Retail Bond Conference

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Retail Bond

Conference

Brown Shipley

20 February 2013

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Wealth well managed 1

Today’s Speakers

Gillian Walmsley

Michael Dyson

Kevin Doran

Head of Fixed Income Products

Head of Fixed Income

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Brown Shipley Fixed Income Race Day

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Investor Demand

• increasing private investor focus on fixed income

–

seeking alternative asset classes given current low interest rates

and recent equity market volatility

• private investors using bond funds are keen to take more active

role in managing their portfolio by selecting and trading

individual bonds

–

trading in individual debt securities allows investors to select

particular bond issues and tailor their portfolio

• strong demand from UK private client brokers for greater

access to retail bonds

IMA Asset Management Survey

2010/11

–

bond funds continued to do well in

2010 with £7.1bn of net sales

–

2009 saw highest ever inflow into

bond funds, net total of £10.7bn

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• in February 2010, the London Stock

Exchange launched its new electronic

bond market for private investors – the

Order book for Retail Bonds (ORB)

• key aims of ORB are to develop both an

efficient, transparent secondary market

in bonds for UK private investors and to

establish a primary market for

distribution of dedicated retail bonds

–

opening up new sources of capital for

companies seeking to diversify their

funding

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Bonds available on electronic ORB

• ORB currently has more than 160 sized bonds on the

platform offering a range of gilts, corporate and

supranational bonds

• over 100 corporate and four supranational bonds

–

at launch, a number of existing retail-size bonds were

made available for continuous quoting on the

electronic order book

• also offers range of more than 50 gilts

–

includes both conventional gilts (excludes strips,

undated, rump issues) and inflation-linked gilts

• 33 ORB-dedicated new issues and 4 taps of

existing ORB issues have raised over £3.1 billion

since launch

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ORB dedicated issues

ISIN Issuer Name Date Listed Maturity Coupon Value Coupon Type Min Den Issue Size

XS0880578728 EnQuest PLC 15/12/2013 9 year 5.5 Fixed 100 £145 million

XS0853358801 Alpha Plus Holdings plc 19/12/2012 7 year 5.75 Fixed 100 £48.5 million

XS0856594642 UNITE Group plc 12/12/2012 7 1/2 year 6.125 Fixed 100 £90 million

XS0859261520 Tullett Prebon plc 11/12/2012 6 1/2 year 5.250 Fixed 100 £80 million XS0841076465 St. Modwen Properties plc 07/11/2012 7 year 6.25 Fixed 100 £80 million XS0846486040 London Stock Exchange Group plc 05/11/2012 9 year 4.75 Fixed 100 £300 million

XS0832324981 Workspace Group plc 10/10/2012 7 year 6 Fixed 100 £57.5 million

XS0827693663 Beazley plc 25/09/2012 7 year 5.375 Fixed 100 £75 million

XS0818634668 Intermediate Capital Group plc 20/09/2012 8 year 6.25 Fixed 100 £80 million

XS0820711215 CLS Holdings plc 12/09/2012 7 1/4 year 5.5 Fixed 100 £65 million

XS0805454872 ICAP plc 31/07/2012 6 year 5.5 Fixed 100 £125 million

XS0795445823 Primary Health Properties plc 24/07/2012 7 year 5.375 Fixed 100 £75 million

XS0796078193 Severn Trent plc 11/07/2012 10 year 1.3 Variable 100 £75 million

XS0780063235 Tesco Personal Finance plc 21/05/2012 8 1/2 year 5 Fixed 100 £200 million XS0762418993 Provident Financial plc 04/04/2012 5 1/2 year 7 Fixed 100 £120 million XS0731910765 Places For People Capital Markets 31/01/2012 10 year 1 Variable 100 £40 million XS0716336325 Intermediate Capital Group plc 22/12/2011 7 year 7 Fixed 100 £35 million XS0710391532 Tesco Personal Finance plc 16/12/2011 8 year 1 Variable 100 £60 million

GB00B3YYW134 Royal Bank of Scotland 07/11/2011 7 year 2 Variable 1000 £20 million

XS0678522490 3 _{National Grid plc} _30/09/2011 _{10 year} _1.25 _Variable ₁₀₀ _{£282.5 million}

XS0635014177 Places For People Capital Markets 27/06/2011 5 1/2 year 5 Fixed 100 £140 million XS0605672558 Provident Financial plc 31/03/2011 5 1/2 year 7.5 Fixed 100 £50 million

XS0604804194 Lloyds TSB Bank plc 25/03/2011 5 1/2 year 5.5 Fixed 1000 £150 million

XS0602217159 European Investment Bank 11/03/2011 5 1/2 year 3.25 Fixed 100 £350 million XS0591029409 Tesco Personal Finance plc 25/02/2011 7 1/2 year 5.2 Fixed 100 £125 million

GB00B42SH312 Royal Bank of Scotland 21/02/2011 6 year 2 Variable 100 £10 million

GB00B442CZ84 Royal Bank of Scotland 17/01/2011 7 year 3.3 Fixed 100 £15 million

GB00B4MTS317 2_{Royal Bank of Scotland} _06/12/2010 _{10 year} ₀ _Variable ₁₀₀ _{£35 million}

GB00B4RM3T66 Royal Bank Of Scotland plc 01/11/2010 12 year 3.9 Variable 100 £20 million GB00B4P95L57 1 _{Royal Bank Of Scotland plc} _01/11/2010 _{12 year} _3.9 _Variable ₁₀₀ _{£35 million}

XS0517466198 Lloyds TSB Bank plc 21/06/2010 5 1/4 year 5.375 Fixed 100 £75 million

XS0496412064 Provident Financial plc 15/04/2010 10 year 7 Fixed 1 £25.2 million

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Key features of the new market model

• Transparency

–

dedicated market makers are committed to quoting two-way

prices in a range of retail bonds throughout the trading day

• means that private investors can see continuous tradeable

prices on-screen and easily monitor the value of their bond

portfolio

–

open model for all participants, offers new opportunities for price

improvements

–

prospectuses for all the bonds on ORB are available to download

free from our website

• Regulatory supervision

–

high degree of market monitoring and supervision

–

EU regulated market, highest standards of disclosure and

transparency

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Electronic Order Book

• new market model means private investors are able to see prices on-

screen and trade in bonds in a similar way as they currently do for

shares

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Market Partners

• ORB is currently supported by nine market makers:

• Investec Bank and Winterflood Securities in gilts and corporates

• Canaccord Genuity, Peel Hunt and Shore Capital across

corporate bond range

• HSBC and Numis Securities in a range of corporates

• RBS and Barclays Capital

• we are working with market partners to further develop the ORB and

to support new admissions with press/marketing activity

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Further Information

Fixed Income

London Stock Exchange

10 Paternoster Square

London EC4M 7LS

Tel:

+44 (0)20 7797 3921

Email:

[email protected]

Web:

www.londonstockexchange.com/bondsmadeeasy

www.londonstockexchange.com/retail-bonds

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The independent UK Investment Bank

20 February 2013

Presentation to Brown Shipley Retail Bonds Conference

“Why, how, when to issue a Retail Bond”

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Debt profile – XYZ Properties plc

Group facilities at 31/05/12 Lloyds £100m November 2014 RBS £95m November 2015 Barclays £84m September 2015 HSBC £75m December 2015 Kennedy Wilson £50m November 2014 Santander £30m January 2016 Deutsche pbb £5m June 2019 Barclays VSM £38m March 2017

Total facilities £477m

Undrawn facility headroom £107m

Net debt (excl. jvs) £370m

Bank Gearing Covenant 175% Actual Gearing 74%

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Which Lender?

Bank Borrowings Sterling Wholesale Bonds Retail Bonds Private Placements Positives Negatives Positives Negatives Positives Negatives Positives Negatives

Size Flexible loan sizes

May need syndicating

Capacity for large size capital raising. EMTN allows tapping Not cost effective for deals smaller less than £150m? Typical issue sizes of £50m to £150m are ideal unit sizes Difficult to gauge size or absolute demand ahead of launch From £25mn. PP Programme can lead to regular placements Smallish mkt in UK. Some US demand for £ . US PP market open to European issuers in $ Term and Rate Flexible term and coupon types Rarely offer longer term fixed rates Wide choice of maturities and coupon types Larger size means "lumpy" debt profile unless frequent borrower. Refi risk Coupon types and tenor will reflect current retail appetite Limited to terms of 5 to 10 years in normal circumstances Offers competitive cost of funds for maturities between 7-30 years Ratings and Credit profile Bank should understand and work with the business Covenant and frequency of reporting can be onerous. Often take a charge over security Huge resource to understand complex credits. Can be flexible on security for right price “Current” market covenants required. Ratings required (usually)

Will judge credit on it’s own merits. Ratings helpful but not essential . Unsecured possible if responsibly covenanted EU prospective directive requirement for small denominations Private Placements create competitive price tension amongst lenders May required private ratings Ongoing Approachable for renegotiating in difficult times Needs regular refinancing Speedy pricing and settlement process Pricing power lies with investors (as pricing is in a range) A successful retail bond launch can greatly enhance investor awareness and increase profile with equity Can require extensive roadshow/marke ting Early redemption can be expensive

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4 Planned frequency of issue key factor in determining appropriatestructure

Standalone vs. MTN Programme

Standalone issue

Standalone bond is a lower cost documentation route for a single bond issue

Reduced documentation – prospectus must satisfy:

– Prospectus Rules (Annex IV, V, XII)

– FSMA and ESMA Guidance on retail offers

Less disclosure vs. equity issue (e.g. no working capital review)

Requires UKLA approval

Any additional offers must submit an entirely new document to the regulator

MTN Programme

 Prospectus requires same information disclosure and approval process as for standalone

 Additional documents include Programme Agreement and Programme Notes

 Requires annual update if further issues planned

 As many of the arrangements (such as regulatory, agents, trustees, lawyers, listing) are maintained on a continuing basis, the documentation process for additional issues is simplified

 Standardisation of the contractual provisions relating to each issue of debt securities, reduces legal risk

 Expensive to set up due to additional disclosure but cost efficient for repeat borrowers

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6‐8 week process from start to finish –offer to launch post the interim results

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What does it Cost?

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Expenses Indicative costs

Issuer's counsel £50,000 - £75,000

Bookrunner's counsel £60,000 - £80,000 - Retail Bond Issuance

Trustee and paying agent £500 - £15,000

LSE listing fees Ranges from £300 to £3,650. The LSE fees are based on the size of the issue, and for

reference, the fee for a bond of up to £100m is £2,750

Auditors This is the cost to produce a comfort letter (can be £10,000, but depends on work/time post

results)

Roadshow £3,000 - £7,000 including UK, Ireland and Channel Islands

Advertising £50,000 - £70,000

Total fixed costs

Indicative Fixed Costs £173,800 - £260,650

Ratings? Variable costs

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Required documentation

Company counsel Accountants

 Prospectus (business description & risk factors)

 Application forms to LSE

 Legal opinions

 UKLA checklists

 Verification

 Proper extraction of financials comfort

 No significant change review

Bank counsel Bank

 Prospectus (Terms & Conditions of the bond)

 Subscription agreement

 Terms and conditions

 Trust deed and Agency agreement

 DD questionnaire

 Distribution agreements

 Term sheet (if MTN programme)

 Offer announcements  Marketing presentation  Information booklet  Roadshow schedule  Bookbuild  Settlement  Marketing feedback

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Post listing requirements

Disclosure obligations

Disclosure of price sensitive information – must be announced as soon as possible

Periodic financial reporting

– Annual report (must be published within 4 months of year end for Main Market retail debt)

– Interim report (must be published within 2 months of half year end for Main Market retail debt)

– Interim management statements

Ongoing costs

Paying agent and Trustee: c. £2,000

London Stock Exchange: £7,000*

Role of trustee and paying agent

Coupon payment

Trustee responsibilities

Investor management

Offer meetings with company management at time of results to Distributors

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Retail Bond

Opportunities

Kevin Doran

Senior Fund Manager

Wednesday 20 February 2013

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Fundamental Belief

• Investors should not be willing to accept increased levels

of risk without a commensurate increase in the expected

levels of return

• As a corollary to that belief; equally, investors should not

expect an increased level of return without a

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Sources of Risk

• Interest rate risk

• Credit Risk

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Sources of Risk

• Interest rate risk

• Credit Risk

• Liquidity Risk

Chance of default

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Income Statement

Due Diligence Process

Balance Sheet

Assets

Liabilities

Equity

=

+

Sales

(Cost of Goods Sold)

EBIT/Operating Profits

(Operating Expenses)

(Interest)

(Tax Charge)

Net Income

Generate

Retained Earnings

Used For:

Increasing Asset Base

Increasing Working Capital

Increasing Cash Balances

Reducing Liabilities

Divs

Circular

Flow

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Spotting The Pitfalls

• Sub-Ordination

• Pricing vs. Institutional Deals

• Covenant Packages

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Brown Shipley is a trading name of Brown, Shipley & Co Limited, which is authorised and regulated by the Financial Services Authority. Registered in England and Wales No. 398426. Registered Office: Founders Court, Lothbury, London, EC2R 7HE. Brown Shipley's parent company is KBLEuropean Private Bankers which, from Luxembourg,heads a major Europeannetwork of private bankers.