merril lynch on hybrid bonds
TRANSCRIPT
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The CFO Summit 2006Innovative Financing Hybrid Capital
Laura KohDirector Asia Capital Markets & Financing
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What Is Hybrid Capital?
Traditional View o CapitalTraditional View o Capital Current View o CapitalCurrent View o Capital
!ebt
Coupon
Maturity
Senior claim
"#uity
Dividends
Permanent
Voting rights
Residual claim
!ebt
"#uity
Hybrid
Capital
Deferrale Coupon
Cumulative or !on Cumulative
Perpetual or Long"dated
Suordinated
!o voting rights
Partial e#uity credit from ratingagencies
Possile e#uity treatment onalance sheet
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!ri$ers o %rowth In Hybrid Capital
&atin' ('en)ies
Moody$s and S%P revised or clarified their methodologies for a&arding partiale#uity credit on 'yrid Capital
(mportant for companies &hich are facing ratings do&ngrade pressure ut areun&illing or unale to issue additional e#uity to olster the alance sheet
(uditors
)hen certain conditions are met* the 'yrid Capital may e treated as +#uity
in the financial statements under (,RS
Particularly useful in the computation of -ey financial ratios* such as GearingRatio
*ar+ets
)ith .SD and / rates at historically lo& levels* investors have to search harder
for yield returns Demonstrated a &illingness to go do&n the capital structure to achieve more
yield
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Features o Hybrid Capital Se)urities
*aturity Most 'yrid Capital securities are perpetual* ut they can e issued &ith a long"datedmaturity e2g2* 30"45 years6
Coupon &ate
'yrid Capital securities typically have a stated coupon2 7he coupon can e8
a fi9ed rate per annum for the life of the instrument*
a floating rate per annum for the life of the instrument* or
a fi9ed rate per annum for a certain numer of years* then s&itching to a floating rate
thereafter i2e2* ,i9ed Rate:d;ustale Rate Preferred* or
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Features o Hybrid Capital Se)urities
Coupon
())umulation
Coupons can e cumulative or non"cumulative
Cumulative:(f coupons are deferredsuspended* they &ill accrue and ille an oligation ofthe company to e paid in the future
Non-cumulative: (f coupons are deferredsuspended* no coupons &ill e paid for that periodand the missed coupons ill notecome an oligation of the company to e paid in thefuture
!i$idend Stopper Precludes dividend payments on securities that ran- ;unior to the 'yrid Capital securities if
interest is not paid on the 'yrid Capital securities
&an+ 'yrid Capital securities typically ran- ;unior to all indetedness of the (ssuer* and senior to the
(ssuer$s common stoc-
,i#uidation
-reeren)e
'yrid Capital securities have a stated li#uidation preference per security* &hich is the dollaramount that a holder of such a security is entitled to receive out of availale funds upon li#uidation*dissolution or &inding up* after creditors have een paid* ut efore common shareholders are paid
Call &i'hts 'yrid Capital securities typically can e called y the issuer a6 after the passage of a certain
numer of years e2g2* ? or 106* or 6 upon the occurrence of certain events e2g2* certain changesin la& that occur after the hyrid capital securities are issued6
&epla)ement
,an'ua'e
Language that evidences a commitment y an (ssuer that it &ill only call an outstanding security&ith the proceeds from an issuance of a security &ith similar or greater e#uity"li-e characteristics
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!&"#s Approach to $%uity Credit
Hybrid Capital .pdate
/ew )ate'ory*inimal "#uity Content Intermediate "#uity Content Very Hi'h "#uity Content
Old )ate'ory01 201 01 301 401 601 501 01 701
*aturity -erpetual
Step8.p /o Step8.p
!eerability
Optional
!eerability9
!i$ Stopper
Only
Subordinated
&an+ as
-reerred:
Subordinated
Ta;Treatment
!edu)tible
";amples Perpetual !C* step"upPerpetual !C* optional deferral
replacement language if step"up6
Perpetual !C* Mandatory Deferral (nterest
Payments legally inding replacement
language if step"up6
Maturity lo&ering to @0 yr
Senior
Step".p AB100ps6Replacement LanguageLegally inding6
Less ,le9iility Dividend Pusher6
Replacement LanguageMandatory Deferaility Partial Credit6Mandatory Deferaility ,ull Credit6
Mandatory Convertile
Convertile
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Moody#s Approach to $%uity Credit uilding locks
Hybrid Capital .pdate
Optional
Suspension:!eerral
Note: Cumulative = cash cumulative distributions or unlimited stoc settled distributions
Non-cumulative = non-cumulative distributions or stoc settled distributions sub!ect to limitations
"ubordination #ill be e$uivalent to pre%erred in all cases
"
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&atin' ('en)y=s Finan)ial &atios Cal)ulation
,e$era'e&atios
RC,Det* !et DetCapitalisation
:d;ust det reflecting the proportion of e#uitycredit assigned to the instrument
D as-et ?6 E1n transaction &ill add E@?0mto det and E?0m to e#uity
Cash flo& items li-e RC,6 &ill reflect the fullcoupon of the instrument
,or leverage ratios ,,FDet* DetCap6* S%P &illconsider the instrument in t&o &ays8
Considered as 100 det vs2 100 e#uity
Very 'igh +#uity Content Category100 e#uity
Lo& +#uity Content Category100 det
(ntermediate +#uity Content Categoryoth set
of ratios are considered
Interest
Co$era'e &atios
Main ratios are8 ,,F(nterest and ,,F,i9edCharges
,or ,,F to (nterest* Moodys e9cludes a fractionof the hyrids interest payments &hich is e#ualto the e#uity credit received y the hyrid i2e2 ona D as-et ?6 paying E100 million of interestper year* only E@? million &ill e considered as
interest6
,or ,,F to ,i9ed Charges* Moody$s includes fullcoupon as a fi9ed charge* regardless of e#uitycontent
,or (nterest Coverage ,,F(nterest6* S%P &illconsider the instrument in t&o &ays8
100 det vs2 100 e#uity
Remuneration on instruments in the Very 'igh+#uity Content Category is considered as dividendpayments
Remuneration on instruments in the Lo& +#uityContent Category is considered as interestpayments
Remuneration on instruments in the (ntermediate+#uity Content Category &ould generally econsidered as interest payments
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IA! Accounting 3reat-ent
Hybrid Capital *ar+ets
: perpetual security is treated as either det or e#uity on the issuer$s alance sheet
(:S 3@ 7he issuer has an (unconditional ri)ht to avoid pa*in) cash or %inancial assets to settle the obli)ation+:
7rue8 +#uity
,alse 8 Det
:dditional criterion8 7he holder of e#uity must have a residual interest in the assets of the issuer after deducting all liailities
Regulators* rating agencies and ta9 authorities can have different criteria so classification can differ for different purposes
Hybrid Classiies as !ebt .nder I(S 2 Hybrid Classiies as "#uity .nder I(S 2
Terms and Conditions> ,aturit*: Perpetual ,aturit*: Perpetual
anin): Deeply Suordinated anin): Deeply Suordinated
Call: !on"Call ? Call: !on"Call ?
.nterest /a*ment: Dividend Pusher Cumulative .nterest /a*ment: !on"Cumulative
.nterest 0e%erral: Restricted .nterest 0e%erral: .nrestricted
"tep-1p: !o "tep-1p: !o
I(S 2> Det +#uity
I(S 7> 'edge :ccounting for s&ap !o 'edge :ccounting for s&ap
-, Volatility> Lo& Lo& to medium
( -erpetual Is Classiied as "ither !ebt or "#uity( -erpetual Is Classiied as "ither !ebt or "#uity
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Vattenall Case StudyVattenall Case Study
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4ationale *or the 3ransaction
Vattenall Case Study
Why Issue a Hybrid Capital
Se)urity?
(nders ,ideelt9
-resident o Vattenall
TreasuryWhy we did not Issue a Hybrid
Capital Se)urity ecorporate hyrid offering /H00m6
Chan'es
Hybrid Capital Ofering&esult
(e are state o#ned so our access to
ne# e$uit* capital is ver* limited+
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4ating Agencies 3reat-ent
Vattenall Case Study
*oody=s Standard ? -oor=s
Senior &atin' :3 :"
Hybrid &atin' Iaa1 III"
"#uity Content Ias-et D ? e#uity credit6 H0 e#uity credit
&ationale
Perpetual
:de#uate replacement language to mitigate
step"up
,ull credit to the mandatory deferral feature
Perpetual
:de#uate replacement language to mitigate
step"up
Partial credit to mandatory deferral
&atio Impa)t
'yrid treated as ? e#uity* @? det for
ratio purposes
More &eight given to leverage and cash flo&
coverage ratios that considered the instrument
as all e#uity
Distriutions treated as interest for fi9ed charge
coverage ratios
('en)y
Considerations
Ratings placed on positive outloo- after
announcement given significant financial
fle9iility
Capital structure to e enhanced given
issuance of hyrid
(ssuance strengthens alance sheet y
enhancing financial fle9iility
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ene*its *or 5atten*all
Vattenall Case Study
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3he 3ransaction
Vattenall Case Study
Summary o -rin)ipal TermsSummary o -rin)ipal Terms
89 t issuance; in the mean#hile up)raded to 2 8compan*9 and
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Innovative !tructure
Vattenall Case Study
541 e#uity )redit rom
*oody=s @
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Key Highlights
Vattenall Case Study
Very hi'h #uality
Si'nii)antly positi$e
";)ellent ";tremely
well perormin' on the
se)ondary mar+et
First e$er perpetual se)urity
or a )orporate issuer in the
/ordi) &e'ion
*ost inno$ati$e stru)ture in
the )orporate spa)e
Hi'hest e#uity )ontent
non8diluti$e )orporate debt
se)urity 8 "V"&
Dbn Hybrid Capital
!istribution
Impa)t on &atin'
-erorman)e
%round
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-ors)he=s .S! Hybrid Transa)tion !etails
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+vervie
-ors)he=s .S! Hybrid Transa)tion !etails
Hi'hli'htsHi'hli'hts Hybrid Transa)tion &ationaleHybrid Transa)tion &ationale
7he hyrid instrument reinforces the Group$sstated conservative financial strategy* providesadditional financial fle9iility* and refinances thecompany$s strategic li#uidity reserves and aond maturing in @00
Porsche is the &orld$s most profitale carmanufacturer and committed to maintaining aconservative financial structure and vie&s theissuance of a hyrid security as a means offurther strengthening its capital ase
.SD &ere selected as currency of issue as theond can e used to hedge foreign e9change
ris-s derived from car e9ports
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3ransaction !u--ary
-ors)he=s .S! Hybrid Transa)tion !etails
Issuer Porsche (nternational ,inancing plc
%uarantor Dr2 (ng2 h2c2,2 Porsche :-tiengesellschaft
&atin's !ot rated
Tenor Perpetual !C?
Compensation -ayments ,i9ed rate of 2@ per annum payale #uarterly
Optional &edemption Redeemale at par on 01 ,eruary @011 and any compensation payment date thereafter
Spe)ial "$ent &edemption Redeemale at par if either the (ssuer or the Guarantor is re#uired to pay additional ta9 amounts
Redeemale at par if interest e9penses cease to #ualify as ta9"deductile payments for the (ssuer
Redeemale at par if the proceeds of the securities may no longer e accounted for as e#uity of theGuarantor
Optional Compensation-ayments
7he (ssuer may defer payment of compensation on a cumulative ut not compounding6 asis on anycompensation payment date if i6 no dividend or other payment &as resolved on in respect of shares of theGuarantor* ii6 no dividend or other payment &as resolved* paid or made in respect of any ;unior or paritysecurities #ualifying as e#uity of the Guarantor and iii6 the Guarantor has not repurchased any parity or ;uniorsecurities or any shares2
-ayment o (rrears oCompensation
:rrears of compensation &ill ecome due on any compensation payment date on &hich the (ssuer payscompensation &hether due to non"satisfaction of the deferral conditions or due to the (ssuer electing not todefer62 :rrears &ill also ecome due on the earlier of8 redemption of the securities* the date on &hich an orderis made for the &inding"up or li#uidation of the (ssuer or the Guarantor and the date on &hich the (ssuer orGuarantor ma-es any payment on any parity or ;unior security #ualifying as e#uity of the Guarantor2
Status o the %uarantee :t least pari passu &ith any present or future capital securities and guarantees thereon Senior to common and preferred e#uity of the Guarantor
Kunior to all unsuordinated and suordinated creditors of the Guarantor and guarantees thereon
!enominations .SD @*000
Sole
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-ors)he=s .S! Hybrid Transa)tion !etails
Summary o -ayment *e)hani)sSummary o -ayment *e)hani)s !i$idend History per -reerred Share!i$idend History per -reerred Share @A@A
'as Porscheresolved
on apaymentdivide
ndin respect of
shares
'as Porscheresolved
on or made apayment
on ;unior orparity
securities#ualifying ase#uity of theGuarantor
'as Porscherepurchased
any;unior or parity
securitiesor any shares
FptionalCompensationPayment Date
CompulsoryCompensationPayment Date
!o !o !o
es eses
89 /lease note that pre%erred shareholders receive an additional >6 dividend p>a>? compared to ordinar* shareholders; No special dividends illustrated
829
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!is)laimers
*errill ,yn)h prohibits @aA employees rom9 dire)tly or indire)tly9 oerin' a a$orable resear)h
ratin' or spe)ii) pri)e tar'et9 or oerin' to )han'e su)h ratin' or pri)e tar'et9 as )onsideration
or indu)ement or the re)eipt o business or or )ompensation9 and @bA &esear)h (nalysts rom
bein' )ompensated or in$ol$ement in in$estment ban+in' transa)tions e;)ept to the e;tent
that su)h parti)ipation is intended to beneit in$estor )lientsE
This proposal is )onidential9 or your pri$ate use only9 and may not be shared with others
@other than your ad$isorsA without *errill ,yn)hs written permission9 e;)ept that you @and ea)h
o your employees9 representati$es or other a'entsA may dis)lose to any and all persons9without limitation o any +ind9 the ta; treatment and ta; stru)ture o the proposal and all
materials o any +ind @in)ludin' opinions or other ta; analysesA that are pro$ided to you relatin'
to su)h ta; treatment and ta; stru)tureE For purposes o the pre)edin' senten)e9 ta; reers to
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an e;pert on9 and does not render opinions re'ardin'9 le'al9 a))ountin'9 re'ulatory or ta;
mattersE Gou should )onsult with your ad$isors )on)ernin' these matters beore underta+in'
the proposed transa)tionE