Australian Hybrids Research Monthly Review June 2012

Transcription

1 Australian Hybrids Research Monthly Review June Hybrid Best Ideas 2 2. Rate Sheet at 5 June Recommendation Changes Since Last Month 4 4. Monthly Market Review 4 5. New Issues, Maturities and Resets 5 6. Outlook and Comparative Yield 6 7. Major Bank Hybrids 7 8. Other Floating-Rate Hybrids Fixed-Rate Hybrids Glossary 14 Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 1

2 1. Hybrid Best Ideas ASX Code Name Recommendation Risk Gross Running Yield ANZHA ANZ Subordinated Accumulate Low 6.21% Notes ANZHA are subordinated, unsecured securities with a $100 face value. They mature on 14 June 2022 but ANZ has an option to redeem them early on 14 June 2017, or on an interest payment date for taxation reasons subject to APRA approval. The notes pay quarterly interest based on the 90-day BBSW rate plus a 2.75% margin. The notes rank ahead of ANZ ordinary and preference shares (including the ANZ hybrids on issue: ANZPA, ANZPB and ANZPC). The distributions are interest payments so are not franked. They are currently trading below our fair value estimate and offer a running yield of 6.21%. ANZPA ANZ CPS2 Accumulate Low 6.76% ANZPA are Convertible Preference Shares of ANZ with a face value of $100. ANZPB are unsecured securities with a mandatory conversion date of 15 December 2016, subject to conversion conditions. They pay non-cumulative, floating rate, fully franked distributions at a 3.10% margin above 90-Day BBSW. They are currently trading below fair value and offer a gross running yield of 6.76% and 7.24% yield to reset. CBAPA CBA Perls V Accumulate Low 6.95% CBAPA are exchangeable resaleable listed securities in CBA with a face value of $200. CBAPA are classified as perpetual securities as there is no maturity date, however there is a mandatory conversion date of 31 Oct 2014 subject to the call rights of the issuer. They pay non-cumulative, fully franked distributions at a 3.40% margin above 90-Day BBSW. They are currently trading below our fair value estimate and offer a gross running yield of 6.95% and 7.29% yield to reset. MBLHB Macquarie Accumulate Medium 8.98% Income Securities MBLHB are stapled securities with a face value of $100. They pay non-cumulative, unfranked distributions quarterly in arrears at 1.7% p.a.+90-day BBSW. MBLHB is a perpetual security that can be repaid with cash (no conversion to shares) and so is essentially floating rate corporate debt. MBLHB is backed by bank cashflows which are less volatile than cashflows from the Macquarie Group as a whole. The security is perpetual so market price is more sensitive to overall market movements than a security with a fixed maturity date. Investors have no redemptions rights. They look attractive with a running yield of 8.98%. WBCPB Westpac SPS II Accumulate Low 7.32% WBCPB are Stapled Preferred Securities (SPS II) of WBC with a face value of $100. WBCPB are unsecured securities, with a mandatory conversion date of 30 September 2014, subject to conversion conditions. They pay non-cumulative, floating rate, fully franked distributions at a 3.80% margin above 90-Day BBSW. They are currently trading below our fair value estimate and offer a gross running yield of 7.32% and 7.32% yield to reset. Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 2

3 2. Rate Sheet at 5 June 2012 Issue Size Years To Trading Running Yield Yield to Reset Code Recommendation Price ($) Issuer ($m) Maturity Margin inc Fr ex Fr inc Fr ex Fr Dist ($) Ex Date AAZPB NOT COVERED ALZ % 9.68% 9.68% /03/2012 ANZPA ACCUMULATE ANZ % 6.76% 4.73% 7.24% 5.21% /05/2012 ANZPB ACCUMULATE ANZ % 6.07% 4.25% 6.96% 5.15% /05/2012 AQNHA NOT COVERED AMP % 8.05% 8.05% 6.38% 6.38% /07/2012 BENHB NOT COVERED BEN % 5.92% 5.92% /08/2012 BENPB HOLD BEN % 5.73% 4.01% % /05/2012 BENPC HOLD BEN % 5.83% 4.08% % /06/2012 BOQPC REDUCE BOQ % 6.03% 4.22% /03/2012 CBAPA ACCUMULATE CBA % 6.95% 4.87% 7.29% 5.05% /07/2012 CBAPB HOLD CBA % 4.48% 3.14% 6.97% 5.11% /07/2012 DXRPA HOLD DXS % 4.70% 4.70% 7.32% 7.32% /03/2012 ELDPA NOT COVERED ELD GMPPA HOLD GMG % 6.24% 6.24% /06/2012 GNSPA AVOID Suspended GNS IANG HOLD IAG % 7.70% 5.39% 7.90% 5.58% /06/2012 MBLHB ACCUMULATE MQG % 8.98% 8.98% /06/2012 NABHA ACCUMULATE NAB % 6.84% 6.84% /07/2012 NFNG ACCUMULATE NUF % 9.91% 9.91% /10/2012 PCAPA ACCUMULATE CBA % 5.10% 3.57% 8.57% 6.98% /06/2012 RHCPA HOLD RHC % 8.17% 5.72% /03/2012 SVWPA ACCUMULATE SVW % 10.56% 7.39% /05/2012 SBKHB HOLD SUN % 7.56% 7.56% /08/2012 SBKPB HOLD SUN % 6.97% 4.88% % /05/2012 TPAPA AVOID TPI % 11.90% 8.33% /09/2012 WBCPA ACCUMULATE WBC % 5.95% 4.17% 7.34% 5.21% /06/2012 WBCPB ACCUMULATE WBC % 7.32% 5.12% 7.32% 4.87% /06/2012 WCTPA ACCUMULATE WBC % 5.11% 3.58% 8.60% 7.01% /06/2012 BENPA HOLD BEN % 6.35% 9.93% 6.53% /10/2012 IAGPA HOLD Suspended IAG MQCPA HOLD MQG % 11.43% /12/2011 SBKPA SELL SUN % 4.69% 8.57% 6.48% /02/2012 PXUPA NOT COVERED 8.50 PPX CBAHA ACCUMULATE CBA % 4.53% 4.53% 5.09% 5.09% /07/2012 PRYHA NOT COVERED PRY % 7.82% 7.82% 8.83% 8.83% /06/2012 TAHHA HOLD TAH % 7.67% 7.67% 6.80% 6.80% /07/2012 MXUPA NOT COVERED NA % 10.48% 10.48% /03/2012 BENHA NOT COVERED BEN % 4.87% 4.87% 5.58% 5.58% /06/2012 ANZPC ACCUMULATE ANZ % 6.76% 4.73% 7.67% 5.50% /08/2012 WOWHC HOLD WOW % 6.52% 6.52% 5.89% 5.89% /08/2012 ORGHA HOLD ORG % 7.64% 7.64% 7.87% 7.87% /06/2012 ANZHA ACCUMULATE ANZ % 6.21% 6.21% 6.21% 6.21% /06/2012 TAHHB HOLD TAH % 7.72% 7.72% 8.12% 8.12% /06/2012 WBCPC ACCUMULATE WBC % 6.72% 4.71% 7.14% 5.01% /09/2012 CNGHA ACCUMULATE CNG % 6.84% 6.84% 7.09% 7.09% /06/2012 AGKHA ACCUMULATE AGK % 7.39% 7.39% 7.47% 7.47% /05/2012 IAGPC HOLD IAG % 7.55% 5.29% 8.11% 5.76% /10/2012 Source: Morningstar (yields) and ASX (prices and ex-dates) - Yields and trading margins above 30% are not displayed. Ex-dates and distributions are the latest reported by the ASX at the publication date, 5 June Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 3

4 3. Recommendation Changes Since Last Month None. 4. Monthly Market Review The Australia sharemarket had a horror month with the ASX200 accumulation index down 6.64% for the month and 9.00% for the twelve months ending 31 May Concerns about the European sovereign debt, the possibility of a hard landing by China and domestic economic issues continues to hurt investor confidence. Not surprisingly the defensive sectors outperformed over the month: Utilities (+2.13%), Telecommunications (+ 0.21%) and Health Care (+0.15%). Resources related sectors were the weakest performers (Materials % and Energy %). Over the past twelve months the Telecommunications sector is the best performer (28.18%) driven by Telstra. The picture was no better overseas as major global equity markets fell as concerns about the European sovereign debt crisis weighed. US: Dow Jones: -6.21%; S&P500: -6.27%; Nasdaq: -7.19% UK: FTSE100: -7.27% Germany: DAX: -7.35% France: CAC: -6.09% Japan: Nikkei: % Hong Kong: Hang Seng: % June has not started well with soft jobs data in the US ignited concerns about US economic growth. This has seen long term US treasury yields fall further and equity markets selloff. Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 4

5 5. New Issues, Maturities and Resets Tatts Group (TTS) will raise $200m via an ASX-listed security issue, Tatts Bonds (TTSHA). TTSHA are senior, unsecured debt securities, which rank equally with TTS existing bank facilities and capital market debt. They are also guaranteed by material subsidiaries of TTS, on similar terms to other senior unsecured debt. The notes mature in seven years unless they are redeemed earlier by TTS following a tax or clean-up event. The notes pay quarterly interest based on the 90-day BBSW rate plus a 3.10% p.a margin. Interest payments are mandatory and are not franked. Our recommendation is Subscribe. TTSHA is a rare debt offering for retail investors. Being senior debt, it is higherranking in the capital structure than most other issues. What does this mean? Investors are not at the back of the queue in a wind-up scenario. They stand next to bankers and institutional debt holders rather than behind them, which is more the norm in the hybrids market. TTSHA provides investors with exposure to a relatively defensive business, with a high mix of stable revenue. This suits debt investors. We like the fact TTSHA is senior debt and interest payments are not deferrable or discretionary. That said, investors need to understand TTSHA is still an unsecured investment and is therefore riskier than a bank deposit. Potential investors should be aware TTSHA is a floating rate note which reprices quarterly, so interest rate changes will affect interest payments. In a declining interest-rate environment, interest payments will fall. The opposite is the case in a rising interest-rate environment. Please refer to the Special Report published on 31 May 2012 for more details. Seek (SEK) will raise $125m via and ASX listed security SEEK Subordinated Notes. The securities are perpetual, noncumulative, subordinated notes with a $100 face value. The notes are subordinated and based on Seek s current capital structure rank ahead of equity and behind senior unsecured debt. Distributions will be franked and payable half yearly. The distribution rate is fixed for 5 years and will be the higher of 8.60% or the 5-year swap rate plus an indicative margin between 5.00% to 5.50%. The distributions are discretionary and non-cumulative, but there is a dividend stopper of lower ranking securities (such as Seek ordinary shares) if distributions on the note are missed. At the five year mark, Seek can redeem the notes for cash, convert into Seek ordinary shares or let them remain on issue. If they remain on issue, the margin steps up by a once-off 2.00% p.a and the notes become a floating rate security paying franked distributions at a margin above the 180-day BBSW rate. Holders can have no redemption rights. They can request conversion following a change of control event. The offer opens on 12 June 2012 and closes on 25 June 2012 for the shareholder offer and 28 June 2012 for the broker firm offer. The notes commence trading on 2 July Given the small size of the issue we will not be preparing a pre-ipo report and will not be providing ongoing coverage once they list. DXRPA. Dexus (DXS) will redeem all RENTS (DXRPA) outstanding on the 29 June 2012 step-up date for face value ($100 cash). The final (June quarter) distribution will also be paid at this time. This is in line with our expectations given DXS light capital expenditure commitments relative to previous periods, room on the balance sheet and average interest rate lower than the stepped up rate on this note. We advised subscribers to HOLD until maturity. IAGPA. Approximately 1.27m IAGPA were bought back for face value plus the accrued dividend on 1 May 2012 as they were reinvested into the new offering by IAG, IAG Convertible Preference Shares (IAGPC). The remaining securities (approximately 2.27m) will be bought back on the 15 June 2012 reset date at face value ($100 cash). The final distribution will also be paid at this time. We advised subscribers to HOLD until maturity. Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 5

6 6. Outlook and Comparative Yield The RBA cut the cash rate by 25bps to 3.50% at its June meeting. The RBA s rationale for the cut: At today's meeting, the Board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy. This is a double edged sword; while lower interest rates should be positive for consumer and investors sentiment, it could also be argued that the RBA s rationale for cutting rates, weaker global economic conditions, just reinforces why there is poor sentiment amongst consumer and investors. The stronger than expected March GDP figure, which came out a day after the RBA Board meeting may dampen prospects for more rate cuts in the immediate future. However it appears the RBA has left the door open for further cuts if conditions deteriorate overseas. US yields fell at the long end of the curve. 5-year treasuries declined 16bps while 10-year treasuries fell 36bps. This is following a familiar trend which of capital seeking the security of US treasuries in times of heightened security. In the Australian market, yields fell by 50bps to 88bps across the curve in May on expectations of more cuts in interest rate by the RBA. The 90-day and 180-day BBSW fell 62bps and 76bps respectively. These are now both below 3.5%. Ten-year bonds fell 75bps to 2.93%, a historical low. 10-year spreads between Australian and US government bonds are also quite narrow at around 100bps, down from 216bps a year ago. At these levels, the market is effectively pricing in a deep recession in Australia. Figure 6.1 AUD Swap Rates Annualised 4.00% 3.75% 3.50% 3.25% 3.00% 2.75% 2.50% Source: Morningstar/Reuters Bank Bill Rate IR Swap (Fixed Leg) RBA Cash Rate 3.50% 1 year 2.77% 1 month 3.48% 2 year 2.81% 2 month 3.40% 3 year 2.97% 3 month 3.31% 4 year 3.23% 4 month 3.27% 5 year 3.34% 5 month 3.23% 7 year 3.57% 6 month 3.19% 10 year 3.74% Source: Reuters Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 6

7 7. Major Bank Hybrids What do we see as the main risks for Australian banks in the current environment and how well placed are they to cope? A major slowdown in the Australian economy would impact on credit quality with a rise in corporate and business bad debts. Employment is the key driver to housing credit quality. A sharp rise in unemployment would see a flow on impact on housing bad debts. We expect fiscal and monetary levers would be used to try to soften the impact of a major economic slowdown. The RBA would cut interest rates, though rates are already very low and the government would increase spending to stimulate the economy. Regardless we would not get through unscathed. Currently European wholesale funding markets are difficult to access. However, US and Asian wholesale debt markets continue to function normally. What would happen if all wholesale funding markets closed? We would expect the Australian Government to act by providing a guarantee on bank wholesale funding (as was done during the GFC). Maintaining a stable and strong banking system is one of the crucial foundations for any healthy economy. Despite the political rhetoric of bank bashing, we believe there is an appreciation of this reality by the government. The banks also hold large amounts of liquids assets which they could access in an emergency. Customer deposit flows have been strong and lending growth moderate, which has reduced bank wholesale funding requirements. The banks can afford to stay out of wholesale funding markets for several months but a prolonged closure would limit their ability to lend. Funding costs are still an issue. Banks do not obtain much funding at the RBA cash rate. Their funding cost is a blended rate based on a mix of retail and wholesale funding of various maturity terms. There are other costs incurred holding liquid assets to meet regulatory requirements. If we look at the retail deposit market, competition is intense. It is possible for investors to earn interest rates well above the cash rate. Term deposit rates are also well above swap and bond rates of equivalent maturity terms. What does this all mean for hybrid investors? There is increased risk. However, it is worth looking at the experience of the major banks during the GFC. All reported profits during this period. What action did they take? They cut dividends on their ordinary shares, raised capital and utilised the federal government guarantee on wholesale funding. The government also provided a guarantee on deposits, which helped avoid a run on deposits for smaller deposit taking institutions such as the regional banks. During this period the major banks did not miss any distribution payments on income securities. This time around they are better capitalised and have higher levels of liquidity and have lower wholesale funding requirements given the strong deposit flows. That said, in a dire scenario we would expect hybrid holders to wear some of the pain as would ordinary equity holders. We continue to prefer exposure to major bank issued hybrids and those issued by quality industrials. Investors may weigh up alternative investment options, depending on their individual preferences and circumstances: you can also invest in bank deposits or bank equity. Yields on major bank equities still look attractive, albeit they carry more risk and prices are more volatile than hybrids. Potential investors should be aware that in a declining interest rate environment, interest payments on floating rate securities will fall; the opposite in a rising interest rate environment. Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 7

8 Issue Size Years To Trading Running Yield Yield to Reset Code Recommendation Price($) Issuer ($m) Maturity Margin inc Fr ex Fr inc Fr ex Fr Dist ($) Ex Date ANZPA ACCUMULATE ANZ % 6.76% 4.73% 7.24% 5.21% /05/2012 ANZPB ACCUMULATE ANZ % 6.07% 4.25% 6.96% 5.15% /05/2012 CBAPA ACCUMULATE CBA % 6.95% 4.87% 7.29% 5.05% /07/2012 NABHA ACCUMULATE NAB % 6.84% 6.84% /07/2012 PCAPA ACCUMULATE CBA % 5.10% 3.57% 8.57% 6.98% /06/2012 WBCPA ACCUMULATE WBC % 5.95% 4.17% 7.34% 5.21% /06/2012 WBCPB ACCUMULATE WBC % 7.32% 5.12% 7.32% 4.87% /06/2012 WCTPA ACCUMULATE WBC % 5.11% 3.58% 8.60% 7.01% /06/2012 CBAHA ACCUMULATE CBA % 4.53% 4.53% 5.09% 5.09% /07/2012 ANZPC ACCUMULATE ANZ % 6.76% 4.73% 7.67% 5.50% /08/2012 ANZHA ACCUMULATE ANZ % 6.21% 6.21% 6.21% 6.21% /06/2012 WBCPC ACCUMULATE WBC % 6.72% 4.71% 7.14% 5.01% /09/2012 CBAPB HOLD CBA % 4.48% 3.14% 6.97% 5.11% /07/2012 Figure 7.1 Major Bank Hybrids Trading Margins Trading Margin - Major Bank Trading Margin CBAHA ANZHA ANZPB WBCPA NABHA CBAPA WBCPC ANZPA WBCPB ANZPC PCAPA WCTPA 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% Source: Morningstar Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 8

9 Figure 7.2 Risk vs. Trading Margins 5.0% 4.5% 4.0% 3.5% Less risk Major Bank Securities WBCPB ANZPA NABHA CBAPA WBCPA ANZPB Trading Margin WCTPA PCAPA ANZPC WBCPC 3.0% 2.5% ANZHA 2.0% More Risk 1.5% CBAHA 1.0% Source: Morningstar Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 9

10 8. Other Floating-Rate Hybrids Despite the second successive rate cut by the RBA the expectations further cuts remain. Looking at the yield curve, the market is pricing in more cuts. The 10-year bond rate is at an historical low and is essentially pricing in a deep recession. The appetite for yield and capital preservation is stronger than ever. Stocks such as Telstra have traded like a fixed interest bond and have significantly outperformed the market. This appetite has also seen strong demand for recent hybrids offering. We remind investors that hybrids are riskier than bank deposits as they are unsecured with most ranking just above equity and below other creditors. As mentioned previously in a falling interest rate environment, interest payments on floating rate securities will fall when they reset. Issue Size Years To Trading Running Yield Yield to Reset Dist Code Recommendation Price ($) Issuer ($m) Maturity Margin inc Fr ex Fr inc Fr ex Fr ($) Ex Date BENPB HOLD BEN % 5.73% 4.01% 10.59% 8.92% /05/2012 BENPC HOLD BEN % 5.83% 4.08% 10.82% 8.91% /06/2012 BOQPC REDUCE BOQ % 6.03% 4.22% /03/2012 GMPPA HOLD GMG % 6.24% 6.24% 28.45% 28.45% /06/2012 GNSPA AVOID Suspended GNS IANG HOLD IAG % 7.70% 5.39% 7.90% 5.58% /06/2012 MBLHB ACCUMULATE MQG % 8.98% 8.98% /06/2012 NFNG ACCUMULATE NUF % 9.91% 9.91% /10/2012 RHCPA HOLD RHC % 8.17% 5.72% /03/2012 SVWPA ACCUMULATE SVW % 10.56% 7.39% /05/2012 SBKHB HOLD SUN % 7.56% 7.56% /08/2012 SBKPB HOLD SUN % 6.97% 4.88% 10.94% 8.84% /05/2012 TPAPA AVOID TPI % 11.90% 8.33% /09/2012 TAHHA HOLD TAH % 7.67% 7.67% 6.80% 6.80% /07/2012 WOWHCHOLD WOW % 6.52% 6.52% 5.89% 5.89% /08/2012 ORGHA HOLD ORG % 7.64% 7.64% 7.87% 7.87% /06/2012 TAHHB HOLD TAH % 7.72% 7.72% 8.12% 8.12% /06/2012 CNGHA ACCUMULATE CNG % 6.84% 6.84% 7.09% 7.09% /06/2012 AGKHA ACCUMULATE AGK % 7.39% 7.39% 7.47% 7.47% /05/2012 IAGPC HOLD IAG % 7.55% 5.29% 8.11% 5.76% /10/2012 DXRPA HOLD DXS % 4.70% 4.70% 7.32% 7.32% /03/2012 Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 10

11 Figure 8.1 Floating Rate Hybrids Trading Margins Trading Margin - Floating Trading Margin WOWH BOQPC TAHHA CNGHA AGKHA ORGHA IANG TAHHB SBKHB IAGPC RHCPA MBLHB BENPC NFNG BENPB SBKPB SVWP TPAPA GNSPA GMPPA 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% Source: Morningstar Figure 8.2 Risk vs. Trading Margins 19% 17% Floating Rate Securities GMPPA Trading Margin GNSPA 15% 13% Less risk 11% 9% 7% 5% 3% SBKHB SBKPB IANG BENPB BENPC IAGPC TAHHB ORGHA AGKHA CNGHA WOWHC TAHHA SVWPA MBLHB RHCPA BOQPC NFNG More Risk TPAPA 1% Source: Morningstar Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 11

12 9. Fixed-Rate Hybrids There have been no recommendation changes in our fixed-rate hybrids coverage universe. IAGPA: IAG bought back 1.27m IAGPA for face value plus the accrued dividend on 1 May 2012 as they were reinvested into the new IAG hybrids (IAGPC). IAG will buyback the remaining securities for $100 cash plus the final dividend of $ plus franking per security on the 15 June 2012 reset date. IAGPA were suspended from quotation on 24 May SBKPA: On 8 July 2011 we had advised SBKPA investors to Sell or Exchange for cash before 26 July The 1.50% margin offered on reset was thin. As expected the price crashed once redemption was no longer available. Around 70.27% of securities on issue were exchanged, so liquidity is very low and the bid-ask spread is wide. The gross running yield of 6.70% is not attractive when compared to higher quality offerings of the major banks. There is nothing fundamentally wrong with Suncorp. The thin margin and very low liquidity have made this security unattractive. SELL BENPA: While the yield on BENPA is attractive, this security is very illiquid and the bid-ask spreads can vary wildly, with some days seeing no trades. It is trading near our fair value estimate. HOLD MQCPA: On the 30 June 2013 Macquarie Group (MQG) can onsell MQCPA to a third party and thereby return $100 cash to security holders. If MQG does not sell/redeem these securities they mandatorily convert into MQG shares worth $101.01, subject to conditions the most important being that the VWAP of MQG ordinary shares 25 business days before conversion is above $ If conversion does not occur at that time then the conversion test is applied at each conversion date. Also if conversion does not occur then MQCPA will become a floating rate security paying fully franked distributions at a 3.50% margin above the 90-day BBSW. In the current market this margin does not look attractive when you consider that major bank issued mandatory convertibles are trading at margins around 3.5% to 3.8%. The Macquarie Bank issued security MBLHB is trading at a margin around 5.8%. HOLD. Years Issue Size To Trading Running Yield Yield to Reset Code Recommendation Price ($) Issuer ($m) Maturity Margin inc Fr ex Fr inc Fr ex Fr Dist ($) Ex Date BENPA HOLD BEN % 6.35% 9.93% 6.53% /10/2012 IAGPA HOLD Suspended IAG MQCPA HOLD MQG % 11.43% 11.14% 11.14% /12/2011 SBKPA SELL SUN % 4.69% 8.57% 6.48% /02/2012 Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 12

13 Figure 9.1 Fixed Rate Yields Yield - Fixed YTR inc Franking SBKPA BENPA MQCPA 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% Source: Morningstar Figure 9.2 Fixed Rate Yields Fixed Rate Hybrids Risk vs. Yield 12% 10% 8% Less risk Fixed Rate Securities SBKPA YTR inc Franking MQCPA BENPA 6% 4% 2% More Risk 0% Source: Morningstar Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 13

14 10. Glossary BBSW Conversion Conversion Discount Conversion Number Convexity Cumulative Dividend Yield Duration Exchange Face Value Gross Margin Market Rate Mandatory Conversion Net Reference Rate Reset Running Yield Step-up Tax Deferred Time to Maturity/Reset Trading Margin The Bank Bill Swap Rate (BBSW) is the average mid rate for Australian dollar bills of exchange accepted by an approved bank, having a tenor with a designated maturity, that appears on an approved information vendor s service (e.g., Reuters Screen BBSW page). Under certain circumstances, the hybrid security may be converted into a number of ordinary shares of the underlying stock at a specified conversion number, subject to terms, conditions and corporate events, including conversion discount, conversion date and triggers. A discount in percentage applied to the underlying stock price into which the hybrid security may be converted. Also referred to as exchange discount. The number of ordinary shares of the underlying stock into which the hybrid security may be able to convert. For certain hybrid securities, there may be a minimum and/or a maximum conversion number applied. The conversion number is generally calculated based on a formula: Conversion Number = Face Value / [VWAP х (1 Conversion Discount)] A measure for bonds used in conjunction with modified duration in order to measure how the bond's price will change as interest rates change. It is equal to the opposite of the second derivative of the bond's price relative to its yield, divided by its price. For example, since a non-callable bond's duration usually increases as interest rates decrease, its convexity is positive. Depending on the hybrid security, the dividend, distribution or coupon paid may or may not be cumulative. If the dividend, distribution or coupon is cumulative and if the issuer defers the payment of the dividend, distribution or coupon on any payment date, then additional dividend, distribution or coupon will accrue at the prevailing distribution rate. Expressed as a percentage, dividend yield is the company s annual dividend payments divided by its market cap, or the dividend per share divided by price per share. The change in the value of a fixed-income security that will result from a 1% change in interest rates. Duration is stated in years. For example, a five-year duration means the bond will decrease in value by 5% if interest rates rise 1% and will increase in value by 5% if interest rates fall 1%. Duration is a weighted measure of the length of time the bond will pay out. Exchange means the conversion, redemption, buy-back or cancellation of the hybrid security. The face value of the security is the issue price typically being $100 per security. Yield expressed, inclusive of any available franking credits or tax-deferred benefits. Expressed as a percentage per annum, the margin offered by the hybrid security over a reference rate. The initial margin is typically determined by a bidding process within a prescribed margin range known as bookbuild. For certain hybrid securities, the margin may be increased (refer to Step-up) at a predetermined date. See Reference Rate. Some securities include a mandatory conversion condition, which forces conversion if the underlying stock price is above some threshold level and the issuer chooses not to redeem the security for face value. Yield expressed, exclusive of any available franking credits or tax-deferred benefits. Typically a floating reference rate (e.g., 90-day BBSW) used to reference the periodic coupon payment of a hybrid security. The reference rate is generally applied at the beginning of a distribution period for the upcoming distribution. Also referred to as the market rate. For certain hybrid securities, on a reset date, the issuer may reset certain terms including the next reset date, the dividend/distribution rate, the conversion discount and the timing of frequency of dividend/distribution payments. Resets may mean significant change to the terms of the hybrid security and as a result investors may or may not accept such new terms. Further, the issuer may elect to redeem or to exchange the hybrid security. As such, Morningstar has a conservative approach to treating resets and considers it as a probable maturity. In tables and abbreviations, we use Reset to refer to any step-up, mandatory conversion, call or other pseudomaturity event. The hybrid's annual coupon payments expressed as a percentage of the market value of the security. For certain hybrid securities, the margin above the reference rate may be increased or stepped-up at a predetermined date upon the occurrence or non-occurrence of a certain event (e.g., non-conversion at a specified date). The distribution of certain hybrid securities may have a tax-deferred component (may be less than 100%), which allows the distributions to be tax deferred over a certain period. The tax-deferred distributions are not assessable to Australian income tax upon receipt for most investors, but instead reduce the cost base of the security for capital gains tax purposes and as a result defer tax until the disposal of the security. Securities offering a tax-deferred component may give rise to tax benefits. Changes to tax legislation may have the effect of reducing the taxdeferred component of distributions. Investors should seek professional taxation advice in relation to dealing in these securities and their individual situation. The time expressed in number of years from now to a reset date, conversion date, step-up date and/or maturity date, where on such date, either the terms of the security may change or the security may be repurchased, redeemed, exchanged or converted. In simple terms if an issuer already had securities on issue, they could expect any new securities with $100 face value to trade close to the trading margin. The Trading Margin of a security s is the effective margin at which s trades; it is the margin which a new security n with face value of $100 would need so the sum of the discounted cash flows of n equal the discounted cash flows of s assuming redemption of both s and n at the pseudo-maturity date of s. The calculation is grossed up for franking where appropriate. Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 14

15 VWAP Volatility Yield to Reset/Maturity (YTR/YTM) pcp p.a. Capex YoY HoH QoQ The average of the daily volume weighted average sale price of ordinary shares sold on ASX during the relevant period subject to specific terms and adjustments of the relevant hybrid security offer. The degree to which the price of a security tends to fluctuate. The hybrid's internal rate of return to reset, step-up or other pseudo-maturity event. previous corresponding period per annum Capital expenditure Year on Year Half on Half Quarter on Quarter Copyright 2012 Morningstar Australasia Pty Ltd. All rights reserved. The information in this document is property of Morningstar. 15