Debt Market Update. Key themes Q3 2017

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1 Debt Market Update Q3 217 AUSTRALIAN DOMESTIC BANK DEBT MARKET The loan volume in the first three calendar quarters of 217 increased by 21.3 percent to US$52.7bn compared with US$43.5bn recorded in the corresponding period in 216. Q3 217 lending increased by 17.6 to US$16.4bn compared to US$13.9bn in Q Bank liquidity remains strong for quality assets and, combined with the increased appetite amongst institutional lenders for infrastructure assets, has resulted in a vast majority of loans being oversubscribed. Figure 1: Australian syndicated loan volume (US$ billion) Key themes Australian bank debt market M&A loans continued to lift the market, with leveraged buyout financings adding to yearto-date volumes Australian domestic bond market corporate supply reached record volume levels with several debutant issuers entering the market USPP issuance dominated by large scale NSW infrastructure privatisations Positive outlook for the rest of 217 with increased appetite from global investors LTM Volume (LHS) Quarterly Volume (LHS) No. of deals, LTM basis (RHS) Notable transactions for the quarter include: A$25m unitranche 1 loan to fund the acquisition of Laser Clinics Australia Pty Ltd by private equity firm KKR & Co. This transaction is another of the recent unitranche 1 debt structures that has been executed in the private equity sector in Australia. It has a 5.2x EBITDA opening leverage, which is higher than that observed in recent traditional senior leverage financing(s). A$46m senior leveraged loan for the acquisition of Icon Cancer Care by a consortium led by QIC. The loan was heavily oversubscribed which resulted in tightening of 25bps in pricing. Leverage on the deal was 4.75x EBITDA. A$1.6bn multi-tranche loan to support Australia's largest onshore oil producer Beach Energy s purchase of Lattice Energy from energy retailer Origin Energy Ltd. TPG Telecom Ltd executed an A$2.4bn refinancing the syndicate package included commitments from some of the new Asian lenders and institutional investors. Table 1: Notable syndicated loan transactions Borrower Date Tranche amount (A$m) Tenor (years) Margin (bps) TPG Telecom Ltd n/a 1, CIMIC Finance Ltd 1, Beach Energy Ltd 1, 5 18 Laser Clinics Aus. Pty Ltd Whitehaven Coal Ltd 1,2 4 2 Icon Cancer Care , 425 Alinta Energy Finance Pty Ltd PARF Coopers Gap Finco (AGL Energy) Adani Abbot Point Terminal Pty Ltd , 22 Source: Loan Connector (data extracted October 217) and KPMG Analysis Source: Loan Connector (data extracted October 217), KPMG Analysis 1 Unitranche debt financing structure combines senior and subordinated debt into a single tranche and can offer financial sponsors with greater leverage compared to traditional senior LBO loans. Unitranche investors are typically debt funds and other institutional investors. 217 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights

2 Although the Q3 217 volume dropped as compared to Q2 217, the year-to-date performance was stronger than most markets in Asia which experienced significant decreases in loan volumes due to lack of jumbo event-driven financings and M&A activity potentially due to restrictions imposed by the Chinese regulators on capital outflows. The strong Q3 217 loan volumes in the Australian bank market can be attributed to a number of factors including: The surge in leveraged buyout financings contributed to a rise in M&A-related loan volumes; and Increased level of refinancing (>5 percent of the total Q3 lending), either to take advantage of the current pricing levels or refinancing requirements as tenors continue to remain restricted to 3 to 5 years. Although Australian banks continue to dominate the domestic bank market, recently there has been increased competition from offshore lenders. In particular Asian lenders continue to gain a larger share in the market as Australian borrowers focus on increasing diversity in their bank groups. The loan market is also seeing an increased involvement of institutional investors and funds, offering an additional source of liquidity in the loan markets. In regard to sector performance in Q3 217, the utilities sector loan volume continues to be supported by new renewable energy projects and recapitalisations. The mining sector also shows continued activity with early refinancing(s) / extension of facilities by miners such as Fortescue Metal Group, Stanmore Coal and Whitehaven Coal. Figure 2: Australian syndicated loan volume, LTM by sector (US$ bn) Mining, Oil & Gas Utilities Services & business services Source: Loan Connector (data extracted October 217) and KPMG Analysis AUSTRALIAN DOMESTIC BOND MARKET Financial services Real estate and construction Transport The local corporate bond market reached a record volume of $A7.6bn in Q3 217, circa 22 percent higher than the total corporate bond volume in the calendar year of 216 and represented the busiest quarter for some years. A similar volume of A$7.2bn was last observed pre-gfc in Q4 26. This volume build-up has lifted the rolling 12-month issuance by circa 43 percent on a quarter-on-quarter basis for Q3 217, with YTD corporate volumes reaching circa A$15.bn. The transactions were distributed across a wide range of both domestic and global investors, with a strong demand for 5, 7 and 1 year maturities. Figure 3: A$ corporate bond market (A$ bn) Source: Bloomberg (data extracted October 217) and KPMG Analysis Note: Criteria has changed, new criteria excludes Financials and Government Table 2: Notable corporate bond transactions Borrower / Rating ESTA Utilities / A- Date Amount (A$m) Tenor (Years) Margin (bps)* Optus / A Places for People / A Victoria Power Networks / A FBG (Sab Miller) / A- Verizon Communications / BBB+ Qtly Vol LTM Vol Australian Catholic University / Aa2 Jul Adelaide Airport / BBB Jul University of Technology, /Aa1 Jul Source: KangaNews, S&P CapitalIQ (data extracted October 217) and KPMG Analysis * Indicative spread over A$ swap rate Despite higher issuance volumes, global credit conditions and liquidity levels remain supportive for borrowers, with corporate bond spreads continuing to tighten. This quarter saw several issuers making their inaugural appearance in the market: Verizon Communications raised A$2.2bn, with 54 percent of the deal being placed with domestic investors. This is the second largest deal ever to be priced in the Australian Corporate bond market after Apple s debut of A$2.9bn in KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights

3 Australian Catholic University (ACU) issued its first Sustainability Bond. While the order book received an overwhelming response, ACU sized the bond at A$2m. University of Technology, (UTS) issued A$3m the tightest in terms of yield and the largest transaction by an Australian University. US$ bn Source: KangaNews Figure 4: Australian corporate bond 5yr spread to A$ swap (bps) Source: Bloomberg (data extracted October 217), KPMG Analysis US PRIVATE PLACEMENT MARKET AA A BBB Figure 5: USPP 217 YTD volume % by country 1% 14% 14% 9% 62% USA UK Australia & NZ Canada Other - Volume (All ex-aust.) Volume (Aust. & NZ) 7 year 1 year 15 year Source: Private Placement Monitor The US Private Placement (USPP) market had a strong third quarter pricing US$4.5bn an increase of percent compared to the prior corresponding period which lifted the year to date volume to US$6.8bn. The USPP market continues to be a reliable source of capital for the Australian borrowers looking for long maturities. Investors are increasingly willing to provide funding in currencies other than the US$, with a number of A$ transactions recently completed. The supply in Q3 217 was dominated by the Australian infrastructure privatisations. Ausgrid made its debut and was strongly supported by investors as they continued to seek high quality infrastructure assets. The transaction was US$1.9bn-equivalent in total across 1, 12 and 15 year tranches. TransGrid made a quick return to the market (after its inaugural issuance in June 216) and raised US$747m with pricing on the 1, 12, 15 and 17 year tranches ranging from 13bps to 165bps over the US Treasuries. Other notable transactions included CSL Ltd and GPT Group raising US$7m and US$325m, respectively. US HIGH YIELD BOND MARKET Figure 7: US high yield bond spreads (bps) 12 Source: Private Placement Monitor (October 217), KPMG analysis Figure 6: USPPs volumes and NAIC-2 pricing (bps (RHS) and US$ billion equivalent (LHS)) North Korea missile scare USD 5yr BB MARGIN USD 5yr B MARGIN Source: Bloomberg (data extracted October 217), KPMG Analysis 217 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights

4 The US high yield corporate bond market experienced a surge in volatility in the month of August 217, driven by the rising geopolitical tension between the US and North Korea. The last month of the quarter, however, saw a moderate tightening of spreads (circa 15-2 bps across BB-rated issuers and 1-15bps across B-rated issuers) on the back of relatively stable macro-economic conditions including balance sheet normalisation 2 in the US and phasing of the European Central Bank s bond buying program. OUTLOOK The lending environment across all markets is expected to remain robust for the remainder of 217 providing excess liquidity relative to demand. Despite recent geopolitical concerns, debt markets have shown resilience, continuing to produce favourable conditions for quality corporate borrowers. The Australian bank loan market is expected to remain attractive for a range of sectors and asset classes. The emergence of foreign banks and non-traditional lenders will support transaction liquidity levels and pricing, especially as institutional investors and debt funds increase their involvement in the syndicated loan markets and direct lending. Non-bank lenders have become particularly active in leveraged finance transactions, offering the borrowers with appetite to play at much higher leverage. The local bond market will remain constructive for domestic issuers seeking diversification, however with a significant amount of new funding and refinances completed throughout the year, corporate transaction volumes are expected to soften in the lead-up to the holiday period. While liquidity levels remain high for USPP investors, and global credit indices continue to tighten to levels not witnessed since 26, the USPP market will continue to remain a stable, attractive alternative source of funding. Investors in this market will continue to remain supportive of Australian corporate borrowers, with a prevalence of A$ dominated transactions as well as transactions completed on a direct, bilateral basis. The volatility in the A$ will continue to be a key factor in the consideration of any US$ issuance given the impact on the cost of cross currency swaps. 2 At the Federal Open Market Committee (FOMC) meeting held on June 14, 217, the Federal Reserve disclosed its intention to reduce its US$4.5 trillion balance sheet, comprising circa US$2.5 trillion in Treasury bonds and US$2. trillion in mortgage-backed securities (MBS). 217 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights

5 Our Global Debt Advisory offices KPMG s global Debt Advisory Services of 11 professionals helps our clients achieve optimal financing outcomes across the entire spectrum of debt products. KPMG CONTACTS David Heathcote dheathcote@kpmg.com.au Scott Mesley Melbourne smesley@kpmg.com.au Raj Bhat rbhat@kpmg.com.au Greg Eldridge Melbourne geldridge@kpmg.com.au Conrad Hall Brisbane conradhall@kpmg.com.au Matt McKenna mmckenna1@kpmg.com.au Ian O Brien Perth Iobrien2@kpmg.com.au KPMG.com.au The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise). 217 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo and are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.