, although

international preferences have allowed some evolving into pass-throughand other investor-driven structures.

• Cover pool assets (“cover pool”): predominantly prime residential mortgagesand public sector loans with some commercial real estate and shipping loans

being issued more recently.

• Double protection: investors have full recourse to the issuer as well asrecourse to the cover pool in the event of issuer insolvency.

• Bankruptcy remoteness of covered bonds essentially ring-fences the assets tosafeguard investors’ preferential position and ensure payments to covered

bond investors continue.

• An Asset Coverage Test ensures that sufficient overcollateralization isavailable to meet repayment obligations, and this is monitored by anindependent party.

Exhibit 1: Generalized diagram of a covered bond issue

Source: RBC Capital Markets.

A Covered Bond Issue

Financial institutions issue covered bonds as an alternative tool for asset-liabilitymanagement and to fund loans of high quality such as prime residential mortgages and

Borrowers

Assets

Eligible Assets

• Prime residential mortgages

• Public debt

• Other high quality loans

Other Assets

Liabilities

Covered Bond s

Cover asset pool

Prime mortgages, public debt

or other high quality loans

Non-priority Senior Debt

Other CapitalEquity

Collateral

Financial Institut ion – Covered Bond Issuer

Investo

Origination Issuance

Borrowers

Assets

Eligible Assets

• Prime residential mortgages

• Public debt

• Other high quality loans

Other Assets

Liabilities

Covered Bond s

Cover asset pool

Prime mortgages, public debt



Other CapitalEquity

Collateral

Financial Institut ion – Covered Bond Issuer

Investo

Origination Issuance



Canadian Corporate Bond Market Outlook, 2007 June 22, 2007

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government loans. Features such as bankruptcy remoteness allow covered bonds torank ahead of other senior debt securities. It’s this rank that can pose risk to other debtholders and depositors because of the preferential claims covered bond holders haveover a pool of assets on the balance sheet, although there have been no instances ofissuer insolvency to date.

Covered Bonds versus Asset-Backed Securities

Covered bonds are similar to asset- or mortgage-backed securities because they’recollateralized by an underlying pool of assets. However, a number of key differencesexist:

• Issuer: Covered bonds issuers are loan originators who prefer to keep the assetson balance sheet. Asset-backed securities (“ABS”) are issued by a SpecialPurpose Entity (“SPE”) and are not consolidated on the balance sheet without anyrecourse to the originator.

• Risk: Covered bond issuers retain credit risk whereas ABS deals transfer thestructural risk to the investor. So ABS investors have claim only on the SPE assets

and its associated cash flows depending on the purchased tranche, whereascovered bond investors have recourse to the issuer, and in the case of issuerinsolvency, to the assets.

• Underlying assets: Cover pools are generally restricted to prime residentialmortgages, public or other high quality debt that revolve and are activelymanaged. ABS collateral have little restriction on underlying asset type and aremostly static within the SPE.

• Investor: Covered bonds are generally fixed-rate bullet format deals with principal payment at maturity, whereas amortization is common in mortgage- backed security structures so investors assume prepayment risk. As a result, thecovered bond investor base may differ from buyers of amortizing product.

• Regulation and framework: Covered bond issuance in many, but not all,countries is governed by specific legislation or structured arrangements thatidentifies a legal framework for a bond to be treated as a covered bond. Issuers,who are normally large banks, are subject to regulatory supervision while ABSentities are generally not specifically supervised.

Perspectives: Account ing, Legal and Capital

Accounting

Covered bonds remain on the issuer’s consolidated balance sheet. In some structured

cases, a cover pool can be sold into an SPE which would be considered a “true sale”although it is fully consolidated, and the issuer structure model can vary from jurisdiction to jurisdiction. Countries with a legal framework may mandate a distinctcover pool on the balance sheet.




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Exhibit 2: Example Special Purpose Entity (“ SPE” ) structure – consolidated on balance sheet

Source: RBC Capital Markets

Legal / Legislation

To help maintain stability in the mortgage and public lending sectors, governmentsand supervisory bodies have either enacted legislation that govern covered bonds orhave placed restrictions to provide safety to market participants.

There are two frameworks for covered bond issuance:

• Legislation or Statutory Frameworks: Many countries in Europe have legalframeworks that participants rely on to specifically segregate the cover pool from

the balance sheet assets of the covered bond issuer. Although frameworks canvary between jurisdictions, legally supported provisions include criteria foreligible cover pool assets, maximum asset Loan to Value ratios (LTVs), limits onissuance amounts, swap and segregation mechanics, minimumovercollateralization requirements and bankruptcy effects. (Standard & Poor’s, November 2006)

• Contractual or Structured programs: Some countries including the UK, the Netherlands and the US rely on general contractual rules and structuredtechniques that are proving to enhance the credit quality of the bond. (Standard &Poor’s, November 2006) These are issued by financial institutions in jurisdictionswhere no covered bond statutory framework exists, although many are movingtowards legislation. The Association of German Pfandbriefe (“Covered Bonds”)Banks states that the less issuers are subject to prudential supervision, the moredetailed their covered bond regulations need to be to achieve clear segregation andto convince capital markets of it.

The UK and The Netherlands are among several contractual countries examining andmoving towards a legal framework. Why? In Europe, the 1988 Directive onUndertakings for Collective Investments in Transferable Securities sets out ”theminimum requirement that provide the basis for privileged treatment of covered bondsin different areas of European financial market regulation.” (European Covered Bond

Borrowers

Assets

Eligible Assets• Prime residential mortgages• Public debt• Other high quality loans

Other Assets

Liabilities

Covered Bonds


Other Capital

Equity

Financial Institution – Covered Bond Issuer

Investors

Origination

Issuance

Special Purpose Entity

Covered Bonds

Cover asset pool as collateralPrime mortgages, public debt


Consolidatedon balance sheet

“True sale” of

eligible assets to SPEbut consolidatedon balance sheet

Guarantee over

cover pool




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Council, Fact Book, August 2006). If in compliance, the covered bonds benefit from privileged credit risk weightings and are considered safe to justify higher investmentlimits for funds and insurance companies. (E.g. investment fund limits for covered bonds of a single issuer can increase from 5% to 25% if the issuer meets the abovecriteria). Among other restrictions, the issuer must be a credit institution and besubject to special prudential public supervision. Also, the cover pool of assets must bedefined by law and provide sufficient collateral to cover bondholders’ priority claims.

Some markets such as France have issuers (e.g. BNP Paribas) establishing structuredcovered bond programs despite the existence of local legislation which adds to thedebate of the benefits of legislative versus structural frameworks. Our understandingis that structured programs offer more flexibility (e.g. in terms of the underlyingassets) relative to the rigidity of legislation and that structured programs have beenwell received when issued.

The European Covered Bond Council states that 25 covered bond systems are alreadyin place in Europe and 17 EU members have notified the EU commission on bondsand authorized issuers fulfilling a set of criteria for covered bond treatment.

The main covered bond issuing countries are Germany (Pfandbriefe), Denmark(Realobligationer), Spain (Cedulas Hipotecarias), France (Obligations Foncières),Ireland (Asset Covered Securities), Sweden (Sakerstallda Obligationer), Austria(Pfandbriefe/Fundierte Anleihen), and Luxembourg (Lettres de Gages).

The main structured covered bond issuing countries and example institutions include:UK (HBOS, Northern Rock, etc), Spain (Ayt), Italy (CdP), Netherlands (ABN) andnow the US (WaMu in Euros, and BofA in USD).

Capital

In terms of seniority within the capital structure, covered bonds technically rank pari passu to unsecured senior debt but have the double protection of the segregated asset pool. Therefore, they can be considered a separate class that rank ahead of other debtor deposit pools. It is the degree of bankruptcy remoteness of the cover pool, and its

cash flows, from the covered bond issuer that dictates the degree of ratingsdifferentiation between a covered bond issuer and the covered bond.

Regulatory risk weighting of covered bonds in Europe range from 10 to 20%. UnderBasel II, covered bonds aren’t explicitly addressed and are therefore treated asunsecured bank bonds for credit risk weighting calculations.

Rating agencies:

According to S&P, rating covered bond issues requires analysis of the legal andregulatory framework, analysis of the issuing bank, determination of the asset qualityof the cover pool and cash flow analysis, among other steps. True asset isolation fromthe originator’s other assets and bankruptcy remoteness is considered by rating

agencies and by investors to provide double protection security, and S&P suggeststhat a number of questions should be asked. How do you identify the cover assets?How do you legally segregate the cover pool from an insolvent bank’s remainingassets? Are the covered bonds touched by the legal proceedings? How do you ensureliquidity in case of insolvency?




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European History, Global Future

Growth of covered bond market has exploded recently and is now

characterized by diversification of issuers and investors globally.

Covered bonds have been in existence in Europe for a few hundred years, but realgrowth began a decade ago with the introduction of a jumbo or benchmark product

attracting international attention and providing the necessary market liquidity.Originally established by German and Danish covered bond issuers, these two marketsstill remain the largest in Europe even though covered bonds are issued in over 25different jurisdictions today. According to the European Covered Bond Council,outstandings grew 10% from 2004 to 2005. Outside of Germany and Denmark, thegrowth rate was 34%.

Exhibit 3: The Covered Bond Market outside Germany and Denmark are Growing

Source: European Mortgage Federation, European Covered Bond Council, RBC Capital Markets.

Evolution of Covered Bonds

The jumbo segment of large and liquid covered bonds has fuelled the recent rise, andEuromoney reports that the consensus is for 2007 to be another record year forcovered bond issuances. Germany Pfandbriefe (covered bonds) still dominates the jumbo segment with almost half the total global Euro market share, even with thesignificant growth of other markets.

An important trend is the expansion of the market beyond German, and European, borders. There are growing numbers of issues in different currencies and in newcountries. For example, Washington Mutual launched the inaugural (structured)covered bond issue in the United States in September 2006 that was denominated inEuros, while Bank of America became the first US issuer of US dollar-denominatedcovered bonds completed in June 2007. And more are in the works.

The cover pool asset composition is also diversifying out to loans such as commercialreal estate and shipping loans.

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2000 2001 2002 2003 2004 2005

Germany and Denmark Other countries

Covered Bonds Outstanding

1995 – 2005 (in € billions)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2000 2001 2002 2003 2004 2005

Germany and Denmark Other countries

Covered Bonds Outstanding

1995 – 2005 (in € billions)




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Exhibit 4: Cover pools most ly Mortgages and Government Loans

Source: European Covered Bond Council, RBC Capital Markets

We should point out that since covered bonds are a form of collateralized debt, theyare included in indices such as the Lehman’s Global Aggregate Index and Pan-European Aggregate Index as part of a securitized sector that includes mortgage- andother asset-backed securities.

OSFI and the Canadian Market

New territory

Covered bonds are a known commodity in the Canadian fixed income landscape asMaple issuers such as Compagnie de Financement Foncier, Depfa ACS Bank andDexia Municipal Agency were the inaugural issuers in the domestic market. Inaggregate these issuers have placed approximately C$2.3bn of covered bonds in theCanadian market – see Exhibit 5.

Exhibit 5: Maple Covered Bond Issuance

Issue Date Name Coupon MaturityAmount

($CMM)Bond Ratings

Parent Senior

Rating

25-Feb-05 DEXIA MA 4.68 9-Mar-29 200 - / Aaa / AAA AAH / Aaa / AA

31-Mar-05 DEPFA ACS BANK 5.25 31-Mar-25 300 - / Aaa / AAA N - / Aa3 / AA- N

24-Aug-05 DEPFA ACS BANK 4.9 24-Aug-35 350 - / Aaa / AAA N - / Aa3 / AA- N

30-Nov-05 DEPFA ACS BANK 4.2 30-Nov-12 250 - / Aaa / AAA N - / Aa3 / AA- N

21-Feb-07 DEXIA MA 4.625 30-May-17 500 - / Aaa / AAA AAH / Aaa / AA

17-Apr-07 CIE FIN FONCIER 4.55 1-Apr-17 500 - / Aaa / AAA - / Aaa / AAA

15-May-07 DEXIA MA 5 9-Mar-20 200 - / Aaa / AAA AAH / Aaa / AA

Source: RBC Capital markets

Most recently, OSFI weighed-in to the world of covered bonds by issuing a memo tothe industry (dated June 27, 2007) indicating that upon review of certain regulatoryand policy concerns associated with the instruments, it was prepared to permitdeposit-taking-institutions to issue the securities, with certain restrictions. SpecificallyOSFI stipulated that covered bonds must not, at any time, make up more than 4% ofthe Institution’s total assets (as defined by the assets-to-capital multiple) and theInstitution’s pledging policies would need to be amended and approved by the Board prior to the issuance of any covered bond securities.

Public Sector

37%

Ships

1%Mortgage

59%

Other Assets

3%

Covered Bonds Issuance in €, 2005 (in %)

Public Sector

37%

Ships

1%Mortgage

59%

Other Assets

3%

Covered Bonds Issuance in €, 2005 (in %)




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We note that OSFI’s interest in covered bonds is entirely a function of limiting theextent to which banks can create a preferred class of claimants (thereby reducing theresidual level of assets available to deposit holders in the event of an insolvency) – forunlike securitization, there is no regulatory capital benefit to issuing covered bondssince the assets remain on the bank’s balance sheet. While OSFI has addressed thisconcern with a 4% limit, the potential scope for issuance remains significant. Asdemonstrated in Exhibit 6, total assets (on and off balance sheet) across all domesticdeposit taking institutions amounts to C$2.4 trillion – 98% of which are Big Six bankassets. The potential market size, therefore, amounts to C$97.6bn, or C$95.4bn for theBig Six. Given the limited capacity for non-Big Six issuance, we expect covered bondissuance will be almost entirely relegated to the larger institutions.

Exhibit 6:

C$MM BMO BNS CM NA RY TD Total All Domestic

On B/S 356.5 411.7 326.6 136.7 589.1 396.7 2,217.3 2,258.5

Off B/S 31.1 35.4 16.8 7.4 53.0 23.8 167.3 180.6

4% Limit 95.4 97.6

RBC Capital Markets

Opportunities and Risks

The covered bond market has demonstrated significant growth in recent years as paperoutstanding has grown to €1.8 trillion (YE 2005) from €850 billion in 1995 – annualgrowth of 8% per annum. With covered bonds being introduced in a growing numberof countries, primary activity continues to grow – issuance in 2005 totalled €479bn, a23% increase over the €391bn issued in 2004. What’s driving the growth? Below, weoutline some catalysts and considerations for investing in, and issuing, covered bonds.

The Investor’s Perspective

Quality: Stable, triple-A credit ratings that are largely independent of the issuingfinancial institution and sovereign rating of the country of issuance offer an obviousappeal. Structurally, as obligations of the financial institution rather than a SPE,covered bonds offer risk-averse investors the safety of a high-quality cover pool while benefiting from the cash-flows of the entire financial institution, rather than those of just the collateral. Does covered bond issuance structurally subordinate existing debtholders? To the extent that covered bond issuance creates a layer of preferentialclaimants, existing debt holders are disadvantaged. However, OSFI is well aware ofthe implications of creating a layer of claimants that rank ahead of deposit holdersand, as such, has introduced a conservative 4% limit.

Yield: As very highly rated, high quality securities covered bonds are traditionallyconsidered a yield-enhancing alternative to government bonds, supranationals,

sovereigns and agencies – Exhibit 7 lists the typical covered bond investor base. Froma Canadian investor perspective, however, the value proposition offered by aSchedule-1 bank covered bond is not as absolute as there are currently plenty of high-yielding triple-A alternatives. Maple supranational and agency offerings, also triple-Arated, continue to offer value relative to government (and even provincial) bonds asthey are not treated as a perfect substitute. Furthermore, while one may argue a triple-A rated offering from a Schedule-1 bank with a strong brand could be more easily besold as a Government alternative, clients are equally likely to adopt a view that, as




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financial paper, there are better yielding alternatives to the same credit at a marginalincremental assumption of risk.

Exhibit 7:

Investor Type Typical Allocations

Central banks 10% - 20%

Insurers 2% - 7%Funds / asset managers 20% - 40%

Savings and cooperative banks 20% - 40%

Pension funds 5% - 15%

Source: RBC Capital markets.

Other: Global interest in covered bond investments has been further enhanced byfactors such as: (1) preferential risk weighting in Europe – the lower risk weightingmaterially reduces the regulatory capital burden; (2) the opportunity to diversify forconservative fixed income investors who are otherwise confined to the sovereignspace; (3) the elimination of event risk, given their tight collateral criteria and full

recourse to the cover pool. Preferential risk weighting is not a factor for regulatedCanadian investors as all claims on Canadian deposit-taking institutions, OECD(Organisation for Economic Co-operation and Development) banks and non-domesticOECD public sector entities continue to attract a 20% charge.

The Issuer’s Perspective

Efficiency: The obvious price advantage of covered bond funding has been a keydriver of increased primary activity.

Exhibit 8:

High Grade Spreads (10Y)

Debt Spread (bps)

Government of Canada 5.25% 1Jun12 (Yield) 4.621%

EDC 14

CMHC 14

Canada Mortgage Bond 14

Covered Bonds* 40.5

Asset Backed Securities 43

Senior Bank Debt 72

* Assuming 8bps through LIBOR; Source: RBC Capital Markets

Exhibit 9 below depicts secondary spread levels for various covered bond issuers.Generally, a financial institution can anticipate savings over senior debt funding levelsof 7-9bps in the 5-year term, 9-11bps in 7-years and 12-14bps in 10-years. The abilityto tap funding at preferential levels in global markets where brand recognition is lessfavourable is clearly an attractive value proposition for Canadian banks. Furthermore,




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while we will see domestic Banks issue Canadian dollar covered bonds at some point,Europe currently offers the world’s deepest, most liquid covered bond market.Combined, brand enhancement and a more liquid market suggest the more substantiveefficiencies are clearly in overseas funding.

Funding: covered bonds serve to augment a bank’s funding toolkit with a resilientform of cost effective financing. In addition to allowing for more cost effective global

funding, the covered bond investor universe is distinctive, offering an entirely newinvestor base. Furthermore, the cost effective funding is particularly attractive againsta backdrop of stagnant deposit growth and shrinking margins.

Exhibit 9:

Issuer Security Type Coupon Maturity Spread

HBOS SENIOR 4.5 Oct-13 EURIBOR +10

HBOS COVERED 3.25 Jan-13 EURIBOR FLAT

WAMU SENIOR FLOAT Sep-11 EURIBOR +41

WAMU COVERED 3.875 Sep-11 EURIBOR +5

BAC SENIOR 6.25 Apr-12 USLIBOR +7

BAC COVERED 5.5 Jun-12 USLIBOR FLAT

BAC SENIOR 5.3 Mar-17 EURIBOR +34BAC COVERED 4.25 Apr-17 EURIBOR +6

Source: RBC Capital Markets




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Explanation Of RBC Capital Markets Ranking Sys tem For Global Credit Research (Canada)

(Note: Our risk-reward assessment is based, in part, on a comparison of the spread of a particular bond to the spread interpolated by a creditratings-derived relative value curve for a given maturity.)Top Pick (TP): Represents the analyst’s best ideas in the Outperform category; provides best relative risk-reward ratio and/or is expectedto significantly outperform the RBC CM Canadian corporate bond index over 12 months.

Outperform (O): Provides superior relative risk-reward ratio and/or isexpected to materially outperform the index over 12 months. Index Perform (IP): Provides an adequate relative risk-reward ratio and/orthe spread performance is expected to be in line with index average over 12months.Underperform (U): Provides an inferior relative risk-reward ratio and/or thespread performance is expected to be materially below the index over 12months.

Risk Qualifiers: Average Risk: Volatility and risk expected to be comparable to universe of issuers followed; average revenue andearnings predictability; no significant cash flow/financing concerns over coming 12-24 months; and/or fairly liquid.Above Average Risk: Volatility and risk expected to be above universe of issuers followed; below average revenue and earnings

predictability; may not be suitable for a significant class of individual fixed-income investors; may have negative cash flow; and/or lowmarket liquidity.Speculative: Risk consistent with venture capital; potential low market liquidity; potential balance sheet concerns.

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Important Disclosures

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including totalrevenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates.Priced as of prior trading day's market close, EST (unless otherwise stated).

The author(s) of this report are employed by RBC Dominion Securities Inc., a securities broker-dealer with principal offices located inToronto, Canada. The analyst(s) responsible for preparing this research report received compensation that is based upon various factorsincluding total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated

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Addi ti onal Disc losures

R a n k in g C o u n t P e r c e n t C o u n t P e r c e n t

B UY [TP /O] 53 25.24 33 62.26

H O L D [ IP ] 118 56.19 72 61.02

S E L L [U] 39 18.57 19 48.72

R B C C a p i t a l M a r k e t s L im i t e d

I B S e r v ./ P a s t 12 M o s .




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To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No.246521). This material has been prepared for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, anyrecipient should, before acting on this material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relatesto the acquisition or possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product and consider that document before making any decision about whether to acquire the product. To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, a licensed corporation under the Securities and FuturesOrdinance. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. Hong Kong personswishing to obtain further information on any of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited at 17/Floor, Cheung KongCenter, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388).

® Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license. Copyright © RBC Capital Markets Corporation 2007 - Member SIPC

Copyright © RBC Dominion Securities Inc. 2007 - Member CIPF

Copyright © Royal Bank of Canada Europe Limited 2007

Copyright © Royal Bank of Canada 2007

All rights reserved




RBC Capital Markets - Global Credit Research Team

Toronto Barbara Komjathy, CFA (416) 842-6466 [email protected] Alt af Nanj i, CFA (416) 842-6462 [email protected] Martinez (416) 842-5165 [email protected]

Jie Liu (416) 842-6140 [email protected] Andy Mystic (416) 842-6152 [email protected]

London Miriam Hehir 44 20 7653 4175 [email protected] Alast air Wh itfi eld 44 20 7653 4834 [email protected]

Add iti onal Disc los uresRBC Capital Markets is the business name used by certain subsidiaries of Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital Markets Corporation, Royal Bank of Canada Europe Limitedand Royal Bank of Canada - Sydney Branch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express orimplied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBCCapital Markets' judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or taxadvice or individually tailored investment advice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of personswho receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability ofsuch investments or services. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a lossof original capital may occur. RBC Capital Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment bankingrevenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to theirresidents, as well as the process for doing so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construedas, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the fullextent permitted by law neither RBC Capital Markets nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the

information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Capital Markets. Add iti onal inf orm atio n is availab le on requ est.

To U.S. Residents : This publication has been approved by RBC Dominion Securities Corp. (“RBCDS Corp.”) and RBC Dain Rauscher Inc. (“RBC DRI”), both of which are U.S. registered broker-dealers, which accept responsibility for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker ordealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with RBCDS Corp. or RBCDRI.

To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc. Any Canadian recipient of this report that is not a Designated Institution in Ontario, an AccreditedInvestor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that wishes further information regarding, or to effect anytransaction in, any of the securities discussed in this report should contact and place orders with RBC Dominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibilityfor this report and its dissemination in Canada.

To U.K. Residents: This publication has been approved by Royal Bank of Canada Europe Limited (“RBCEL”) which is authorized and regulated by Financial Services Authority (“FSA”), in connectionwith its distribution in the United Kingdom. This material is not for distribution in the United Kingdom to private customers, as defined under the rules of the FSA. RBCEL accepts responsibility for thisreport and its dissemination in the United Kingdom.

To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880). This material has been preparedfor general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting on this material, consider theappropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition or possible acquisition of a particular financial product, arecipient in Australia should obtain any relevant disclosure document prepared in respect of that product and consider that document before making any decision about whether to acquire theproduct.

To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, a licensed corporation under the Securities and Futures Ordinance. This materialhas been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. Hong Kong persons wishing to obtain further information on anyof the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited at 17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is2848-1388).

Copyright © RBC Capital Markets Corporation 2007 - Member SIPCCopyright © RBC Dominion Securities Inc. 2007 - Member CIPF

Copyright © Royal Bank of Canada Europe Limited 2007Copyright © Royal Bank o f Canada 2007

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