PRESENTATION TO

1
New Trends in Capital Financing October 2005
2
Different Markets and Their Features

• Capital Market
• Government, Corporate, Parastatal and Municipal
  bonds
• Listed on BESA
• Generally requires a public rating to be done
• Daily price and trades
• Institutional Market
• Direct investment by non-banking parties
• Form of loans
• INCA, DBSA, DFIs
• Banking Market
• Major 5 banks

3
Debt Capital Market Update

• The listed SA Debt Capital Market (DCM) is
  R610 billion strong market BESA has seen
  issuance in total for the year to date of approx
  R30 billion
• Borrowers in the listed debt capital market have
  historically been Banks and State Owned
  Enterprises (SOEs)
• In recent times, issuance size has decreased
  (previously R1bn per issue, of late there have
  been smaller issuances)
• However funding from the capital markets should
  be sourced for larger funding requirements due to
  the costs involved
• Spreads have also tightened and the low interest
  rate environment has made funding through the DCM
  more attractive
• Investors in the Bond Markets seek long term
  capital bullet repayment profiles

4
Debt Capital Market

• Options available in the Capital markets
• Merits of a Domestic Medium Term Note programme
  (DMTN) vs. a Standalone Bond Issue

5
DMTN vs. Standalone Issue Costs
6
Expert Services Required

• Advisor/ Structuring Role
• Implementation Role legal, rating agencies,
  accounting/tax, credit enhancement, investors
• Underwriting and market-making Role

7
Background on Institutional market

• Institutional market
• DBSA
• INCA
• DFIs
• Not regulated by the Banks Act and has little
  statutory costs to comply with.
• DBSA focusing more on developmental funding
• FirstRand Group has 36 stake in INCA

8
Background on Banking Market

• Banking Market
• Big 5 banks
• Raise funds cheaper due to good credit ratings
  but has statutory costs as a result of regulation
• History of Regulations
• Pre 1992 No legislated capital holding
  requirements
• 1992 Basle I - Legislated for capital holding
  requirements
• Minimum Capital holding 8 of risk weighted
  assets
• SARB - Municipalities 0 risk weighting
  (0 of 8)
• Margin for ROE 0 x 8 x shareholder exp ROE
• Result All municipality risk was the same
  NIL risk. Weak municipalities advantaged.
• 2000 SARB - Capital holding 10 of risk
  weighted assets
• Municipalities 100 of 10 risk weighting
• Margin for ROE 100 x 10 x shareholders exp
  ROE
• Result All municipality risk is the same i.e 100
  risk weighting. Strong municipalities
  penalised.
• 2006 Basle II - Capital holdings based on
  economic risk.
• Depends on rating of counterparty and security

9
Developments in the Municipal Market

• In the past year there has been renewed and
  increased activity from the municipal sector in
  terms of long term borrowings
• Financial Services Charter (FSC) requirements
  put pressure on financial institutions, life
  companies and Banks to invest in Transformational
  Infrastructure with a focus on local government
  as the agent of delivery
• This has resulted in a very aggressive pricing
  competition in an attempt to acquire such assets
  pure Bank on-balance sheet funding has not
  proven to be advantageous due to the statutory
  costs involved
• Hence structured, tailor-made products are
  required which sources capital market funding
  either directly or indirectly

10
Bank Funding

• There is a more cost effective solution for
  municipalities to gain capital market funding
  through Bank structuring (indirect capital market
  funding) on terms more suited to municipalities
  e.g. amortised cashflows with less onerous
  requirements than direct capital market funding
• Although not publicly noted, Banks have been
  utilising structures that tap into the capital
  market via Asset Backed Commercial Paper Conduits
  to enable them to price more competitively
• Conduits are used extensively by most
  international banks to provide clients with
  direct access to the capital markets where the
  client does not want the cost of setting up its
  own capital market programme(s)
• Viewed as on-balance sheet Bank funding by the
  Municipalities

11
Direct vs. Indirect Capital Market Funding
12
Requirements for Indirect Capital Market Funding

• Conduits are set up to fund highly rated
  counterparties/borrowers (AA- or better rating)
• Ratings slightly below AA- can be included into
  the conduit however tailor-made structuring is
  required
• Such structuring could include the participation
  of credit enhancement from Foreign Development
  Finance Institutions e.g. European Investment
  Bank, Proparco etc

13
Alternative Bank Structures CPI Funding

• CPI-linked debt has the advantages of
• Offering the municipality longer maturities than
  term facilities (20 year funding is achievable)
• Being comparatively cheaper due to investor
  demand
• The reference government CPI-linked bonds which
  represents the base cost is at its lowest levels
  (R197 trading around 3.25)
• This translates into a real funding rate of
  approximately 5
• Providing a more efficient funding tool
  especially where revenue increases are linked to
  the consumer price index
• Providing the municipality with finance
  diversification

14
Alternative Bank Structures

• Buyers and Sellers of Inflation
• Sellers of CPI-linked instruments in SA include
• Government
• TCTA
• Toll Road Consortiums (N1, N3, N4E, N4W,
  Chapmans Peak)
• Corporates as part of a DMTN programme
• Buyers of CPI-linked instruments in SA are
• Pension Funds
• Life Companies
• Collective Investment Schemes
• Banks

15
RMBs Team

• Forbes Padayachee
• Tel [phone] Cell 082 854 8777
• Fax [phone] e-mail forbes.padayachee_at_rmb.c
  o.za
• Laurent Scholtz
• Tel [phone] Cell 083 381 1334
• Fax [phone] e-mail laurent.scholtz_at_rmb.co.
  za