Australian Corporates' High-Yield Debt Entices Global Investors

Primary Credit Analyst: Anthony J Flintoff, Melbourne (61) 3-9631-2038; anthony.flintoff@standardandpoors.com

Table Of Contents
Panelists Opening Remarks Introductory Remarks: Panel Discussion

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Australia's financing landscape has eased recently since the tightening that occurred after the global financial crisis. In the past year, more speculative-grade Australian corporates have tapped the Term Loan B markets in the U.S. This trend was discussed in a roundtable Standard & Poor's Ratings Services hosted with several industry experts in late 2013. Participants in the roundtable also shared their views on factors affecting their financing decisions: bank loans or bonds; offshore versus onshore markets; hedging; and refinancing risks and liquidity.

Panelists
Standard & Poor's Managing Director and Head Of Australian Corporate Ratings group Anthony Flintoff and Head of Standard & Poor's Australia John Bailey conducted the roundtable. The other participants were: Will Farrant, Head of Debt Capital Markets, Credit Suisse Matt Tehan, Co-Head of Debt & Derivatives, Credit Suisse Patrick Harsas, Chief Financial Officer, Sydney Desalination Plant Jonathan Fisher, General Manager Corporate Finance, Atlas Iron Ltd. Ross Tzolakis, Corporate Treasurer, Federation Centres Matthew Batrouney, Head of Client Business Management, Standard & Poor's Australia Pty Ltd. Ellen Lambridis, Group Treasurer, Alinta Energy Ltd. Peter Rice: General Manager, Capital Markets, Origin Energy Ltd. Erin Strang: Group Treasurer, Vice President Tax and Governance, Aurizon Holdings Ltd. Joanna Wakefield: Group Treasurer, Asciano Ltd. Asrar Rahman: Group Treasurer, Woolworths Ltd. Matt Brassington: CEO, Aquasure Finance Pty Ltd. Daniel Antman, Head of Marketing, Standard & Poor's Australia Pty Ltd.

What follows is an edited version of the discussion. The opinions expressed in this article are the opinions of the individual participants and not necessarily of their employers or Standard & Poor's.

Opening Remarks
Anthony Flintoff: Let me make a few comments on the credit environment to set the scene. We do think that the Australasian credit environment is fairly benign. Obviously in Australia and the wider region, the credit environment is very much affected by sentiment, whether it is because of what happens in China, the U.S., or Europe. But the fundamental environment in Australia is, we think, quite sound. The statistics covering rated companies show that the 10-year negative bias in ratings averages around 8%. That means that the net of negative outlooks versus the positive outlooks averages around 8% in the long term. At the moment though, it is at 5%, slightly below the long-term average. For the first time ever, in 2013 there are more companies rated 'BBB' and below rather than above 'BBB'. We think that

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is a tipping point, and partially a reflection of companies on average heading down the credit spectrum, which is a long-term trend. Also, we have seen a lot of first-time capital-market issuers in the 'BB' and 'B' ranges. We think the downward rating trend will continue as existing companies become more comfortable heading down the credit curve (which is often within their control but not always)--and as newly rated companies in the 'B' and 'BB' ranges access the capital markets for the first time. John Bailey: I was looking at our rated pool of companies not so long ago; probably three years ago it was about 95% investment-grade, and interestingly, over those years it's probably come down to around 85% of our rated pool. Anthony: It's interesting to note where we stand now in terms of the debt-maturity profile of companies. Of the rated Australian and New Zealand corporates, there is A$350 billion in committed bank debt outstanding at December 2013. About A$271 billion of that total bank debt is currently drawn (at December 2013). We project that 2016 is going to be the biggest year of maturities for corporates, with 18%, or A$63 billion, coming due. And the maturing debt numbers are A$34 billion for 2014, and A$49 billion in 2015. As the companies start to think about how they deal with those maturities, a lot of the issues we discuss today will be pertinent for those companies. Will Farrant: What we have seen driving markets all around the world in the past few years is a manifestation of investors searching for yield. A large cause of this is the liquidity that has been pumped into the market at different points by central banks. We don't see a sudden end to that liquidity and markets have been resilient to initial tightening moves. In Europe, we think there will be a new LTRO (long-term refinancing operations) next year (2014), probably taken up less enthusiastically by the banks than the last one, but still providing banks with liquidity and money to spend. While the banks may not be great buyers of corporate bonds directly, the liquidity they receive from the ECB (European Central Bank) means they don't need to fund so much in bond markets, leaving asset managers with money looking for a home. So, the ECB liquidity indirectly makes its way into the corporate bond market. We therefore see that liquidity continuing in Europe. On the other side of the Atlantic, we are all acutely aware of the U.S. Federal Reserve and ongoing tapering expectations. Events in that regard may cause some short-term volatility, but in terms of liquidity in the bond market, we don't see that in itself (Fed tapering) as a huge problem. The Bank of England continues to splash the QE (quantitative easing) cash, so liquidity remains high in the U.K. system. And the slow rise in household savings is finding its way more and more into fixed income--all those factors are still there and continue to push things forward. Couple this liquidity trend with the low rates around the world. For example, look at some of the three-month levels: three-month LIBOR in the U.S. is 23 basis points (bps), in Europe its 6 bps, Sterling: 39 bps, Yen 1 bp, Swiss francs: 2 bps, and Australia: at 2.62% is quite a different environment. The steepening of yield curves has been given less focus by the press but drives investor appetite, nonetheless. In the past 12 months, the U.S. yield curve has steepened by 100 bps. In the U.K., it has steepened by 85 bps, Swiss franc by 50 bps, euro by 25 bps, and in Australia, it has steepened by 150 bps.

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The low rates and steep curves caused some of the investor behavior we've seen, namely a move down the credit spectrum into lower rated issuers and out the yield curve into longer tenors. These changes have been seen in nearly all bond markets and in particular, have had a very positive effect on the local bond market in the past 1224 months. During that period, we have seen demand for longer tenors--moving from five to seven years in particular, and to lower rated corporates--with successful deals for 'BBB-' rated companies. From a corporate treasurer's point of view, we don't see this backing off any time in the near term. Around the world the search for yield has been quite dramatic, and what you see in the different global markets demonstrates that. This reach for yield is also demonstrated by relative price moves across rating brackets. If you look at the compression across different rating bands, it is phenomenal, with 'BBB's tightening considerably more than single 'A's, and single 'A's tightening more than 'AA's, etc. A Credit Suisse-run index called LUCI, which is an index of U.S. IG cash bond trading levels, showed that over the year double 'A's have only compressed about 7 bps, single 'A's by 24 bps and triple 'B's by 33 bps--which gives you a feel for where the investors are putting their cash. Our equivalent euro, sterling and Swiss franc indices show the same. Away from IG, we are at record global issuance levels in high yield and leveraged loans. This is not so just in the U.S., but across Europe and Asia as well. This year (2013) outstrips 2007 in volume. About 60% of all the U.S. leveraged loans (year to date) have been covenant-lite loans, a fact that blows any other year well out of the water. These realities are once again caused by the force of money searching for yield. In other funding markets, there have also been some very large deals in the local bank market this year (2013). And with many banks looking to grow their balance sheets, this market will continue to be a very useful one for corporate treasurers. The strong bank market in Australia is not indicative of all jurisdictions however. In Europe for example, we have seen more of a shift in corporate funding into capital markets and away from the capital-constrained local bank markets. All of these macro factors are changing markets--both their features and their relative value to you as an issuer. It will be interesting to hear your observations between bank versus bond financing, and when you're in bond territory, whether you are looking at onshore or offshore funding options, and how they stack up against each other. Matt Tehan: In respect of the macro environment, a number of Australian companies over the past couple of years have really trail-blazed their way into the U.S. markets. It is part of a theme. Now we are seeing more interest in the U.S. from the funds that are buying deals--loans or bonds--out of Australia for non-investment grade. They are setting up funds in Asia to buy and be close to the credits. As part of the global chase for yield, and the globalization of the credit market, there is less of an emerging market taint to non-investment-grade Asian credit. Investors are now sophisticated enough and the documentation standardized enough that people feel comfortable to be able to invest in non-investment-grade credit across the region. Australia is a great place for them to start because we have a rule of law that is First World, reliable reporting standards, long track records, and a reliable history. A lot of the things that make it a very strong investment-grade

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credit market make it a very good non-investment-grade credit market as well--and the rest of the world is waking up to that. The challenge going forward is: can we tap that appetite in Australian dollars and not just in U.S. dollars, as a lot of companies that have accessed it thus far have been U.S. dollar-type companies, and the interest rate differentials clearly make it quite expensive to come back into Aussie dollars. We are seeing appetite for Aussie dollars on the nonlisted and nonrated mezzanine paper market. That will creep up to the rated paper as well. We are on the threshold of some significant changes to the overall credit market in the next couple of years and your experience and comments today will be very interesting. If we were to reflect on these comments in 2 or 3 years' time, it will be interesting to see how it actually plays out.

Introductory Remarks:
Patrick Harsas: Sydney Desalination Plant's (SDP) lease from the New South Wales government commenced in June 2012. In September 2013, SDP refinanced its acquisition debt, taking advantage of a strong bank market. As part of the refinancing, SDP has a bridge facility, and I will be looking at other funding opportunities to add funding diversity and longer tenor to our debt portfolio. Jonathan Fisher: Atlas Iron is Australia's fourth-largest iron ore producer. Last year we put in place a Term Loan B structure in the face of a bit of iron ore price volatility. The structure is covenant-lite. The year has been very good and the iron ore price remains very buoyant. Moreover, the currency has trended down and we have hit our targets in terms of production. We are now facing an opposite issue of having to reinvest money and worry about de-gearing or refinancing, and taking advantage of the company's stronger credit. Ross Tzolakis: Federation Centres was formed by the aggregation of the former Centro Group entities in December 2011. We are bank-funded and are looking to diversify our funding sources in line with our refinancing strategy. Ellen Lambridis: Alinta Energy has had a colorful history over the past three years. It is the company that resulted from the whole Babcock & Brown power fund spin-off. So it's been a fairly interesting rollercoaster ride over the past three years. We were bought out by private equity in March 2011 that was led by TPG, and subsequently had to sort out our capital structure. Because of our colorful history, the Australian bank market was difficult. So when the opportunity presented itself in the U.S. Term Loan B market, we took a leap of faith and jumped forward. We are really pleased with the impact on our capital structure. Private equity has fairly high return hurdles, and we typically have a higher appetite for more expensive debt than most companies would. In this respect, the Term Loan B market presented a great opportunity for us this year. Peter Rice: Origin Energy has had a very busy time over the past three or four years, raising a substantial amount of capital, including tapping offshore markets, bank markets, hybrid markets, and project finance. We are now at a stage where we have largely completed the financing activity for our major project, the Australia Pacific LNG (liquefied natural gas) plant, located in Queensland. We are now more of an opportunistic borrower and can therefore now look and take advantage of niche markets. We have got the liquidity that we need. The other big decision that we think about a lot is capital structure. We think about it from a currency perspective, because as we move to 2016 and the Australia Pacific LNG project completes, circa half of our cash flow will be U.S.

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dollar based. We are in a unique situation as we can now take advantage of funding in U.S. dollars, with lower costs to match our revenues. Erin Strang: Aurizon was privatized in October 2010. We are a rail infrastructure and transport service provider operating across Australia. We started out with a A$3 billion syndicated bank debt facility at the head company, a fairly simple capital structure. We spent a lot of time figuring out what the appropriate structure was, and this year fully refinanced our debt. It involved putting the majority of our debt against our regulated asset base (RAB) and matching the assumptions that the regulator has, i.e. 55% debt to RAB. This also meant that we could access debt capital markets. Consequently, we went to the MTN (medium-term notes) market in October. Going forward, I see us as being well-placed to look at opportunities to continue to diversify on a cost-effective basis to further spread the maturity profile. Joanna Wakefield: When I arrived at Asciano 18 months ago, we had A$3 billion debt and A$2 billion of it was in U.S. bonds - 144A. So one of the first thing that I did was put in place an EMTN (euro MTN) program to get that diversity of funding sources. We have done our first half-a-billion (Australian dollars) into the U.K., which was very successful and I'm already seeing a lot of reverse inquiry. Having put that (debt) document in place, I can now access more markets. And having already got the U.S. bonds makes it easier to replicate the documents and go there again. So we are now well-positioned to access any market we would like to. My big focus now is our bank facility that is coming up for refinancing. Asrar Rahman: Over the past year or so, Woolworths has been focused on its core business. We divested the Dick Smith business, which had a format no longer consistent with that of the broader business. We also accumulated a fair bit of property, particularly during and post the GFC (global financial crisis). A number of property developers were unable to access funding themselves, and Woolworths--choosing not to compromise the integrity of our store rollout program--was able to carry on the development on our own balance sheet. But as we are not a natural long-term holder of property, we took the opportunity to de-risk our balance sheet and spin off properties to a trust, Shopping Centers Australasia (SCA), when the market presented an appropriate opportunity. We don't have any immediate funding requirements. Shortly after the property sale, we actually conducted a bond buyback via tender of our U.S. bonds. That's not to say that we don't need any funding, but we are comfortably placed with our available facilities. We recently established an EMTN program but not with the view of any immediate issuance. The program was established without the pressure of a pending transaction, but will allow us to access the market in an opportunistic manner. Diversification is really the key. Matt Brassington: Aquasure is responsible for designing, financing, building, and operating the Victorian Desalination Plant. So we have a reasonably high profile, mostly for the wrong reasons. We are a private vehicle with a contract with the Victorian government, which is a concession that runs to 2039. We had A$3.7 billion of bank debt that was put in place in 2009. But it was quite expensive. So we went through a refinancing process about 6 weeks ago, refinancing all of that bank debt. At the same time, we settled all of the litigation that had come out of the construction, which was a complexity that meant our focus wasn't necessarily always on the bank deal when we wanted it to be.

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Someone had the bright idea when we did the bank deal that we should put in place a new capital structure. We did that and went to see Standard & Poor's and another agency to get a rating. There was a further suggestion to go to the bond market and do both the U.S. Private Placement (PP) and the Aussie dollar issue, which we did. We issued a A$440 million bond and followed it with a small Australian MTN issue. We still have a bit further to go, but we have sort of put our capital structure in place. We are a very unusual organization in that we are very very small. Our ongoing focus is about mitigating our residual risk, which is really financing margin risk. We are unusual in the sense that our basis interest rate risk sits with the (Victorian) government--something that complicates our financing approach in a bond market. That's because if I borrow at a fixed rate, I've then got a problem of how I do it given the hedges that the government previously asked me to put in place to fix my floating rates. So, when we look at an overall (financing) package, we can sometimes get different outcomes, depending on which side of the fence you are sitting on. Also, when you are dealing with the government, obviously they like to take several weeks and analyze everything. For corporates, however, you just have to make a decision based on the available information. So, we have had some very interesting nights.

Panel Discussion
Anthony Flintoff: Let's shift gears now and hear about the experience of those who have gone down the Term Loan B path. It would be very interesting to hear about what was behind the decision, what sort of experiences did you have compared with other funding experiences, and what lessons were learned. Jonathan: The clear objective was the ability to have a covenant-lite structure. The Australian bank market is generally pretty poor at lending to smaller resource companies and understanding commodity risk. And at the time, the iron ore price was pretty volatile, registering at multi-year lows. The ability to have a structure that effectively had no earnings maintenance covenants was the primary driver. That factor led us to the U.S. capital markets, either bonds or term loans. We had the possibility that this debt might not actually be outstanding for too long. We therefore went for the term loan, which had greater flexibility in terms of being able to repay, as opposed to a bond market where you have to refinance early at Treasury rate plus 50 bps, which is very expensive. Now we are in a net cash position, even delivering on major capital expansion this year. We may not go into a net debt position at all, which gives us a lot more flexibility with what to do with our capital structure. Matt Brassington: What is the documentation process like? Jonathan: It is a secured deal, which meant there were some details that required the Australian lawyers to negotiate the security documents, but generally I actually found it easier than the high-yield market. Pretty straight-forward. Ellen: Similar circumstances (for us). We were starting from a fairly low base where firstly, our debt was already expensive, and secondly, we had credit reputation damage that affected the Australian banking market's impression of us. The Term Loan B market was a great solution for us. We toyed a little bit for a while with a high-yield bond, but we got

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a bit nervous toward the end. It's a fickle market with windows that open and close. So we decided it was a lot quicker and simpler to go for the Term Loan B issuance. Documentation was interesting, as U.S. legal documents speak another language that is totally not what you are used to. You do need good lawyers, and I think that the role that our Australian lawyers played was critical because they translated the legal language of the American lawyers into one that I understood. The other thing was that the term loan was good from a covenant-lite perspective. This again for us was important, given we are a turnaround company. It was really refreshing to go over to the U.S. as a subinvestment-grade entity, where they are after high yield and you are paying for that privilege. The other lessons learned were that I don't think you should take it for granted that U.S. investors would just dive straight into your company. There is a lot of educational work that needs to be done upfront so that they understand your industry and your company. We are a power generation wholesaler and retailer, which is a very different market from the U.S. It took a while to get investors comfortable with the industry we are selling and our performance, but it was much worth the effort. Daniel Antman: How did you go about talking to the investors--I presume there was a roadshow. And how did you identify the ones you really wanted to seek out? Ellen: We had the deal underwritten, which was great and somewhat took the edge off the stress. Jonathan: I think that you lose a little bit of bargaining power if debt investors know you've already got an underwritten deal--they know they can push you a bit harder. Matt Tehan: That's definitely a true statement: part of the thinking around structuring an underwritten commitment. The vast majority of underwritten commitments are really in LBO (leveraged buyouts) and M&A (merger and acquisition) situations, where you absolutely need to have funding certainty. The market does know, for instance in an LBO situation, that it is underwritten. Other than that, they don't know for sure. So, if you have the flexibility of timing, a critical factor will be preparation, having as long a lead time as you can with the agencies to make sure you get the right outcome. But it is also a good education process as to how you are going to engage the investors; so that you are ready to hit the market when it's optimal. It's always better to have the timing to be your option as opposed to the market's because you can get better terms. The high-yield loan market is a tradable market; so it is subject to market conditions, unlike the bank market we experience here in Australia. External factors like the debt ceiling debate, a hurricane, are really material factors, because investors come to work thinking: what are they going to buy today? Are they going to sell? You need to know what's their mindset, what's their perspective, and what holidays are coming up, etc. All of these things affect people's mood when they sit down and get their head around a credit story; so you do want to make sure you are as prepared as possible. Ellen: That was not our case. We started in May and were done in August. It was a rollercoaster experience: we had to get a credit rating within that period of time, we raised A$462 million of equity, and we were running for that window before New York headed out for their summer holidays. So it did mean that there was a lot of compromise.

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I agree with your points on the underwriting. Hindsight is always great, but it does also mean that you have to play a much stronger role in that negotiation because your banks just want to get it off their books. Peter: Is it customary for a Term Loan B to be secured? Ellen: It was part of the attraction on why we looked at the high-yield bond market. We were thinking of maybe issuing a small piece unsecured, but that was just not going to work in the time table that we had set ourselves. In the end, we decided to go with the fully secured Term Loan B. Peter: So, how does that work Jonathan, when you've talked about expansion? Jonathan: It is a secured deal, but you are able to customize the security to suit your needs. Peter: If you needed to go back to the holders and get a waiver--how did that process work? Jonathan: Depending on what you need, the agent is authorized to do some waivers or approvals or extensions of time without consulting. But if you go back to the investor base, you will generally have to pay some basis points in order for them to do the work to effect the change. We found our structure fit for purpose. Ellen: Flexibility is an interesting point. There is a concept called "incremental facilities", which essentially is a pre-approved bucket of debt that you can go back to the Term Loan B market for. By way of example, if you raised US$1.2 billion in Term Loan B but you get another US$300 millionUS$400 million pre-approved, it is then exactly the same documentation and terms. As long as you can go back and find the appetite for it, you have the flexibility to upsize your debt. Matt Tehan: The other point I want to make in regard to security is that you cannot customize the security, but you can have separate layers of security. We did a deal earlier this year where there was a first-lien secured tranche and a second-lien secured tranche. While there is obviously a different rating category and pricing point between the two, investors can get their head around that and they understand why that is. The different structures basically affect the overall cost of the debt. In that particular circumstance, they wanted to raise US$410 million. The most cost-effective way of doing it was to drive the tightest possible price on the first-lien tranche, and then fill the gap with the second-lien tranche. The second lien pretty much ended up being the dividend, so it was effectively a dividend recapitalization. In other structures that have been done, you might have a first lien and a second lien, and then there might be an intermediate holding company inserted. Then you can put an unsecured note or pick a note that is sold to the bond market. So there is actually quite a lot of cross-over there, and I guess we were talking about pieces of paper that are in the rating category of double 'B' minus down to maybe triple 'C+' in that sort of context. In fact, there are a large number of triple 'C' transactions being done, and investors are getting pretty attractive yields. In some cases, there are 8%-9% yields--it depends on the business and what is ahead of it. So this is an example of flexibility. If you had a business that you wanted to separate and eventually move away from, you could capitalize it in that way, retain an equity stake, and then spin it off later before it capitalized. John: How deep is the market, does it switch off and on fairly quickly, is it fairly seasonal market, is it a structural market or a new thing that is here to stay?

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Matt Tehan: It is a market that can open and close. In the second half of 2011, it was shut for a period of time for both bonds and loans. The reason for that were concerns about quantitative easing. But in the second half of 2012 and all of 2013, issuance has been pretty robust. Now if you look forward, the vast majority of the volume in the past couple of the years has been refinancing and re-pricing--not new money. So there hasn't been a lot of M&A, which is usually what drives a lot of the issuance into that market. And because there hasn't been a lot of M&A and not a lot of sponsor activity, there is not a lot of new money being put to work. As we look forward to 2014, there is not a lot on the horizon because just about everything that is coming up for refinancing has been refinanced or re-priced at pretty crazy low yields. So the dynamic for investors is getting more difficult absent any pick-up in the market--even though there is likely to be a debt ceiling conversation that goes on in February, which we are keenly watching. Absent that, it looks pretty good certainly for the below investment-grade companies, in terms of access to the market. Will: I have a follow-up question to Matt's comments (addressed to Matt Brassington). You talked about the make-whole in U.S PP markets. U.S. PP often has a mixture of financial covenants, long-dated debt, and make-wholes, which is kind of an interesting combination. An issuer has to be comfortable that they won't want to change the financial constraints for the duration of the issuefor negative reasons and also for positive events, such as M&A opportunities. How did you think about that when comparing markets? And what was your view versus, say, doing a bond without financial covenants? Matt Brassington: Our position is unusual in the sense that we have to get consent from the Victorian government to issue or undertake any refinancing. The Victorian government does not have any FX (foreign exchange) exposure. Of the 19 PPPs (public-private partnerships), no one has ever before gone to the bond market, certainly not since the GFC. So we quickly determined that the issues as far as they were concerned were the fact that there are some very narrow examples where the Government can take over our business effectively and has the right to pick up the debt. In those circumstances, it went through the Victorian Treasurer who, albeit in rare circumstances, would say we will not allow you to issue a bond that has got a make-whole in it, whereby we will have to pay any dollars over and above par. We basically went to the market and said we will take the standard package that will give you "this" covenant, and will give you the normal corporate make-wholes. The feedback we received in advance was: as long as you are upfront and you aren't trying to take a whole raft of stuff out, then they will live with it. Our complexity thereafter was because we had a consent process with the government--and the government does not like making decisions. We weren't really in a position to then negotiate much with investors while we were in the market. So we ended up losing probably about 20% of the investors who might ordinarily have put in a bid. That's because when we did our roadshow we sat with all of them and said: we are terribly sorry, we are not trying to be arrogant about this, our unusual circumstance is "here is the deal, take it or leave it". For a first-time issuer, that's a pretty unusual position to take. We lost four or five big investors on that, but we still ended up getting US$440 million. I found the market to be phenomenal in terms of the professionalism of the advisors and the investors. The U.S investors do their due diligence. We had a very intensive week of meetings but they are

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prepared to go big. And relative to the efforts we put in on an Asian roadshow where they are talking much smaller numbers, you would rather put efforts into the U.S investors who are prepared to put in US$50 million or US$100 million. So we had some fun and thoroughly recommend a U.S. PP roadshow. Anthony: From a credit standpoint, one aspect which the TLB and other leveraged deals have highlighted is the importance of recovery prospects. While the issuer credit rating talks about the general creditworthiness of the company and the probability of default, the issue rating also gives weight to the recovery prospects of that issue, relative to other levels of debt in the capital structure. We would typically distinguish between secured and unsecured debt, for instance. The various tranches will potentially have different issue ratings because of their different recovery prospects, as seen in some TLB debt structures. For investment-grade issues, however, there is less of a distinction made because the probability of default is given much more weight than recovery prospects. Let's turn the discussion now to consider companies who have had experience in a variety of markets and have issued both bank and bond debt--offshore and onshore. We would like to get some perspective on the key things that companies need to think about when deciding between one form of debt versus another. Is it covenants, documentation, investor interactions, or something else? Asrar: Firstly, documentation is not really an issue. Neither are covenants, because we don't have covenants except for in our bank facilities, and they are very manageable. And these covenants are less stringent than the ratios we aspire to for our current credit rating. What we look for is the "slam dunk" approach. We prefer not to experiment in other types of funding on the basis that they are "doable", especially if the traditional markets are open for business with minimal execution risk. It is ironic that being the strong credit that we are, bankers tend to show us a range of non-traditional options, which could potentially be very successful in our context. But because we have access to a number of funding sources, we tend not to take those sort of risks. So far we have successfully accessed the Aussie and U.S. capital markets. A typical evolution sees a company initially borrowing from the bank markets, which is all that's available at the time. Then having established a certain amount of core debt and a track record, it is time to consider the capital markets and introduce some term debt. This allows a company to retain the banks for working capital requirements and to free up capacity for strategic needs that require immediate response. A common approach is to start with a U.S. private placement, which has depth and is relatively straight-forward and easy to issue into. As your debt requirements start to grow, you can progress to the U.S. 144A market, which is a slightly more public type of market. It is the most public source of debt you can raise in the U.S. without having to actually be registered with the SEC (Securities Exchange Commission). So that is where we tend to land. If you were a U.S. company, you would be SEC-registered and naturally commence with the SEC-registered offerings. We note that the U.S. 144A market is where there is an immense amount of depth and liquidity. The ticket sizes that they offer tend to be larger, with the capacity for a single transaction being quite large, and over a given calendar year, there is a decent amount that can be raised from this market.

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When we were considering our funding decisions in the past to support various needs--for example acquisitions, capital management--obviously the bankers would promote to us the merits of the EU, the sterling, U.S., and the other markets. But when we inquired about the capacity remaining in the U.S. markets, which we were familiar with and where we have a track record, the advice so far has been that we were nowhere near saturation point. And the volumes we were seeking to raise would be easily accommodated. In addition, the pricing is very stable. The all-in margins would be the most efficient for us, but importantly, were more predictable compared to the sterling or euro markets. This dynamic may have changed in recent times. As a corporate issuer, there does tend to be a longer gestation period to come to market compared to financial institutions, who can act more swiftly. So it is important to know that you can finish what you started and you don't have to change tack part way through a process. Recently, however, we were advised that it is now appropriate to progress and set up an EMTN program. That's what we're looking at, and I guess what that offers us now is quite distinct from the U.S. markets, where it makes sense for benchmark transactions. Under an EMTN program, the need to raise large volumes to justify management effort is not as strong, as the program is live and under continuous disclosure, so one can issue under this program with minimal effort. This is important for a relatively small corporate treasury like ours. Preparing the documentation and offering circulars does consume a lot of due diligence work and management time. So there is a reluctance to undergo this process for relatively low value debt raisings. Anthony: In relation to the U.S and EU markets, you mentioned the different size of the loans. What other differences are there in terms of servicing the market and communicating to the investors? Asrar: There is quite a difference. First, what we realized is that it is important to have a robust and active investor relations program for debt investors. It wasn't always the case. Historically, the equity investor base would receive more information updates about the company from the CFO and CEO. But the feedback that we have received over a number of years is that debt investors appreciate being attended to as well, irrespective of whether it is in anticipation of a debt raising transaction. And they really value us providing them with regular updates, at least annually. The response we have received has been very positive, and we now have a well-established debt investor program within Woolworths. Our experience is that the U.S. capital markets investor base probably requires a less rigorous investor relations program than perhaps their peers in the Asia-Pacific region, and certainly compared to the banking sector. From what I am advised, the Europeans generally are a bit more particular in responding to funding needs if they are unfamiliar with you. And importantly, they will not be too responsive if you're perceived to be a "one-hit wonder". If there is a sense that following a debut issue they may not see you again for another four or five years, they probably won't be that interested. But then under an EMTN program, issuance can extend beyond Europe. The program is a structure from which you can extract some really great mileage by issuing into the Asian market, who are more inclined to buy into smaller transactions (US$50 million to US$100 million), via privately placed reverse inquires. Many of the Asian investors don't need to be part of a larger syndicate of investors and are happy to gain a pick-up on yield--and Aussie bonds offer a great yield for their relative credit quality.

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Will: That's absolutely correct. An EMTN program is not just for euro-denominated bonds. The program provides access to every Reg-S market in the world, everywhere except the (United) States. In EMTNs, there are different investor groups who have different ambitions and desires, a feature that provides an issuer with a lot of flexibility. If you look at the sterling market, Swiss franc market, and Canadian dollar market, those are all quite different in their investor approach than the euro-denominated market. They recognize their place in the pecking order to a certain degree, and understand that they need to attract offshore issuers into their market if they want to get paper. So they are more open than a euro-denominated investor to companies coming and seeing them without necessarily issuing bonds straight away. While they would prefer to see an issue, they are open to the concept that there may be no transaction. They are also more aware than euro investors of the impact of swap pricing on the relative price proposition for issuers. They know they have to provide a bit of an arbitrage market to attract an issuer in the first place, and they don't really have an aversion to that in the same way that the European guys do. Your MTN program and all the flexibility it gives you (referring to Woolworths) provides you with access to all of those markets as well as the Reg-S dollar market, to everywhere in the world except the States. It is a hugely flexible tool. Joanna: The U.S. market is the easiest market to leap into. When I started in the role, I thought that US$2 billion in the one U.S. market was too much. I am very much into funding diversity. I have also dealt with EMTNs and sterling deals before. We chose sterling over euros because benchmarking into euros is at 500 million, whereas for the sterling, the benchmark is 250 million. Having said that, we did get pressure to do more than just 250 million. That's why we did 300 million, which we were comfortable with. We wanted to go to a market that we can build loyalty in, by being a repeat issuer and therefore, for us not always having to do big volume issuance. We will therefore also go back to the U.S. as we want the diversity. As for debt investor relations, we are planning on going to the U.S. market in one half of the year, and the U.K. in the other half of the year off the back of our annual and half-yearly results. Peter: We are a natural U.S dollar borrower but it is hard to ignore the European market when it was pricing inside other major markets. The U.S. market operates very well if you are large enough to go there to access capital and if your business fits neatly into an industry category--i.e. if you are a utility, then you can talk to a utility analyst; if you're a retailer, you can talk to the retail analyst. But we are a little bit of a hybrid--we are half a utility and half an energy company. That works well for a market where people take the time to analyze you. The U.S. market, however, is a quick response market. There, it is just as important as what day you go on the market, which can dictate as much about the success of the deal, as how well you market the deal. We did use the euro market to show to the U.S. market that they were mispricing our credit. We then went back to the U.S. with our original yield offer. It is an educational process--the U.S and EU markets want to know that you are not going to go there and never come back. Matt T (question to Peter Rice): What sort of internal conversations did you have? Did you have to get approval to get that strategy? Did you have an internal education process? It is quite an initiative for an Australian company to be quite forceful with its strategy. It's not one that's typically employed by other companies.

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Peter: I think that the size of our debt portfolio dictates that we have to operate in more of a global sphere; you are forced to make those decisions and you are forced to think about the market in global terms, and look across markets. It wasn't a particularly challenging education process internally; however, the process of raising capital in the U.S. 144A bond market was challenging, and we have learned from that process. Anthony, in your opening comments you asked how companies decide between onshore and offshore borrowing. For a number of us, we are forced offshore. As a second point: even for companies that borrow locally, invariably the banks that they are borrowing from are actually sourcing that capital offshore. However, the local bank market is very competitive in the five-year space. If you are a good Australian company that is mid-size, it's a great market--so why go anywhere else? Patrick Harsas: That is the interesting position SDP finds itself in. As a new asset and being well-capitalized, we are strongly supported by the Australian bank market. The Australian banking market is offering very competitive pricing even for seven-year money now. Seven-year money was always available particularly from the Japanese banks; however, pricing was generally expensive. Matt Brassington: We used our Japanese banks in the group to persuade the Aussie banks to extend the term to seven years. We removed one of the Australian majors in our banking group specifically to send a message that we were not going to be held hostage to traditional inflexible lending practices. Some of our European Directors were amazed that you can only get five years from local banks--he asked: "where is the 1015 year tenor", to which I advised: "this is Australia". Ross: It is during these times that you also need to look at the funding diversity and establish different funding programs to protect against a potential change in banking strategy. For example, banks may decide "tomorrow" that they are over-exposed to the property sector. For Federation, we think now is a good opportunity to set up such programs and establish investor relations. So when we do decide to raise capital, the doors will hopefully be open for business. Peter Rice: You are absolutely right: banks are niche funders, which is partly the reason why companies have gone to the TLB market. Will: It's an interesting strategic question as well because, although now is a great time to borrow money from bond markets, the banks are also offering you great deals. There are a number of corporate treasurers I know that agonize over the strategic benefit of diversification and tenor, versus the possibility that right now the bank deal is cheaper. Different people will come to different conclusions on the importance of long-term diversification versus short-term cost of funds, but the thinking process is quite interesting. Ross: Diversification is the key. Looking at our credit risk, credit counterparty exposure, and current market conditions, we now need to consider balancing our debt exposure between domestic banks and the debt capital markets. Erin: A question for Asrar, Joanna, and Peter. What sort of role do they see for the Australian dollar MTN market? In our case, we looked across all debt capital markets and actually considered our first approach would be overseas. When it came to refinance, there was a lot of activity domestically in the seven-year space and we saw some good pricing. We took advantage of the opportunity to issue domestically, but there was no mention of it in anyone's strategies. Joanna: Originally I couldn't get tenor and volume. But interestingly, now after we did the 10-year sterling issue, everyone says you could have done that in Australia. Now, I think I probably could do a deal in the Australian market because I could point to a 10 in the U.S. and 10 in the U.K. You have to look after your home market, and we will now try and do something here.

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Asrar: My observation about the Aussie market is that it is a great market (especially as a local issuer on home ground) and you generally should expect to price tighter here than you would elsewhere. And being who we are, it is a pretty easy sell to investors. They want to invest in us to the extent that they will actually bypass the intermediaries to do so. The concern is that one can't be fully reliant on the Aussie market. It is a market which has seen a tendency to almost completely shut down soon after it starts to slow. It is also of course sensible for a borrower to diversify its funding sources. Matt T: Asrar, I wanted to refer to your earlier comment about "slam dunk" and your experience with that in terms of time frames? Asrar: A while back, we had an extensive financing program that spanned about 18 months, raising approximately A$4 billion from various sources, including the U.S. and Aussie capital markets, as well as the Asian bank loan market. But the timeline wasn't hard coded. There was a really good reason for that. When Greece was experiencing some turmoil, Europe came to a virtual standstill, and this led to the Aussies closing shop. Fortunately we could be flexible with our timetable in reaction to market conditions, as advised to us by our very prudent Board, and we experienced no set-backs in completing our financing program in the time we originally gave ourselves. In the U.S. markets, even if the environment becomes challenging, so long as you are able to offer a reasonable margin to reflect such conditions, a transaction will generally be completed. But this has not been the case in Australia. You have to really read the (Australian) market and plan ahead, and work with your intermediaries to see what the likely result is going to be by the time you actually launch a transaction. That said, the compensating factor is that an Aussie transaction can be completed from inception to finish in a matter of weeks or less; the gestation period is shorter and the due diligence process is less onerous, allowing a borrower to react quickly. The other difference is in the pricing, which is interesting. U.S. investors will tell you basically where they read you because they have a lot of comparative benchmarks. And while you will ultimately negotiate the final price with them, you know with reasonable certainty what the guidance is--it is similar in Europe and parts of Asia. In contrast, the Aussie market doesn't have a deep or liquid benchmark. There is a tendency for investors to refer to your last U.S. deal for example; use that as a reference, assuming certain swap parameters, and suggest a price. The fact that it was issued at a different time or that the basis swap was pre-hedged may be overlooked. This type of information is not public, but it is used as a proxy. Anthony: If I'm currently in a bond banking market and want to diversify away from the banking market purely from a risk mitigation viewpoint, is the MTN market an option? Asrar: The Aussie banking markets are funding themselves externally, for example from Europe and U.S. generally, while the MTN markets are typically comprised of the institutional fund managers. These include superfunds and life insurance companies, which may not necessarily be on the same cycle of events. You should have the (MTN) program established. It's very efficient, bearing in mind that you should remain flexible with your timing and not depend on it exclusively, as it has tended to be somewhat unstable.

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Will: I think a point to add there is that while described as a local market, it isn't actually really a local market. It's an Aussie dollar-denominated market and there is a lot of local money that goes in there. But there is a lot of offshore money as well, particularly when the market is working well. Often there's a lot of such money creating these conditions. In addition, the high-yield Aussie dollar market works very well for a lot of investors, particularly those from Asia, Switzerland, and other pockets. Private banking money is dominant in this sector. With Asian money and private bank money being a massive driver of what we have seen in the past 18 months, are there any concerns about the investor base? Based on the deals you have done and considering the offshore money in your order book and the yield differentials between the Aussie and other currency, do you think it (offshore money) will disappear, making it more of a local market? Does that factor into your thinking as you look at different markets over the longer term? Erin: When we marketed our transaction, we intentionally went to Asia because we wanted to build relationships in other markets. While we got 8% of the book from the Asian market, altogether 13% was offshore--so mostly from Asia. We got very strong support from fund managers on and offshore. My view is we have to build these relationships over time. That was the intent in terms of diversification as wellsuch that if things are not going so well in one market, you can shift your focus to another. Anthony: The final theme we wanted to explore today is where we are in the cycle of board conservatism in relation to refinancing risk and liquidity risk. At Standard & Poor's, we have observed over time distinct swings in risk tolerance in relation to refinancing risk. We saw in 2007 and 2008 a big step-change in the willingness of boards to tolerate refinancing risk. Boards were typically telling treasurers and CFOs not to fine tune debt pricing and timing just to get the refinancing done well ahead of maturity. We saw the same shift in conservatism in relation to holdings of cash. We are now starting to see the trend go back the other way, with a bit more willingness to take on more risk given that the market is more open, as we have been hearing in this session. Patrick: We refinanced all of our acquisition debt about 2-3 months ago in the Australian bank market. As part of that, we have a bridge facility and we are looking to diversify our sources of funding. That is a key element of our funding strategy. Traditionally, I have always felt that the U.S. PP market is an obvious choice because that's the market most likely to remain open when most others are closed. For me, this is a vital distinction and will help me manage refinancing risk to have a footprint in such a market. I believe it is very important to always have access to those markets, particularly for a geared regulated utility. I consider the U.S. market currently to be expensive and so any activity in that market will consider our strategic objectives regarding funding diversity. SDP will also be ready when the opportunity arises for us to tap the U.S. PP market when pricing is more attractive. Jonathan: Our debt has been outstanding now for about one year, and it is a vastly different world we found ourselves in compared to a year ago. So we will look to refinance our debt early; we purposefully took out a piece of paper (debt issue) that will allow us to do that. We have a number of potential growth options ahead of us, some of which may require capital, some of which won't. I think before we take any decision on that, we need to get more clarity on exactly what money we need over the next months and years. Ross: We have a syndicated bank facility and our refinance strategy is to reduce the towers and create apartment blocks over a longer time horizon, using a mix of bank and debt capital market funding. From a liquidity perspective, there is a cost in carrying excess debt. But that is a decision that we will make after

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weighing this up against the benefit of holding such debt levels to ensure that we have the certainty of funding to enable us to complete our planned projects. Ellen: When we were issuing our TLB, we had access to some very experienced advisors who were part of our private-equity ownership structure. And as they are based in the U.S., you could ring them up and say "what's the precedent for this term in the US?". So, I think the board was quite confident in allowing us to venture into a space that is fairly new to the Australian market. Peter: When you look back 10 or so years ago, there were a range of companies in Australia that were funding themselves through commercial paper and three or five-year bank debt. This was an anomaly compared to other markets around the world at that time. So I think first thing that we should acknowledge is that we have moved a long way. We should just recognize that we have fundamentally changed. I guess from our perspective, a big part of our liquidity risk profile depends on where we are now in our own corporate cycle and what we are doing. Clearly, when you are building a project of the size of the Australia Pacific LNG project, your view on liquidity suddenly changes. So we are influenced by that. However, there is no doubt that the financial crisis affected all of us in terms of our views on liquidity management. I think that the other thing the GFC did was it required equity analysts to recognize balance-sheet risk and liquidity risk as part of their overall analysis of a company. Erin: I think that our (conservative) starting position was very much driven by the IPO and a substantial capital program. We started out with over A$500 million debt; today we have got A$2.4 billion in debt. The board I think is focused on our liquidity and funding capability, and that is very much driven by a focus on maintaining a strong investment-grade credit rating. Also, the way we entered the MTN market recently, I see this as being repeated practice for us. You always want to have another option available, which could mean having a couple of opportunities; that is a key driver for us. Joanna: We have gone into the U.K. with 10-year debt which may look expensive. But the board and management are very comfortable with that. To get that tenor, however, my CFO has been beaten up a bit by equity analysts because we did expensive long-term debt rather than cheaper short-term debt. My board is very happy with our approach though. Matt Brassington: We have only just started moving our debt out of banks to bonds for funding diversity. The board is very supportive of doing that, but I have two challenges: I have to get approval from the board and the government. The government bears the base interest rate risk, and we share the margin risk; so again, we get some really funny anomalies. From our point of view, our residual risk is the possibility that refinancing margin costs may not necessarily be the base interest rate; so we are looking five or seven years ahead. Matt T: Just want to make one comment about equity research; this was borne out of my personal experience from a non-investment-grade side. You shouldn't assume that the equity analyst community is necessarily that well-educated when it comes to debt. Debt is a necessary evil in many respects from their perspective, notwithstanding that statement doesn't actually make financial sense. But that is often the perspective they come from. They prefer clients who want to see new equity deals done at a 10% discount, not deals done with debt; and the company not necessarily needing to raise equity. With the non-investment grade companies, the ability for them to be flexible and get flexible terms and tenor, and the value that brings to equity are not necessarily understood initially. Proactive education not just for the investors but also for your equity analysts is worth doing.

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