Irish Association of Corporate Treasurers

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Irish Association of Corporate Treasurers

• Insights into Corporate Funding
• and Bank Lending
• 5th May 2005
• Fergus McDonald
• Bank of Ireland
• Corporate Banking

Bank of Ireland is regulated by the Irish
Financial Services Regulatory Authority
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Contents

• Types of Bank Debt Funding and Current Market
  Trends
• Financial Covenants Current Usage and Impact of
  IFRS
• Interest Rate and Credit Environment
• Bank Assessment of Risk and Price
• US Private Placement Market
• Conclusion

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Types of Debt Funding
Bi-lateral Funding

• Small / Medium Sized Companies
• Similar Terms Conditions / Pari-Passu
• Inter-Creditor Agreements for complex
  arrangements
• Pricing Differential
• Relationship Basis
• Current Trends
• Larger corporates are going this route
• Increased debt appetites from banks
• Ancillary business is key

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Types of Debt Funding
Syndicate Debt

• Large Corporates Primarily
• Significant Debt Requirements
• Active on acquisitions
• Arranged or Underwritten Syndicates
• One Loan Agreement
• Majority Bank rule
• Transferability of Bank Debt
• Market Pricing
• Efficient and Effective Process

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Types of Debt Funding
bns
Syndicate Volumes - EMEA
912.7bn
743.9bn
656bn
550bn
479.2bn
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Types of Debt Funding
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Types of Debt Funding
Syndicate Debt Current Market Trends

• Emergence of France as a significant originator
  of syndicate debt
• 2004 Q1 2005
• France 189bn 67bn
• UK 226bn 51bn

• Reasons
• Opening of the French market
• Different approach by borrowers
• Greater bank competition
• London is still number 1 bank centre

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Types of Debt Funding
Syndicate Debt Current Market Trends

• Significant element of re-financings
• Accounts for 40 of global deal volume in Q1
  2005, up from 33
• Q1 2005 408 deals, 243bn

• Reasons
• Lower MA activity
• Deleveraging by corporates
• Rationalisation of banks
• Excess bank liquidity

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Types of Debt Funding
Syndicate Debt Current Market Trends

• Resulting in
• Lower pricing and fees

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Types of Debt Funding
2003
2004
2005
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Types of Debt Funding
Syndicate Debt Current Market Trends

• Resulting in
• Lower pricing and fees
• Lower syndicate amounts

• Dilution of terms and conditions

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Types of Debt Funding
Syndicate Debt Dilution of Terms Conditions

• Current Trends
• Acquisition / Investment Baskets
• Material Adverse Change Clause
• Limit on Disposals / Mandatory Pre-Payments
• Capex Restrictions
• Financial Covenants
• Guarantee Structures

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Types of Debt Funding
Syndicate Debt Current Market Trends

• Resulting in
• Lower pricing and fees
• Lower syndicate amounts
• Dilution of terms and conditions
• Increase in self-arranged syndicates

• Extension of terms 3 5 year now 5 year
• 5 1 1 term out fee
• Discretion of banks or
  company
• Invitation to participate invitation to bid

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Types of Debt Funding
Syndicate Debt Current Market Trends

• Underwritten Syndicates
• Mandate Letter
• Clear Market
• Bookrunner
• Market Flex
• Price
• Structure
• Terms
• Current Trends
• Mandated lead arranger hold levels
• Market flex restrictions
• Agreement not consulation on market flex
• Exclusion of sub-underwrites

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Financial Covenants

• Standard Net Debt / EBITDA
• EBITDA / Interest
• Net Worth
• Non-Standard Current Ratio, Debt / Net Worth
• Covenant Headroom increased
• Downward ratchet structures being replaced by one
  overall gearing covenant
• Blurring of distinction between Corporate and
  Leveraged Deals Crossover threshold is higher
• Leveraged 7¼ is the new 6

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Financial Covenants
Impact of International Financial Reporting
Standards IFRS

• Implementation Date 1st January 2005
• Impacted Areas
• Net Debt
• EBITDA
• Interest
• Net Worth
• What are corporates and banks doing
• Frozen GAAP
• LMA Loan Agreement and Directive

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Financial Covenants
Frozen GAAP Provision

• That obligors ensure that all financial
  statements apply the same GAAP and accounting
  practices as used in the preparation of the
  financial statements delivered at the time the
  facility agreement is signed,
• If there has been a change in GAAP or accounting
  practices, the banks/agent is entitled to receive
  information enabling there to be a comparison
  back to the original GAAP and accounting
  practices.

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Interest Rate Environment

• Euro Interest Rates
• Improvement in consumer and investment spending
  recently
• Still low confidence in Germany, France and Italy
• Inflation at 2.1, just above ECBs 2 target
• ECB would like to increase rates, but growth
  issues
• No rate increases expected by markets in 2005
• Current Rates
• 3 Mth 3 Year 5 Year 10 Year
• 2.12 2.65 2.95 3.55
• Historic lows, potential increases end 2005/2006,
  a relatively benign interest rate environment
  leads to continued demand and strong
  bank/corporate appetite

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Interest Rate Environment
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Interest Rate Environment

• Sterling Interest Rates
• Housing market has stabilised
• Consumer spending weak
• Labour market strong with little wage inflation
• Inflation, at 1.9 within BOEs target rate cycle
• Current Rates
• 3 Mth 3 Year 5 Year 10 Year
• 4.90 4.92 4.9 4.90
• As flat as it gets
• At the end of interest rate hiking cycle, maybe
  one more hike, again benign interest rate
  environment

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Interest Rate Environment
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Interest Rate Environment

• US Dollar Interest Rates
• Business activity expanding, real estate markets
  are active
• Improving job market in line with strong new home
  sales
• Good momentum in economy but concerns on oil
  price
• Inflation, at 3 pa, concerning the FED
• Current Rates
• 3 Mth 3 Year 5 Year 10 Year
• 3.2 4.15 4.35 4.65
• Rates to continue to increase at measured pace,
  to reach a plateau level at 3.5 / 3.75

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Interest Rate Environment
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Bank Credit Quality

• An Improving Environment
• Non-Performing Assets / Loans

Leading to enhanced bank appetite
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Bank Assessment of Risk Price

• Traditional Approach
• Know your client and business
• Financial information
• Judgement
• Trust

Increasing globalisation of debt markets and
expanding of bank activities calls for a more
sophisticated and objective approach RAROC Risk
Adjusted Return on Capital
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Bank Assessment of Risk Price

• Loan Portfolio Management Determining the most
  efficient use of a banks capital
• Generally applicable throughout the bank market
• Rating agency models SP / Moodys / Fitch
• Key Parameters Objective Subjective
• Size
• Interest Cover
• Gearing
• Life Cycle
• Management
• Information Quality
• Future Company Industry risk
• Market Position
• Facility Terms Conditions

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Bank Assessment of Risk Price

• PD Probability of Default
• EDF Expected Default Frequency

• EL Expected Loss Given the probability of
  default and the nature of the facility
• Return to the bank on a risk adjusted basis
• BASLE II Accord

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US Private Placement

• Source of stable, long term capital
• Significant capacity
• Strong demand
• High level of flexibility regarding
• Maturity
• Structure
• Terms
• Pricing
• Institutional investors are largely transactional
  
• Bank of Ireland joint venture with Macquarie
  Securities (USA) Inc

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US Private Placement
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US Private Placement
U.S. insurance companies are most active investors
Mutual Funds / Pension Funds
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Banks / Other
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Insurance
Companies
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Source Private Placement Letter
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US Private Placement
Investors are receptive to a broad range of issues
Source Private Placement Letter
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US Private Placement
Irish Issuers in the US Private Placement market
in recent years

• 2005
• Kingspan Group plc 200 million
• 2004
• United Drug plc - 102 million
• DCC plc - 257 million
• 2003
• ESB - 1,035 million
• Bord Gais US440 million
• Greencore Group plc - 302 million
• Kerry Foods Financial Services plc - 650 million

Source Private Placement Letter
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US Private Placement
The most recent Irish issue in the US market
Kingspan Securities Ltd

• Strong demand
• Launched as US150 million offering of senior
  notes
• Upsized to US200 million
• 10 yr bullet, US Treasuries 88 bps
• 12 yr bullet, US Treasuries 95 bps
• BOI Swap Auction
• Closed 29 March 2005

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US Private Placement
Current market conditions are very attractive for
issuers

• Strong demand
• Supply and demand imbalance
• Aggressive new issue pricing
• Less restrictive covenants
• Historically low U.S. Treasury yields
• Relatively flat yield curve
• However
• Amendments can be difficult
• Corporate non-performance
• Make whole provision

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Conclusion
ITS A BORROWERS MARKET

• Strong bank appetite
• Lower pricing
• Flexibility on structures and conditions
• Benign interest and credit environment

IT WONT ALWAYS BE LIKE THIS
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Contacts
Finbarr ONeill, Managing Director, Institutional
Banking Ph [phone] Email
finbarr.oneill_at_boimail.com Pat Gaynor,
Managing Director, Domestic Corporate Ph
[phone] Email pat.gaynor_at_boimail.com
Fergus McDonald, Director, Institutional
Banking Ph [phone] Email
fergus.mcdonald_at_boimail.com
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